IMF, G-20 warn recovery may be derailed, risks still very high

Leaders of the global economy are warning that the recovery from this year's recession is at risk and could be derailed as the resurgence of Covid-19 forces fresh restrictions on households and companies.

Both the International Monetary Fund and the Group of 20 -- which comprises the world's richest nations -- sounded the alert as leaders of the G-20 prepare for a virtual summit this weekend, hosted by Saudi Arabia. The IMF noted progress on a vaccine, but also said elevated asset prices point to a disconnect from the real economy and a potential threat to financial stability.

"While global economic activity has picked up since June, there are signs that the recovery may be losing momentum, and the crisis is likely to leave deep, unequal scars," officials at the Washington-based fund said in a report published Thursday. "Uncertainty and risks are exceptionally high."

The UK, Germany and France as well as parts of the U.S. and Australia are among those with new curbs on movement and businesses to contain the pandemic. They're not as stringent as the lockdowns imposed earlier in the year, but are still enough to damage growth.

"The recovery is uneven, highly uncertain and subject to elevated downside risks, including those arising from renewed virus outbreaks in some economies," the G-20 said in a draft communique seen by Bloomberg. "We are determined to continue to use all available policy tools as long as required to safeguard people's lives, jobs and incomes, support the global economic recovery, and enhance the resilience of the financial system."

The final wording could still change after the virtual meeting.

A Bloomberg Economics index of high-frequency data shows activity contracting since the middle of last month. It previously began a rapid recovery in May that petered out at about 80% of its normal level in July.

The fund urged governments and central banks not to prematurely withdraw policy support. The Federal Reserve and European Central Bank are debating further stimulus as soon as next month even amid mounting confidence that a vaccine for the virus is nearing.

IMF Managing Director Kristalina Georgieva on Thursday underscored that while there's been welcome news on vaccines, G-20 economies must "stay the course" with aid as the latest wave of infections drags on the global recovery.

"It's losing momentum, and in that context our first message to leaders is: do not withdraw support for the economy prematurely," Georgieva said during a panel discussion for the Bloomberg New Economy Forum. "It's so important that we don't pull back until we see the health crisis in the rear-view mirror."

Georgieva said separately in a blog post released with the report Thursday that some economies have room for greater fiscal support next year beyond current budgets, and warned against cutting off lifelines such as expanded unemployment benefits.

But talks over another stimulus package among U.S. politicians seem to have stalled and some previous measures are set to expire. In Europe, a massive recovery fund is at risk because of disagreements over conditions.

The IMF last month warned that the world economy still faces an uneven recovery until the virus is tamed. At the time, it cut its prediction for the slump this year to 4.4% from the 5.2% drop seen in June, though that would still be the deepest contraction since the 1930s.

Georgieva encouraged G-20 nations to prepare synchronized infrastructure investments once the virus is better controlled, saying in her blog post that new IMF research shows large economic gains from such spending. Should countries act alone, it would take about two-thirds more spending to achieve the same outcomes, she said.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement