GLOBE DOWN

Global lockdown

The coronavirus pandemic has triggered a macroeconomic shock that is unprecedented in peacetime. As of the 28th of April, the World Health Organization reported 3 million confirmed cases and over 200 000 deaths1 due to the illness, affecting almost 200 countries and territories. A peak in the number of cases has been observed in only a handful of countries so far. To slow the spread of the virus, governments across the world have imposed restrictions on most social and economic activities. These include partial or complete lockdowns, daytime curfews, closure of educational institutions and non-essential businesses, and bans on public gatherings. About 4.2 billion people or 54% of the global population, representing almost 60% of global GDP, were subject to complete or partial lockdowns as of the 28th of April and nearly all the global population is affected by some form of containment measures.The crisis has unfolded gradually since December 2019. The People’s Republic of China (hereafter, “China”), the country first affected by the virus – and alone representing 16% of global GDP and 24% of energy demand in 2019 – implemented lockdown measures with strong macroeconomic impacts in late January. These were followed by lockdowns in many European countries and India in March, with populations accounting for one-third of global energy demand coming under lockdown.

As an increasing number of states in the United States imposed restrictions, a population that represents 53% of global primary energy consumption in 2019 was living in complete or partial lockdown in early April. By this time, China started to lift restrictions and restart factories, but social distancing measures remain in place, hindering the recovery of the service sector. While the total number of registered cases is lower in Africa than in the worst-hit regions of the world, the continent has yet to feel the full implications of the crisis. Almost 50 African countries are affected, the number of cases is still expanding and containment measures are increasing. Worldwide, between mid-March and end-April the share of energy use under full or partial lockdown skyrocketed from 5% to 52%. Share of global primary energy demand affected by mandatory lockdowns, January-April 2020 Openexpand Share of global population under containment measures, January-April 2020 Openexpand These restrictions represent a challenging combination of a supply and a demand shock. The supply shock arises from the intentional constraints on economic activity: restaurants, shopping malls and, in some countries, factories are closed down to prevent the spread of the virus. To a small extent, this decline is compensated by greater e-business activity as well as some other sectors of the economy, most notably a rise in the sales of medical equipment. On the whole, however, the restrictions substantially constrain the overall supply-side capacity. The demand-side shock arises from the impact on consumers’ disposable income and corporate investment activity. The exact extent of employment loss is determined by country-specific labour market institutions, but in every country lockdowns have been accompanied by a historically unprecedented spike in unemployment. In the United States, initial unemployment claims have been recorded at more than 26 million2 since the start of the lockdown, indicating that the rate of employment loss is around 10 times faster than it was in the aftermath of the fall of Lehman Brothers in 2008.

Similarly in the United Kingdom, 1.4 million3 new claims for unemployment benefits have been registered since mid-March when the government first urged people to stay home. Early studies suggest that unemployment could rise to almost 21%4 of the total workforce, higher than the ratio recorded during the Great Depression of the 1930s. Registered unemployment numbers might even understate the impact, given the importance of informal and “gig economy” employment in the exceptionally badly hit tourism sector. Those who have lost their jobs are concentrated in the lower income segments. Even with unemployment support, they are likely to cut their spending beyond what the restrictions would mandate. Similarly, given the uncertainties of consumer demand, companies hold back investment projects even if social distancing measures would still allow the investment. The importance of the demand-side aspect is especially visible in China. Due to the different timing of the epidemic, the Chinese manufacturing sector is aiming to restart precisely when European and North American demand for Chinese products is sharply falling, creating an additional macroeconomic challenge. Overall, estimates suggest that during the lockdown phase economies can expect a 20% to 40 % decline in economic output, depending on the share of the most affected sectors and the stringency of measures. At the global level, this translates into a 2% drop in expected annual GDP for each month of containment measures, confirming the 2-3% order of magnitude put forward by the President of the European Central Bank in early April. Impact of each month of containment measures on expected annual GDP by sector in selected regions Openexpand The direct impact on annual GDP and on energy use therefore depends on the duration of lockdowns, while the indirect impact of the crisis will be determined by the shape of the recovery. In an ideal case, some economic activity affected by the lockdown will only be delayed, like making necessary repairs on a house, leading to a sharp, V-shaped recovery. In some sectors like tourism, however, the crisis might have a long-term impact. Activities may not even return to the pre-crisis growth path, let alone make up lost ground. The shape of the recovery will be affected by healthcare factors, like a possible second wave of the pandemic. It will also be greatly influenced by the size and design of macroeconomic policy responses.

After the lockdown phase, the challenge will be closer to a “conventional recession” with depressed aggregate demand and potential stress on the financial system. Experience suggests that the depth and duration of a recession can be significantly reduced by anticyclical policy to stimulate demand and measures that prevent spillover effects from triggering a systemic financial crisis. Governments around the world are responding with an unprecedented wave of fiscal and monetary stimuli. The current focus is to provide direct income support both to affected workers and to companies in order to minimise social and employment impacts. At the same time, stabilising the financial system is a priority. Despite the scope and ambition of the policy response, it appears likely that the recovery will only be gradual. As a result, even if lockdown periods are limited, 2020 will be the year of deepest post-war recession, markedly exceeding the 2008 financial crisis. Even in 2021, global economic activity might well be below the 2019 level. Global annual change in real gross domestic product (GDP), 1900-2020 Openexpand As this report describes in detail, the impact of this decline in economic activity on energy use is highly asymmetrical and depends on the specific energy use pattern. Traditional relationships between incomes and energy demand have broken due to the nature of the shock. Some energy uses, like residential gas heating or electricity use for server farms and digital equipment, are unaffected or even more pronounced. Others, most notably aviation jet fuel, have collapsed far more steeply than the decline of GDP. This analysis consequently takes a bottom-up, fine-grained approach in assessing the short-term energy impacts. The scenario used for this report quantifies the energy impacts of a widespread global recession caused by months-long restrictions on mobility, social and economic activity. Within this scenario, economies currently in lockdown open up only gradually and economic and social activity resumes only gradually. The economic recovery is U-shaped and is accompanied by a substantial permanent loss of economic activity, despite macroeconomic policy efforts. Under these assumptions global GDP declines 6% in 2020. This scenario is broadly in line with the IMF longer outbreak case released in April.Major uncertainties surround the economic outlook, including the trajectory of the pandemic, the effects and duration of virus containment measures, reopening strategies and the shape and speed of recovery as the pandemic recedes. On the positive side, a limited period of lockdown, an effective suppression of the virus, a gradual but speedy lifting of lockdown coupled with ambitious and well-targeted macro-financial policies would allow for a more rapid, V-shaped economic recovery. This outlook is broadly in line with the IMF baseline presented in April.Downside risks are also present. There lies the possibility of longer lockdown periods, reopening that may lead to spikes of infections and a second cycle of lockdowns, a second wave of infections in the autumn/winter of 2020, and major global supply chain disruptions.Recognising the many uncertainties, the report presents one base case scenario and discusses for each fuel the main factors that could raise or lower demand. What might the rest of 2020 look like?

By Gita Gopinath عربي, 中文, Español, Français, 日本語, Português, Русский  The Great Lockdown is expected to play out in three phases, first as countries enter the lockdown, then as they exit, and finally as they escape the lockdown when there is a medical solution to the pandemic. Many countries are now in the second phase, as they reopen, with early signs of recovery, but with risks of second waves of infections and re-imposition of lockdowns. Surveying the economic landscape, the sheer scale and severity of the Global Lockdown are striking. Most tragically, this pandemic has already claimed hundreds of thousands of lives worldwide. The resulting economic crisis is unlike anything the world has seen before. Aside from its unprecedented scale, the Global Lockdown is playing out in ways that are very different from past crises. This is a truly global crisis. Past crises, as deep and severe as they were, remained confined to smaller segments of the world, from Latin America during the 1980s to Asia in the 1990s. Even the global financial crisis 10 years ago had more modest effects on global output. For the first time since the Great Depression, both advanced and emerging market economies will be in recession in 2020. The forthcoming June World Economic Outlook Update is likely to show negative growth rates even worse than previously estimated. This crisis will have devastating consequences for the world’s poor. Aside from its unprecedented scale, the Global Lockdown is playing out in ways that are very different from past crises. These unusual characteristics are emerging all over the world, irrespective of the size, geographic region, or production structure of economies. First, this crisis has dealt a uniquely large blow to the services sector. In typical crises, the brunt is borne by manufacturing, reflecting a decline in investment, while the effect on services is generally muted as consumption demand is less affected.

This time is different. In the peak months of the lockdown the contraction in services has been even larger than in manufacturing, and it is seen in advanced and emerging market economies alike. There are exceptions—like Sweden and Taiwan Province of China, which adopted a different approach to the health crisis, with limited government containment measures and a consequently proportionately smaller hit to services vis-à-vis manufacturing. It is possible that with pent-up consumer demand there will be a quicker rebound, unlike after previous crises. However, this is not guaranteed in a health crisis as consumers may change spending behavior to minimize social interaction, and uncertainty can lead households to save more. In the case of China, one of the early exiters from lockdown, the recovery of the services sector lags manufacturing as such services as hospitality and travel struggle to regain demand. Of particular concern is the long-term impact on economies that rely significantly on such services—for example, tourism-dependent economies. Second, despite the large supply shocks unique to this crisis, except for food inflation, we have thus far seen, if anything, a decline in inflation and inflation expectations pretty much across the board in both advanced and emerging market economies. Despite the considerable conventional and unconventional monetary and fiscal support across the globe, aggregate demand remains subdued and is weighing on inflation, alongside lower commodity prices. With high unemployment projected to stay for a while, countries with monetary policy credibility will likely see small risks of spiraling inflation. Third, we see striking divergence of financial markets from the real economy, with financial indicators pointing to stronger prospects of a recovery than real activity suggests. Despite the recent correction, the S&P 500 has recouped most of its losses since the start of the crisis; the FTSE emerging market index and Africa index are substantially improved; the Bovespa rose significantly despite the recent surge in infection rates in Brazil; and portfolio flows to emerging and developing economies have stabilized. With few exceptions, the rise in sovereign spreads and the depreciation of emerging market currencies are smaller than what we saw during the global financial crisis. This is notable considering the larger scale of the shock to emerging markets during the Great Lockdown. This divergence may portend greater volatility in financial markets. Worse health and economic news can lead to sharp corrections. We will have more to say about this divergence in our forthcoming Global Financial Stability Report. One likely factor behind this divergence is the stronger policy response during this crisis. Monetary policy has become accommodative across the board, with unprecedented support from major central banks, and monetary easing in emerging markets including through first time use of unconventional policies.

Discretionary fiscal policy has been sizable in advanced economies. Emerging markets have deployed smaller fiscal support, constrained to some extent by limited fiscal space. Furthermore, a unique challenge confronting emerging markets this time around is that the informal sector, typically a shock absorber, has not been able to play that role under containment policies and has instead required support. We are now in the early stages of the second phase as many countries begin to ease containment policies and gradually permit the resumption of economic activity. But there remains profound uncertainty about the path of the recovery. A key challenge in escaping the Great Lockdown will be to ensure adequate production and distribution of vaccines and treatments when they become available—and this will require a global effort. For individual countries, minimizing the health uncertainty by using the least economically disruptive approaches such as testing, tracing, and isolation, tailored to country-specific circumstances with clear communication about the path of policies, should remain a priority to strengthen confidence in the recovery. As the recovery progresses, policies should support the reallocation of workers from shrinking sectors to sectors with stronger prospects.

The IMF, in coordination with other international organizations, will continue to do all it can to ensure adequate international liquidity, provide emergency financing, support the G20 debt service suspension initiative, and help countries maintain a manageable debt burden. The IMF will also provide advice and support through surveillance and capacity development, to help disseminate best practices, as countries learn from each other during this unprecedented crisis.