The International Monetary Fund said Tuesday that the novel coronavirus will likely push the global economy into its worst recession since the Great Depression, warning that prospects over a global rebound are highly uncertain. Gita Gopinath, IMF Chief Economist, joined Yahoo Finance's Jen Rogers, Myles Udland, and Brian Cheung to discuss.
MYLES UDLAND: We're joined now by Gita Gopinath, the Chief Economist at the IMF. Also joined by Yahoo Finance's Brian Cheung. So Dr. Gopinath, let's just start with the IMF's announcement today of your guys' look on the global economy looking for some of the worst GDP numbers globally that we've seen since the Great Depression.
And I'm just curious. Your process going through this, so much has changed in the last four months. How big of a challenge was it for you guys to finally formulate a forecast that seemed like it captured, at least, what we know right now about the economic impacts of coronavirus?
GITA GOPINATH: Oh, this was a really unique crisis, and this is a crisis like no other. Firstly, the shock is something we haven't worked with a virus pandemic. I mean, we're used to housing price collapses, and financial bubbles bursting, and debt crises.
But this is something we haven't seen, and also, the life of the shock. I mean, we don't know when it will end and how intense it will be in the next several months. So that was one factor, and then, of course, there is the tremendous uncertainty about how this affects firms and people. Some sectors are much more harder hit than others are because of social distancing, and the third is that policy is large amounts of support being put into the system.
I mean, $8 trillion of fiscal spending globally, but you don't want people to actually go out and spend. You actually want people to stay home at this time. So in that sense, the channels through which policy works is also very different. So coming up with this forecast, we have to think really out of the box on all these different pieces of it, and also, talk to many epidemiologists and public health officials.
BRIAN CHEUNG: Hey, Gita. It's Brian Cheung, here, so the headline forecast for global growth is a contraction of 3% for 2020. But you said that, actually, a worse outlook is possible or even likely. A lot of that depends on just how the virus ends up panning out in a lot of corners of the world. I'm wondering on that forecast, do you see the fiscal monetary response as inadequate in that case? Why would a worse outlook be possible or even likely?
GITA GOPINATH: So Brian, what we've assumed in our baseline is that the pandemic peaks in the second quarter for most countries in the world. For China, it's the first quarter. But for other countries, we peak in the second quarter, and then we expect to contain measures to slowly come off in the second half of this year. That's, of course, not guaranteed.
You know, the virus pandemic could last much longer. It could last even into 2021. And if that's the case, then we are looking at much sharper reductions in growth, about 6 percentage points, a negative 6 percentage point growth forecast for 2020, and almost no recovery in 2021. If that were the case, there would be a need for even more policy support. And the policy support right now is consistent with what we're seeing right now, but things can get much worse.
MYLES UDLAND: And thinking about that policy support, we've seen, obviously, the Fed make a number of announcements, and other central banks have come in with very large initiatives. At the IMF, where are you guys thinking about your role in all of this? Because we've seen a number of unprecedented moves globally with kind of these central financial institutions, let's call them. Do you foresee the taking a different role in the recovery here than the fund did, let's say, after the financial crisis or after the euro crisis?
GITA GOPINATH: So in just the last four weeks, we've had about 100 countries approach us for emergency financing. This is unprecedented. It's never happened before. So the scale of this crisis, it's a truly global crises, and we're seeing a very large number of countries in distress.
Now to meet the demand for emergency financing, very recently, we've actually doubled access to emergency financing. So we expect there will be about need for $100 billion, and we've been able to make sure that we can do that kind of lending at that point. So that's one big step we've taken.
The other big step is in providing debt service relief. We have many poor members, who are having to choose between paying their debt bills or spending on health. And we don't want them to have to make that, so we are providing debt service relief to our member countries.
And we've already done that 25 members, and we will be doing that for more. We're also looking into new kinds of facilities, like short term liquidity lines. That's something that's being discussed. SDR's are being discussed, so many other forms of financing are being explored at this time.
BRIAN CHEUNG: Gita, one thing, I guess, that I was trying to be careful of when going to the report was making sure that the numbers that we're seeing don't mask maybe underlying demand destruction that tells you there could be more structural changes at play for some of these countries. I'm wondering, is that the case for some of these countries that are coming to the IMF, some of those 100 countries that you were just describing? For example, the emerging market is actually only projected to fall by 1% in the report, which seems better than maybe the global picture. But are there other factors about those countries that tell us that the recovery for those countries might actually be harder than the advanced economies?
GITA GOPINATH: So for emerging markets in developing economies, of course, they start their normal growth numbers are much higher than advanced economies. So when they fall, you know, the fact that they've gone into negative territory is itself unusual. Again, this is the first time since the Great Depression that we have had both advanced enemies and emerging and developing economies in a recession.
So that also is a first. But it is certainly the case that, if I were to think of downside risks to our forecast, I would say, that our projections for emerging and developing economies would be one of those. The reason is because right now, we are not seeing the kind of serverity of the epidemic in emerging and developing economies outside of China that we saw in-- we are seeing in the US and in Europe.
Now we have assumed, of course, that things are going to be worse than what we are seeing on the ground right now, but the severity could be even further amplified. And given the weaknesses in their health systems and the weaknesses in their ability to provide social protection, the impact on their economies could be much more severe. So that is an important downside risk to our scenarios.
- When you think about this overall, do you think that the risk is that we will have inflation or that this crisis will cause deflation on a global scale?
GITA GOPINATH: I mean, for now, and I would say, even for next year, we are looking at a scenario of high unemployment in many countries, very low economic activity relative to where it should be. So the forces are towards lower inflation, so I don't see a source of push for inflation that comes through a demand for higher wages. That channel is not going to work.
Second, we are also seeing this big collapse in commodity prices. And that's another variable that enters, especially headline inflation, and can also affect inflation expectations. So given the kinds of contractions, the deepness of this recession that we are seeing, I would expect that the pressure is off and inflation would be to the downside.
BRIAN CHEUNG: Then lastly, the Federal Reserve did announce those dollar swap lines, which the WEO didn't make note of. They've been trying to provide dollar liquidity. Is that enough so far? I've been watching tents spread. It seems like maybe there's still quite a lot of high demand for US dollars.
GITA GOPINATH: I mean, the action be-- you know, what the Fed did to provide the swap lines and to extend it to more countries is absolutely welcome. And that has helped, but I expect that there will be much more need for international liquidity. And that has to be fulfilled in many ways.
So again, at the IMF, we are thinking about a short term liquidity line for countries, besides a flexible credit line that we also offer. So it will be needed. I think that going forward, especially for emerging and developing countries, where we're seeing this massive reversal in capital flows, they will need more support.
MYLES UDLAND: All right, Gita Gopinath is the Chief Economist at the IMF. I really appreciate you taking the time. Thank you joining the program.
GITA GOPINATH: Thank you so much for having me on it.