IMF WEO Comment: France among the worst performing economies in 2020
Head of Macro Analysis
Summary: Yesterday, the IMF released its latest report on the global economy and the impact of the COVID-19 crisis, updating previous estimates published in April. Without much surprise, the IMF predicts a deeper contraction in global economy this year with recession reaching -4.9% followed by a weaker rebound next year at +5,4% vs prior +5,8%. France is ranked among the worst performing economies in 2020, with a GDP drop reaching minus -12.5% - which seems a bit too pessimistic considering that France suffered less from lockdown than initially anticipated.
The main conclusions of the report:
- The latest IMF projections confirm that we have entered into one of the worst economic crisis in modern times, with economic losses climbing to $12tr in 2020-21 vs prior $9tr. The baseline scenario is based on a V-shaped recovery at the global level – but it will take a lot of luck. This scenario will mostly depend on the evolution of the health crisis and the efficiency of monetary and fiscal policies implemented after the lockdown.
- Contrary to the previous crisis, there is no desynchronization of global growth. More than 90% of countries have already fallen into recession or are likely to fall into recession this year. GDP decrease is expected to reach -8% in advanced economies and -3% in EMs and developing countries (with large variations of economic activity: +1% in China vs -4.5% in India and -8% in South Africa).
- The largest downward revisions of growth forecasts concern the euro area (-10,2% vs prior -7,5%), the United States (-8% vs prior -5.9%), France (-12.5% vs prior -7.2%), Spain (-12.8% vs prior -8%), the United Kingdom (-10.2% vs prior -6.5%) and India mostly due to the very strict lockdown (-4.5% vs prior +1.9%). China’s GDP growth, which contributes to roughly one third of global growth impulse, has been slightly revised downward at +1% vs prior +1.2%.
- France is among the worst performing economies this year with recession at -12.5%. Taking into consideration the latest PMI and business climate indicators and the upward Q2 GDP growth revision by the French statistics agency INSEE at -17% vs prior -20%, we think the IMF is a bit pessimistic about France’s economic activity this year and that a forecast at -11% - which is obviously no cause for celebration – is probably more realistic.
- The IMF warned about large variation around the forecasts reflecting uncertainty about the evolution of the pandemic – all the released forecasts assume no second wave in H2 this year or Q1 2021 – and the impact on the real economy of the fiscal and monetary packages recently unveiled for about 20% of global GDP. For commodities producers, such as Brazil, South Africa or Russia, economic activity will also be particularly dependent on the strength of China’s stimulus which remains, at the moment of writing, still way below the level of the post-GFC stimulus package.
- Due to the crisis, the global level of debt is expected to exceed the post-WW2 peak, with a 20% jump from 2019.
- On a final note, the IMF also pointed out the widening disconnection between financial markets and the real economy. Yesterday, we had another example of this disconnection (which is mostly explained by the constant increase in central bank liquidity) with a more than 10-times oversubscribed 100-year bond issued at less than 1% by Austria – something that was unthinkable some years ago in similar economic circumstances.
IMF WEO Forecasts (April)
IMF WEO Forecasts (June)
The expected impact of the crisis on the global level of debt
The IMF WEO report unveils a more realistic outcome of the world economy going down in 2020 and 2021 than the April report. However, forecasting has been proved to be very difficult in this crisis. It explains why there is so much divergence between economic forecasts. For instance, based on the 74 GDP forecasts available on Bloomberg, which includes the latest IMF forecast, the current forecast spread among analysts for China ranges from -3% to +3.5% this year. This major divergence is mostly explained by the fact economic models are not able to integrate the pandemic factor and assess precisely hysteresis effects linked to the crisis.
However, the report is a useful reminder that the crisis will be much deeper than what markets are assuming and that the scenario of a V-shaped recovery is not a done-deal considering the numerous downside risks to growth. The recovery is likely to be very slow and uneven with an increase of NPL that could destabilize the banks from H2 this year, an explosion of deficit that will force central banks to inject liquidity on a quasi-permanent basis, and an unavoidable increase in unemployment when extended indemnity programs to save jobs will end.