IMF lifts global growth outlook for 2020 but lowers next year's forecast on fears of persistent social distancing

People waiting outside pass the time Friday afternoon in line outside the CareWell Urgent Care in Inman Square in Cambridge, MA on Aug. 8, 2020, where COVID-19 antibody tests are done.John Tlumacki/The Boston Globe via Getty Images
  • The International Monetary Fund lifted its 2020 global growth outlook to a 4.4% contraction from its previous forecast of a 4.9% tumble.
  • Stronger-than-expected growth in the second quarter, particularly in advanced economies, drove the organization to revise its outlook higher on Tuesday.
  • Still, the IMF lowered its 2021 global GDP estimate to 5.2% from 5.4%, saying that several risks remain and "persistent social distancing" will curb a full rebound in activity.
  • Uncertainty around the updated outlook is "unusually large," and governments should allay debt concerns and instead focus on spending initiatives to keep recoveries on track, the IMF added.

Gross domestic product growth will come in better than expected this year, but the global economy is far from staging a complete rebound, the International Monetary Fund said Tuesday.

World GDP will contract by 4.4% in 2020, the organization said in its latest outlook report. The decline marks a slight improvement from the 4.9% slump forecasted by the IMF in June. The update reflects strong second-quarter recoveries, particularly in advanced economies where economic activity bounced back sooner than anticipated. The forecast also accounts for signs of robust third-quarter growth.

Next year's growth estimate, however, was revised to 5.2% from 5.4%. The shift reflects "the more moderate downturn" expected in 2020 and "expectations of persistent social distancing," the organization said.Advertisement

Read more: Morgan Stanley lays out its 5 favorite trades for investors looking to dominate a looming V-shaped recovery, even if a stimulus deal takes until 2021

"The global economy is climbing out from the depths to which it had plummeted during the Great Lockdown in April," the IMF said. "But with the COVID-19 pandemic continuing to spread many countries have slowed reopening and some are reinstating partial lockdowns to protect susceptible populations."

Expected 2020 growth in the US gained to -4.3% from -8%, while the IMF's forecast for 2021 fell to 3.1% from 4.5%.
Advertisement

China will outperform the world economy with positive GDP growth this year and in 2021, the organization said. While the IMF's 2020 output forecast improved by 2.3% for advanced economies, its projection worsened by 0.2% for emerging markets and developing nations.

Read more: Deutsche Bank scoured 200 years of US history to uncover how investors should handle a contested election — including 3 past examples and how markets responded Governments' unprecedented stimulus responses to the pandemic will also ratchet up the sum of global debt. National debt in advanced economies is poised to reach 125% of GDP by the end of next year, according to the Tuesday report. Governments should stay more focused on reviving their economies than handling debt piles, the IMF added, as a healthy recovery can aid the deficit down the road.Advertisement

Even with the partially boosted estimates, the IMF remains wary of the global economy's trajectory. Uncertainty around its baseline forecast is "unusually large," and several risks stand to derail the world's rebound. The path of the virus can easily revive shutdown measures and plunge economies back into deep recessions. Country-specific outbreaks can easily slam other nations through weakened tourism and softened demand. A dip in financial market sentiment could stymie capital flows and keep cash from struggling businesses, the IMF said.

Countries will need to adjust tax and spending policies to protect vulnerable populations and fund initiatives that lift output, the organization added. While a viable coronavirus vaccine can fuel a second rebound in activity, the timeline for such a drug reaching the market is cloudy and prone to delays. Governments should protect social programs and boost spending in infrastructure and research to best position their economies for a new economic cycle, the IMF said.

Read more: MORGAN STANLEY: Buy these 44 cheap stocks poised to surge as the economy continues to recover and reopening expands.Advertisement

{{}}