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IIF downgrades global growth forecast for 2020 to 0.4% - Daily News Egypt

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IIF downgrades global growth forecast for 2020 to 0.4%

IIF maintains expectations for recovery in 2H 2020

The Institute of International Finance (IIF) has downgraded its global growth forecast for 2020 to 0.4%.

Two weeks ago, the IIF downgraded its global growth forecast from 2.6% to 1.6%. China was a key driver underlying this change, given the sharp drop in the first quarter (1Q) activity resulting from aggressive quarantine measures.

Assuming recovery in subsequent quarters, IIF cut annual average growth from 5.9% to just below 4.0%. It also downgraded US growth, cutting annual average growth from 2.0% to 1.3%, on the assumption that the Coronavirus or COVID-19 shock takes 2Q growth to zero, but that outright recession is avoided.

Since then, the picture has changed drastically. OPEC price war destabilised already fragile markets. Sharp oil price declines and mounting COVID-19 uncertainty combined to yield a sharp “sudden stop.” Because of this sudden stop, the IIF is now downgrading global growth further to 0.4%.

“Our latest revisions put the US, Euro zone and Japan in recession in the first half (1H) of 2020, though we maintain our expectation for recovery in H2,” according to the IIF report.

The main argument that the IIF depend on to expect the recovery to be in H2 is that the virus should abate by summer, so that the “fear factor” holding back global demand will fade. But the severity of the “sudden stop” in global capital markets means that recovery could be slower.

The IIF mentioned that the sudden stop across global capital markets has been accompanied by rising stress in US credit markets and indications of a dollar shortage in the Euro zone and Japan.

“The initial COVID-19 shock in China, the epicentre of which was 1Q, has thus morphed into a much bigger shock for the rest of the world, the full force of which will hit in 2Q, with the effect on manufacturing and services likely to be more spread out and delayed than in China,” the IIF forecasts.

Given the drag from social distancing and other measures, the IIF expects US GDP to fall -0.8 % quarter-over-quarter (annualised) in 1Q, followed by a bigger drop of -8.9% in 2Q. The US is thus already in recession, with annual average growth of -0.4%.

Furthermore, the IIF expects a 2020 contraction of -2.8% in the Euro zone and -1.5% in Japan, which – along with China growth of 3.5% – puts global growth at 0.4%.

The key assumption underlying these forecasts is for recovery in 2H 2020, which in turn assumes that the virus abates by the summer and that credit stress does not prove too destructive. Risks are therefore still to the downside.

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