IMF: Virus hitting a fragile global economy

SIHANOUKVILLE, Cambodia: A general view shows the Westerdam cruise ship in Sihanoukville yesterday. In the best-case scenario, the economic hit from the epidemic in China will be short-lived, but it comes as the global economy remains fragile, IMF chief Kristalina Georgieva said yesterday. – AFP.

WASHINGTON: In the best-case scenario, the economic hit from the epidemic in China will be short-lived, but it comes as the global economy remains fragile, IMF chief Kristalina Georgieva said yesterday. Beset by many other risks, including the paused but still-unresolved US-China trade war, the world is not in a good position to deal with a prolonged impact, she wrote in a blog post. “The truth is that uncertainty is becoming the new normal,” she said. The coronavirus “is our most pressing uncertainty… It is a stark reminder of how a fragile recovery could be threatened by unforeseen events.”

The virus to date has left nearly 1,900 dead and sickened 72,000 in China, cutting off transportation and forcing many businesses to close their doors. Apple, which relies on Chinese production, warned this week that iPhone supplies will be constrained. Georgieva repeated the fund’s view that the new coronavirus is likely to have only a short-term effect, marked by a sharp decline in China’s GDP followed by a sharp recovery.

But she warned that the situation could worsen, with more dire consequences for other countries as the impacts spill over. “A long-lasting and more severe outbreak would result in a sharper and more protracted growth slowdown in China,” she wrote. “Its global impact would be amplified through more substantial supply chain disruptions and a more persistent drop in investor confidence, especially if the epidemic spreads beyond China.”

The International Monetary Fund yesterday again warned that risks to the global economy “remain skewed to the downside,” in its customary report for the Group of 20 finance ministers and central bank governors who will be meeting in Saudi Arabia over the weekend. The Washington-based crisis lender in January downgraded its forecast for global growth this year to 3.3 percent, despite relief over the truce in the US-China trade conflict that led to tariffs on billions of dollars in goods.

The “phase one” US-China deal prevented even more tariffs from taking effect and the IMF estimates it “will reduce the drag from trade tensions on the level of GDP in 2020 by 0.2 percent.” However, it “only addresses a small share of the recently imposed tariffs and specifies minimum increases in China’s imports from the United States,” the IMF chief said. In addition, the deal relies on “managed trade arrangements”-with specific targets for China to purchase from the United States-which “have the potential to distort trade and investment while harming global growth.”

“In fact, our estimates suggest that the managed trade provisions cost the global economy close to $100 billion,” she said. The G20 Surveillance Note, as the report is known, said the recovery in the member economies is “fragile and likely to be shallow,” too low to raise living standards or provide sufficient jobs for young people entering the workforce.

“Even in the best-case scenarios, however, the projected rate of global growth is still modest in too many parts of the world,” Georgieva said. The IMF said it was sticking to its January forecast for 3.3 percent growth in the global economy this year, up from 2.9 percent in 2019, already a downward revision of 0.1 percentage points from its forecast in October. “The recovery could be derailed by a sharp rise in risk premia, triggered for example by a re-escalation of trade tensions, or a further spread of the coronavirus,” the Fund said.

Chinese state television quoted President Xi Jinping as saying China could still meet its economic growth target for 2020 despite the epidemic. But the IMF note cast doubt on that. “The coronavirus, a human tragedy, is disrupting economic activity in China as production has been halted and mobility around affected regions limited,” the Fund wrote in the note. “Spillovers to other countries are likely – for example through tourism, supply chain linkages, and commodity price effects.

It said the impact of the virus was still unfolding, and while the current scenario assumed a quick containment of the virus and a bounce-back later in the year, the impact of the epidemic could be larger and longer-lasting. “A wider and more protracted outbreak or lingering uncertainty about contagion could intensify supply chain disruptions and depress confidence more persistently, making the global impact more severe,” the Fund said in the note.

Cyberattacks, an escalation of geopolitical tensions in the Middle East or a breakdown in trade negotiations between China and the United States could also impede the short-term global recovery, it said. And climate-related disasters, rising protectionism and social and political unrest triggered by persistent inequality posed further economic risks. The Fund urged policymakers to maintain fiscal and monetary policy support. Low inflation required monetary policy to stay accommodative in most economies, it said. – Agencies

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