ⓒ YONHAP News

In its World Economic Outlook presented on April 14, the International Monetary Fund forecast that the global economy will post negative growth in 2020 to experience the worst recession since the Great Depression. Here’s Professor Kim Gwang-seok at Hanyang University Graduate School of International Studies to examine the IMF’s grim outlook.

Unlike the IMF’s report released in January this year, its April report takes the impact of the COVID-19 pandemic into consideration. In the latest report, the IMF predicted that the world economy will shrink by 3 percent this year. It will represent the worst downturn since the Great Depression in the 1930s. Shockingly, the figure is something we’ve never experienced before. It is the first contraction since the negative growth of 0.1 percent in 2009 in the aftermath of the global financial crisis. This year’s projection of minus 3 percent is much worse than the figure back then.

Last week, the IMF slashed its growth outlook by 6.3 percentage points from its previous forecast in January, to an unprecedented minus 3 percent. The figures for advanced economies are even worse, with their growth outlook projected at negative 6.1 percent. The U.S., for example, is expected to contract 5.9 percent, while the eurozone is forecast to fall at a sharper rate of 7.5 percent. The Japanese economy is also expected to decline 5.2 percent.

The IMF estimated that the cumulative loss to global GDP over 2020 and 2021 from the COVID-19 pandemic could reach 9 trillion US dollars. The amount is larger than the combined GDPs of Japan and Germany combined—the world’s third and fourth largest economy.

In addition, over 170 countries out of 189 IMF members are expected to see their per-capita income decrease this year. Just three months ago, the IMF predicted that more than 160 countries would post positive per-capita income growth in 2020.

The bleak outlook is attributable to the nature of the shock from the global pandemic. The 2008 global financial crisis and the 1997 Asian currency crisis led to the collapse of financial and foreign currency systems. First, the coronavirus pandemic disrupts labor supplies and supply chains to cripple output overall. The shutdown of factories and cities will have a more serious impact on the economy. Second, the impact will spill over to financial and currency markets. Third, a sharp decline is expected for prices of crude oil and raw materials including iron ore and metal.

Unlike previous market shocks, the ongoing epidemic even affects supply chains negatively. That’s why IMF believes that the current situation is far worse than previous financial crises.

Very few countries have been able to avoid the shock of the pandemic. Even in the U.S., the richest country in the world, 1 out of 10 workers have lost their jobs in a month since the rapid spread of COVID-19. JP Morgan Chase, the largest U.S. bank, has predicted that the unemployment rate in the U.S. will rise to 20 percent in the second quarter, far surpassing the 10 percent during the Great Depression. Apparently production, consumption, distribution and movement of labor have all come to a halt. Oxfam, which is a global humanitarian relief organization, has expressed concerns that the virus crisis might force over 500 million people into poverty.

While the entire world has been hit hard by COVID-19, it seems South Korea has been less affected.

The South Korean economy grew 2.0 percent last year, and was initially expected to expand 2.2 percent this year. But the IMF revised down the growth rate to minus 1.2 percent. It is the steepest decline and the first negative growth since the Asian financial crisis in the late 1990s. It is a gloomy outlook, of course. But among the members of the Organization for Economic Cooperation and Development or OECD, Korea’s figure is most favorable. And the downward adjustment of 3 percentage points from 2.2 percent to minus 1.2 percent is the smallest among OECD members.

The relatively small downward revision is attributed to Korea’s rapid and effective response to the COVID-19 outbreak. With its major trade partners expected to struggle, negative growth will be inevitable for South Korea, given its high degree of openness. Still, the country’s comprehensive approach in containing the outbreak and its swift policy actions are easing the negative impact on the local economy. Having highly evaluated Korea’s anti-virus measures, the IMF forecast that the Korean economy would grow significantly next year.

The IMF expected Korea’s growth rate would rebound to 3.4 percent next year. As the rate has never exceeded 3 percent in recent years, it may look like a great recovery. But basically, the growth rate shows how much a nation’s GDP increased from the previous year. If the rate for 2020 is extremely low, even a moderate figure in 2021 can be interpreted as a significant growth. So, it will be a rebound from very low levels on the back of a so-called base effect. It doesn’t mean a major improvement in economic fundamentals.

The IMF expected a so-called “V-shape recovery” for South Korea, forecasting a quick rebound. But the projection is based on the assumption that the COVID-19 pandemic will recede and lockdown measures will be eased in the second half of this year. A long tunnel of recession lies ahead, so countries need to come up with special measures to overcome the crisis.

The IMF called for countries to execute monetary and fiscal policies actively to offset the economic shock to some extent. It also underlined the need for more budget allocations to and R&D investment in healthcare. It added that it would be necessary to organize an international system to assist emerging economies that can’t afford to respond to the global pandemic. In light of this, South Korea’s advanced medical and healthcare technology, as seen in its highly efficient virus test kits, is drawing attention. It could take the lead in the development of vaccines and medicines. Through international cooperation and R&D exchanges, Korea may emerge as an exemplary case, in terms of disease control. With this in mind, the government needs to devise relevant policies.

The Korean government plans to concentrate all its abilities on containing the virus swiftly and creating momentum for an economic recovery. Prolonged economic difficulties triggered by the COVID-19 outbreak are inevitable.

The government needs to formulate policies from a long-term perspective, take various scenarios into account, and implement them promptly so the country can tide over the crisis successfully.