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A woman crosses a street in downtown Montreal on April 5, 2020.

Graham Hughes/The Canadian Press

The International Monetary Fund forecast that the global economy will contract by 3 per cent this year, and advanced economies by more than 6 per cent – and warned that the damage will be even worse if COVID-19 persists longer than expected.

The IMF’s new World Economic Outlook, published Tuesday, projected that Canada’s economy would shrink by 6.2 per cent this year, before rebounding by 4.2 per cent in 2021. It predicted that the global economy would grow by 5.8 per cent next year – based on an assumption that “the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound.”

“There is extreme uncertainty around the global growth forecast,” the report said. “The economic fallout depends on factors that interact in ways that are hard to predict, including the pathway of the pandemic, the intensity and efficacy of containment efforts, the extent of supply disruptions, the repercussions of the dramatic tightening in global financial market conditions, shifts in spending patterns, behavioural changes (such as people avoiding shopping malls and public transportation), confidence effects, and volatile commodity prices.”

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The international finance agency calculated that if the COVID-19 measures taken around the world linger for 50 per cent longer than assumed in its base-case forecast, global GDP would shrink by an additional 3 per cent this year. And it estimated that if there were a second breakout of the virus in 2021 – similar to what occurred with the Spanish influenza pandemic in 1918 and 1919 – then global GDP would end 2021 nearly 5 per cent lower than in the base-case forecast.

“It is assumed that [in a longer shutdown] there will be some longer-lived damage realized in 2021 in the form of capital destruction [via business bankruptcies], a temporary slowing in productivity growth, and a temporary increase in trend unemployment,” the report said.

If both a longer shutdown in 2020 and a global relapse in 2021 were to occur, the IMF estimated that the world economy would end 2021 “almost 8 per cent” below its base projection. And it said this figure may underestimate the risk of potential damage, should both occur.

“The prospect of additional increases in public debt, above a baseline that already sees notably higher public debt, could spook markets. This increase in sovereign borrowing costs, or simply fear of it materializing, could prevent many countries from providing the income support assumed here,” the report said. “This would lead to even worse outcomes and additional scarring, which would in turn further worsen public balance sheets.”

The IMF called on a joint international effort to fight both the health and the economic challenges from the pandemic.

“Strong multilateral co-operation is essential to overcome the effects of the pandemic, including to help financially constrained countries facing twin health and funding shocks, and for channelling aid to countries with weak health care systems. Countries urgently need to work together to slow the spread of the virus and to develop a vaccine and therapies to counter the disease. Until such medical interventions become available, no country is safe from the pandemic (including a recurrence after the initial wave subsides) as long as transmission occurs elsewhere.”

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