Global growth plunges; Pace of future rebound hinges on reducing economic scarring and coronavirus testing and tracking

WASHINGTON—Global economic activity is dropping at an unprecedented pace, with US output on track to decline at an annual rate of 50 percent or more in the second quarter and then resume growth in the second half of the year, the Peterson Institute for International Economics (PIIE) forecasts in its semiannual Global Economics Prospects outlook released today.

The COVID-19 pandemic has forced wide-ranging shutdowns in many countries around the world, generating a severe global recession. Normal activity will be restored only gradually because economic structures will be damaged and creating systems of effective testing and tracking of individuals will be difficult. For 2020 as a whole, US output is likely to be 8 percent or more below last year's level. The US unemployment rate will probably peak around 20 percent in the early summer, the highest mark since the Great Depression. Almost every economy in the world will contract in the coming year, most of them sharply.

In announcing the Peterson Institute's economic outlook, Karen Dynan, PIIE nonresident senior fellow and former chief economist at the US Treasury Department, emphasized that aggressive actions by central banks and fiscal policymakers will temper the downturns, but projected that economic scarring and the difficulty of containing the virus when shutdowns are relaxed will slow the economic rebound. Although the uncertainty of the economic outlook is especially pronounced, Dynan said she expects renewed economic growth in the second half of this year and 2021.

Blanchard argued that fiscal policy in this context must have three goals—infection fighting, disaster relief, and aggregate demand management—and detailed how each presents its own set of challenges. On debt sustainability, Blanchard argued that interest rates are likely to remain very low in advanced economies, so that higher levels of debt should be sustainable. He emphasized, however, that this is unfortunately not the case in middle- and low-income economies, where debt standstills and debt restructurings are likely to be needed on a large scale.

PIIE's outlook for China sees weak global demand and continued social controls as ongoing drags on growth, though the country managed to control its initially overwhelming COVID-19 outbreak and move to "micro" mitigation that allowed it to restart about 80 percent of its economy without a second wave of infections thus far. Presenting the Peterson Institute's analysis of Asia, PIIE research fellow Martin Chorzempa noted that even countries like Singapore, which set a standard for "micro" mitigation, that allowed their economies to continue running closer to normal while controlling the virus' spread, have recently imposed painful "macro" countrywide lockdowns because of a second wave of infections. Chorzempa's assessment is that early successes can be fragile and recoveries will be slow, uneven, and full of risks.