The International Monetary Fund is downgrading its forecasts for next year, and warning of a long, slow recovery that will stoke poverty and damage growth.
The IMF predicted on Tuesday that the world economy will shrink by 4.4% in 2020, a less severe contraction than it forecast in June.
However, it downgraded its outlook for 2021 now seeing a 5.2% increase in global output down from 5.4% in its previous report. Last month, the Organization for Economic Cooperation and Development (OECD) also lowered its forecast for 2021.
Interpreting the numbers
“The ascent out of this calamity is likely to be long, uneven, and highly uncertain,” IMF chief economist Gita Gopinath said in a blog post.
Global growth is expected to slow to roughly 3.5% between 2022 and 2025, leaving the output of most economies below levels that were predicted before the pandemic.
One consequence will be worsening inequality and a “severe setback” for improvements to living standards, both in developed economies and emerging markets.
Extreme global poverty is also expected to rise for the first time in more than two decades.
The US economy is expected to shrink by 4.3% in 2020 before expanding by 3.1% in 2021.
Britain, which has the added challenge of Brexit to cope with, will see its economy shrink by 9.8% this year.
Only China is expected to expand in 2020 by 1.9%.
Disparity in country performances
According to the Economist, as recovery takes place, huge gaps between the performance of countries are opening up.
By the end of next year, according to forecasts by the OECD, America’s economy will be the same size as it was in 2019 but China’s will be 10% larger.
Europe will still languish beneath its pre-pandemic level of output and could do so for several years. In Q2 this year, according to UBS, a bank, the distribution of growth rates across 50 economies was at its widest for at least 40 years.
One of the most important factors is the spread of the disease. China has all but stopped it while Europe, and perhaps soon America, is battling a costly second wave.
Another factor is government policy response. America has injected more stimulus than Europe, including spending worth 12% of GDP and a 1.5 percentage point cut in short-term interest rates.
Europe is the laggard. In its five biggest economies, 5% of the labor force remains on short-work schemes in which the government pays them to await the return of jobs or hours that may never come back.
The pandemic will leave economies less globalized, more digitized and less equal.
COVID-19 is imposing a new economic reality. Every country will be called on to adapt.
The UAE economy
According to S&P Global Ratings, Dubai’s economy is somewhat more diversified than that of most of its regional peers, but a sharp economic contraction of around 11% of GDP in 2020 is anticipated, and recovery to 2019 levels will happen only by 2023.
Dubai’s large exposures to tourism and aviation place it in a relatively more vulnerable position to the effects of COVID-19.
Low oil prices have had broad effects on Gulf Cooperation Council (GCC) economies, of which Dubai is one, but hydrocarbons directly contribute only about 1% to Dubai’s total GDP. The indirect effect of weaker demand from Dubai’s neighbors will dampen Dubai’s trade, tourism, and real estate markets.
STR Global, a data intelligence and benchmarking firm, reported Dubai’s hotel occupancy rate at 26% in June as inbound tourism sharply declined following global lockdowns and much-reduced air travel designed to curb the spread of COVID-19.
The Dubai government now expects to post a historically large central government deficit of 12 billion Dirhams ($3.27 bn) or 3.2% of GDP this year, largely owing to the reduction in economic activity and the consequent expected 28% decline in revenue.
In total, S&P expects new government bond issuance and loans to total around 7% of GDP in 2020. The government has issued AED 8.4 bn Dirhams ($2.29bn, or 2.2% of GDP) of public debt so far in2020, marking it the biggest year for Dubai’s debt issuance since2009.
S&P expects Dubai’s gross general government debt to increase sharply to about 77% of GDP (290 bn Dirhams) in 2020, compared with 61% of GDP in 2019. The increase in the debt burden ratio is partly driven by the sharp decline in nominal GDP.
Dubai issued the third stimulus package in July, bringing the total to 6.3 bn Dirhams ($1.71bn).