In its latest set of economic forecasts released this week, the International Monetary Fund struck a firmly dovish tone. The IMF warned that the COVID pandemic will cause “lasting damage” to living standard’s around the globe and warned that governments may need to increase taxes on rich people and corporates in a bid to deal with the economic damage.
Growth Revised Higher But Still Worst Since Great Depression
The IMF warned that job losses and redundancies will change many sectors causing a shift in industries which will be slow and painful. While the bank has revised its 2020 growth forecasts higher from the last update in June, it still sees almost all leading economies suffering the worst economic contraction since the Great depression. The IMF now sees global growth contracting 4.4% in 2020, up 0.8% from the June forecast.
Tourism & Commodities Countries To Suffer
In its twice-yearly report, the IMF cited countries which rely heavily on tourism and commodities exports as those likely to be worst affected by the crisis. Additionally, as economies adjust to less travel and commuting, more bankruptcies will cause “significant losses of output” even once the pandemic has subsided.
In terms of the recovery, the IMF projects that, provided the pandemic is brought under control next year, global growth should recover by 5.2% in 2021, 0.2% lower than the June forecast. However, by the end of 2021, the IMF forecasts that advanced economies will be 4.7% smaller than initially forecast with emerging economies contracting by 8.1%. In terms of the longer-term impact, the IMF forecasts advanced economies to contract by 3.5% and emerging economies by 5.5%.
The IMF’s chief economist Gita Gopinath said: “The persistent output losses imply a major setback to living standards relative to what was expected before the pandemic. Not only will the incidence of extreme poverty rise for the first time in over two decades, but inequality is set to increase.”
Governments Should Raise Taxes & Borrowing
In terms of addressing the economic crisis, Gopinath said: “Although adopting new revenue measures during the crisis will be difficult, governments may need to consider raising progressive taxes on more affluent individuals and those relatively less affected by the crisis — including increasing tax rates on higher income brackets, high-end property, capital gains and wealth”. Gopinath concluded by saying that those countries who can, should borrow as much as possible in the near term to help buffer their economies from the crisis and limit the damage caused. The IMF’s chief economist urged that this should happen before government’s start removing sector specific work and encouraging workers to shift away from sectors harmed by social distancing.
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