IMF Downgrades Outlook for Global Economy Amid Pandemic

In this March 19, 2020 file photo, a deserted construction site is pictured in Dardilly, near Lyon, central France. The virus crisis has triggered the worst global recession in nearly a century -- and the pain is not over yet even if there is no second wave of infections, an international economic report warned Wednesday. (AP Photo/Laurent Cipriani, File)
In this March 19, 2020 file photo, a deserted construction site is pictured in Dardilly, near Lyon, central France. The virus crisis has triggered the worst global recession in nearly a century -- and the pain is not over yet even if there is no second wave of infections, an international economic report warned Wednesday. (AP Photo/Laurent Cipriani, File)
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IMF Downgrades Outlook for Global Economy Amid Pandemic

In this March 19, 2020 file photo, a deserted construction site is pictured in Dardilly, near Lyon, central France. The virus crisis has triggered the worst global recession in nearly a century -- and the pain is not over yet even if there is no second wave of infections, an international economic report warned Wednesday. (AP Photo/Laurent Cipriani, File)
In this March 19, 2020 file photo, a deserted construction site is pictured in Dardilly, near Lyon, central France. The virus crisis has triggered the worst global recession in nearly a century -- and the pain is not over yet even if there is no second wave of infections, an international economic report warned Wednesday. (AP Photo/Laurent Cipriani, File)

The International Monetary Fund has sharply lowered its forecast for global growth this year because it envisions far more severe economic damage from the coronavirus than it did just two months ago.

The IMF predicts that the global economy will shrink 4.9% this year, significantly worse than the 3% drop it had estimated in its previous report in April. It would be the worst annual contraction since immediately after World War II.

For the United States, the IMF predicts that the nation's gross domestic product - the value of all goods and services produced in the United States - will plummet 8% this year, even more than its April estimate of a 5.9% drop. This, too, would be the worst such annual decline since the US economy demobilized in the aftermath of World War II.

The IMF issued its bleaker forecasts Wednesday in an update to the World Economic Outlook it released in April. The update is generally in line with other recent major forecasts. Earlier this month, for example, the World Bank projected that the global economy would shrink 5.2% this year.

The IMF noted that the pandemic was disproportionately hurting low-income households, "imperiling the significant progress made in reducing extreme poverty in the world since 1990."

In recent years, the proportion of the world´s population living in extreme poverty - equivalent to less than $1.90 a day - had fallen below 10% from more than 35% in 1990. But the IMF said the COVID-19 crisis threatens to reverse this progress. It forecast that more than 90% of developing and emerging market economies will suffer declines in per-capita income growth this year.

For 2021, the IMF envisions a rebound in growth, so long as the viral pandemic doesn´t erupt in a second major wave. It expects the global economy to expand 5.4% next year, 0.4 percentage point less than it did in April.

For the United States, the IMF predicts growth of 4.5% next year, 0.2 percentage point weaker than in its April forecast. But that gain wouldn´t be enough to restore the US economy to its level before the pandemic struck. The association of economists who officially date recessions in the United States determined that the economy entered a recession in February, with tens of millions of people thrown out of work from the shutdowns that were imposed to contain the virus.

The US government has estimated that the nation´s GDP shrank at a 5% annual rate in the January-March quarter, and it is widely expected to plunge at a 30% rate or worse in the current April-June period.

In its updated forecast, the IMF downgraded growth for all major countries. For the 19 European nations that use the euro currency, it envisions a decline in growth this year of 10.7% - more than the 8% drop it predicted in April - followed by a rebound to growth of 6% in 2021.

In China, the world´s second-largest economy, growth this year is projected at 1%. India´s economy is expected to shrink 4.5% after a longer period of lockdown and a slower recovery than was envisioned in April.

In Latin America, where most countries are still struggling to contain infections, the two largest economies, Brazil and Mexico, are projected to shrink 9.1% and 10.5%, respectively.

A steep fall in oil prices has triggered deep recessions in oil-producing countries, with the Russian economy expected to contract 6.6% this year and Saudi Arabia´s 6.8%.

The IMF cautioned that downside risks to the forecast remain significant. It said the virus could surge back, forcing renewed shutdowns and possibly renewed turmoil in financial markets similar to what occurred in January through March. The IMF warned that such financial turbulence could tip vulnerable countries into debt crises that would further hamper efforts to recover.

Its updated forecast included a downside scenario that envisions a second major outbreak occurring in early 2021. Under this scenario, the global economy would contract again next year by 4.9%, it estimates.



Dollar Set to End Week on a High on US Rates, Economic Outlook

A teller sorts US dollar banknotes inside the cashier's booth at a forex exchange bureau in downtown Nairobi, Kenya February 16, 2024. REUTERS/Thomas Mukoya/File photo
A teller sorts US dollar banknotes inside the cashier's booth at a forex exchange bureau in downtown Nairobi, Kenya February 16, 2024. REUTERS/Thomas Mukoya/File photo
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Dollar Set to End Week on a High on US Rates, Economic Outlook

A teller sorts US dollar banknotes inside the cashier's booth at a forex exchange bureau in downtown Nairobi, Kenya February 16, 2024. REUTERS/Thomas Mukoya/File photo
A teller sorts US dollar banknotes inside the cashier's booth at a forex exchange bureau in downtown Nairobi, Kenya February 16, 2024. REUTERS/Thomas Mukoya/File photo

The dollar was on track for its strongest weekly performance since early December on Friday, propped up by expectations that the US economy will continue to outperform its peers globally this year and US interest rates will stay elevated for longer.

The greenback began the new year on a strong note, reaching a more than two-year high of 109.54 against a basket of currencies on Thursday as it extended a stellar rally from last year. A more hawkish Fed and a resilient US economy have led US Treasury yields to rise, prompting the dollar to charge higher.

Coupled with expectations that policies by US President-elect Donald Trump will boost growth this year and potentially add to price pressures, the dollar now looks relentless.

"Looks like dollar strength is here to stay for now in early 2025 given the US exceptionalism story is here to stay, and it still comes with high US yields," said Charu Chanana, chief investment strategist at Saxo, Reuters reported.

"Add to that the uncertainty from policies of the incoming (Donald) Trump administration, and you also get the safety aspect of the dollar looking attractive." Uncertainties over how Trump's plans for hefty import tariffs, tax cuts and immigration restrictions will affect global markets has in turn given the greenback additional safe haven support. Jobless claims data on Thursday confirmed a resilient US labor market, with the number of Americans filing new applications for unemployment benefits dropping to an eight-month low last week. The dollar index last stood at 109, down 0.2% on the day, but on track for a weekly gain of just under 1%, its strongest since early December.

Other currencies attempted to rebound against the firm dollar on Friday, still tracking steep losses on the week. The euro was last up 0.28% at $1.02950 but was headed for a 1.3% weekly decline, its worst since November.

The common currency was among the biggest losers against a towering dollar, having tumbled 0.86% in the previous session to a more than two-year low of $1.022475.

Traders are pricing in more than 100 basis points worth of rate cuts from the European Central Bank next year, while they expect just about 45 bps of easing from the Fed.

Uncertainties around trade policies of the incoming Trump administration are also weighing on the outlook for the euro looking ahead, along with China's yuan and some other emerging market currencies.

"We expect Trump's policy mix to trigger further dollar strengthening, with European currencies – and the euro in particular – coming under pressure from protectionism and monetary easing," said ING analysts in a note. Similarly, sterling ticked up 0.22% to $1.24065, after sliding 1.16% on Thursday. It was on track to lose roughly 1.4% for the week. Elsewhere, the yen rose around 0.24% to 157.085 per dollar, but was not far from an over five-month low of 158.09 per dollar hit in December. The Japanese currency has been a victim of the stark interest rate differential between the US and Japan for over two years now, with the Bank of Japan's caution over further rate increases spelling more pain for the yen.

The yen tumbled more than 10% in 2024, extending its losses into a fourth straight year. China's onshore yuan hit its weakest level in over a year at 7.3190 per dollar, as falling yields and expectations of more domestic rate cuts continued to weigh on the currency.