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Home / World News / V-shaped recovery not guaranteed, IMF chief economist Gita Gopinath warns UK

V-shaped recovery not guaranteed, IMF chief economist Gita Gopinath warns UK

Globally, this will likely be a prolonged recovery, with activity levels below pre-crisis levels even by the end of 2021. There are still upside risks, IMF chief economist Gita Gopinath said.

world Updated: Jul 02, 2020 13:45 IST
Bloomberg | Posted by Kanishka Sarkar
Bloomberg | Posted by Kanishka Sarkar
Gita Gopinath, chief economist with the International Monetary Fund (IMF) has warned of a prolonged recovery.
Gita Gopinath, chief economist with the International Monetary Fund (IMF) has warned of a prolonged recovery. (Bloomberg)

Britain may not get the V-shaped recovery that some Bank of England policy makers are hoping for.

Asked by a panel of UK lawmakers on Wednesday whether the country could see a smooth rebound, IMF chief economist Gita Gopinath said “many things are possible.”

“My fear is that the beginning of the recovery” will show “a spike initially, and then going forward, I think we could end up with something much more flat,” Gopinath told the House of Commons Treasury Committee. “It’s a little too early at this point to project what the rest of that path would look like.”

Globally, this will likely be a prolonged recovery, with activity levels below pre-crisis levels even by the end of 2021. There are still upside risks, she said.

Her comments follow a speech from BOE policy maker Jonathan Haskel, who said that the economy is seeing a “glimmer of hope.” BOE Chief Economist Andy Haldane said earlier this week that the recovery looks V-shaped so far in Britain.

Laurence Boone, chief economist at the OECD, told the Treasury Committee that while the economic impact on Britain is comparable to France, Spain and Italy, it will be particularly hit because of its reliance on services.

The OECD sees the UK economy shrinking 11.5% this year, while the IMF predicts a contraction of just over 10%. Gopinath reminded lawmakers that the impact of the pandemic in poor countries is much worse.

‘Really Sad’

“The U.K. having negative growth of 10% is very different to a low-income country having a negative growth rate of 10%,” she said. The projections for poverty in such countries are “really sad.”

The sectors worst affected by the pandemic are job intensive, and low-skilled workers, the young, women and minorities have taken a disproportionate hit, Gopinath said. Unemployment will come down “only gradually.”

Asked whether the 5 billion pounds of accelerated investment announced by U.K. Prime Minister Boris Johnson will be sufficient tor revive the economy, Gopinath said the multiplier effect -- the output generated for every pound of new investment -- would be “quite substantial” at a time of low employment.

Still, measures to help specific firms can only go so far. While credit guarantees made sense during the initial part of the crisis, Gopinath said, “the more prolonged it gets, and depending upon which sector the firm is operating in, you could see that this becomes very quickly a solvency problem for many firms.”

Company Failures

Debt restructuring and equity finance could help, though the best possible policy for countries to pursue now is to improve their bankruptcy procedures, according to Gopinath. “As the longevity of this crisis increases, that’s going to be important,” she said.

The risk of runaway inflation is “pretty muted at this point,” she said, when asked about the massive policy loosening deployed by global authorities to tackle the crisis. Demand is expected to remain subdued for some time, and low employment will limit wage growth.

The deficits created by the crisis cannot be left unchecked indefinitely, however. While now is not the time to be cutting spending or raising taxes, countries need to be planning for medium-term fiscal term consolidation, Gopinath said.

A return to growth in 2021 will stabilize debt, but “more will need to be done to bring down debt to pre-crisis levels,” she said.

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