IMF warning should second Covid-19 wave break in 2021 as fears grip global stocks

Governments should be slow to withdraw from supporting households and businesses as they open up their economies after the Covid-19 shock and should also prepare for the potential for a second wave of infections early next year, the IMF has advised.

In its world update, the Washington-based organisation forecasts hefty contractions in the economies of Ireland's main trading partners and warns the recovery will be more gradual this year than it first thought in April -- as economies grapple with the costs of the lockdowns and the social distancing rules.

The report also assesses the potential damage should a second-wave of infections break out.

Global markets in recent weeks have focused on the potential for a large rebound in consumer spending as the restrictions are fully lifted this summer and US stocks, in particular, have soared.

However, the rally for global stocks came to a sudden halt on Wednesday, as new Covid-19 cases flared in Japan, sending global indices such as the Ftse-100 tumbling by 2.4%.

The losses in Ireland were even more dramatic -- with the two main banks, AIB and Bank of Ireland, which are effectively proxies for the Irish economy for global investors tumbling by up to 7.5%.

Transport and hotels were again on the front line of investors’ fears, with Dalata Hotel Group shedding 7%, Ryanair falling 5% and Irish Ferries firm ICG sliding by 4%.

Shares in the Irish property shares, including the two listed housebuilders Cairn Homes and Glenveagh also fell.

The IMF projects economic activity in both the UK and the eurozone will slide by over 10% this year and activity in the US will drop 8% -- before growth resumes amid a “sluggish turnaround” next year. 

Global trade “will suffer a deep contraction” of almost 12%, the IMF forecasts, which may have implications for the export-facing parts of Ireland’s globalised economy.

Uncertainty surrounding this central forecast continues to include the length of the health crisis, “scarring” to economies amid bankruptcies and job losses, and health restrictions that will weigh on workplaces, it said.

The IMF commends the actions taken to date by governments and central banks to mitigate the economic fallout which it characterises as “some bright spots”.

And it advises governments only to unwind the huge spending and welfare programmes on a gradual base as recovery gets underway and then focus on “public investment to accelerate recovery and expanded social safety net spending to protect the most vulnerable”.

“All countries -- including those that have seemingly passed peaks in infections -- should ensure that their health care systems are adequately resourced,” the IMF said, urging international co-operation over vaccines “so that adequate affordable does are quickly available to all countries”.

It warns of alternative outcomes should the global pandemic re-occur in early 2021.

Under this scenario, “the outbreak is assumed to cause further longer-lived damage to the supply side of economies starting in 2022, as increased bankruptcies lead to capital destruction, temporary slowing in productivity growth, and a temporary increase in trend unemployment,” according to the update.