IMF Raises forecast for global economic outlook

After a harrowing year, the International Monetary Fund (IMF) is raising their outlook for the global economy as coronavirus vaccinations and stimulus measures appear to be improving market optimism.

During 2020, financial markets were gripped by the growing imminence of a global recession as the coronavirus pandemic continued to rattle the world’s biggest economies. Trading was suspended on Wall Street; restaurants, shops and airlines were shutting down across the globe and the US Federal Reserve’s dramatic interest rate cut only aggravated concerns over a collapse in the global economy.

As central banks and governments continue pursuing draconian measures to try and control the coronavirus outbreak, financial markets have tumbled and economists warned that a global recession was near.

As a result, some of the world’s biggest companies were forced to take drastic action. Virgin Atlantic asked a number of workers to take eight weeks unpaid leave due to the rapid decline in passengers flying and travel restrictions being imposed by governments, British Airways announced that they’d be cancelling 75% of their flights, factory output and retail sales are falling worldwide, prompting firms to scramble for funding support. The stock market response was just as chaotic and shares were hit hard across the board.

Global growth prospects improving

During 2020, the IMF had predicted that the global economy would contract by 3.5%. However, their outlook this year is much more optimistic as they forecast that the global economy will expand by 5.5% in 2021.

The shift in outlook is largely down to strong stimulus measures, particularly President Joe Biden’s USD 1.9 trillion coronavirus stimulus plan and the rapid rollout of coronavirus vaccinations.

Both the Bank of England (BoE) and the Federal Reserve stated during their March monetary policy meetings that they expected the UK and US to make a stronger economic recovery than initially anticipated.

Last year, there were fears of a global recession as the coronavirus pandemic displayed historical parallels to other financial crises. As global COVID-19 cases increased and no vaccine appeared to be on the horizon, markets continued to be volatile and investors began to brace themselves.

The coronavirus pandemic devastated economic activity in China, which is the world’s second-largest economy. Retail sales, industrial output and fixed-asset investment, which is a prime driver of the country’s economic growth had all plunged during January and February 2020 compared to the same months in 2019.

As the impact caused by the lockdown on the Chinese economy came to light, other countries enforcing the same measures began to see detrimental economic effects. Strict lockdown measures and increased social distancing continues to strip services from countries, many of which rely upon this to boost their economy. Italy, who are currently experiencing a third wave of coronavirus infections, were expected to endure worse as containment efforts were less rigid than in China.

Central bank efforts to qualm financial market fears by slashing interest rates and introducing aggressive fiscal stimulus did little to cheer investors at the time. Former US President Donald Trump acknowledged that whilst the possibility of a coronavirus global recession was very real, also claimed that there is potential for a strong economic rebound, proving that measures taken quickly would salvage the economy in the future.

It seems to be the case that countries that implemented coronavirus restrictions early, are now in a stronger position economically than those who delayed action. New Zealand and Australia are key examples of this trend, with both countries imposing lockdowns during the beginning of 2020 and both now have very minimal new infections.

What is the impact of a global recession on currency markets?

Currency markets are experiencing extreme volatility and with interest rates at historical lows, and with new coronavirus cases still emerging, it’s likely that market volatility will continue.

In order for the global economy to stay afloat, currency markets need to be able to function in an orderly manner. In 2020, the New York Federal Reserve (Fed) announced that they would inject up to USD 500 billion into financial markets whilst the European Central Bank (ECB) gave EUR 109.1 billion to banks in an attempt to prevent money markets from seizing up.

Whilst there is only so much central banks can do, it appears that most major economies are over the worst of their economic woes. When a global coronavirus recession seemed likely, the fear was that this would trigger deep systematic issues in currency markets as firms could close down, financial companies and households may enter debt crises and the service sector could see a prolonged period of recovery.

Many well-recognised firms have been struggling

In the UK, Laura Ashley became the first retailer to close due to the coronavirus. The company, which had been in operation since 1953 had been severely hit by the Covid-19 outbreak and despite trading up by 24% going into March on the same period last year, the uncertainty around cash flow called for the company to enter administration.

Laura Ashley operated 150 stores in the UK and placed 2,700 jobs at risk after confirming that shareholders would no longer provide additional financial support and experts forecast that other financially weak retailers would likely befall to the same fate as the coronavirus outbreak developed.

The closure of Arcadia Group was another disappointing milestone for UK retail, as it was announced that clothing giants such as Topshop, Dorothy Perkins and Miss Selfridge would all have to close their high street stores.

The worst-affected industries however are the hospitality, catering and travel and tourism sectors. Britain’s hospitality industry contributes over GBP 120 billion to the UK economy each year and understandably the industry has taken a significant hit with bars and restaurants closed since January this year. With UK non-essential businesses opening 12th April, it looks as though the UK is set to see a strong economic recovery this year.