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US, global GDP may take until at least 2022 to reach pre-pandemic levels – IMF

Economic output around the world may take until at least 2022 to return to levels seen before the coronavirus pandemic, and rising global financial vulnerabilities could hamper the recovery if left unaddressed, the International Monetary Fund said.

The IMF upgraded its global GDP forecast for 2020 on Oct. 13 with a less severe projected contraction, but it flagged a "long, uneven, and uncertain" economic rebound.

"For many countries in the world, we are seeing a return back to 2019 levels ... by 2022. But then, there are some regions in the world where [GDP] is projected to take even longer," IMF Chief Economist Gita Gopinath said in a press conference, noting that Latin America's full recovery may drag on until 2023.

For the U.S., the GDP recovery to pre-pandemic levels is unlikely until "well into 2021 and maybe 2022," Gopinath added. "We expect the path going forward to take some time."

Gopinath said the coronavirus crisis will leave economic scars, limiting global growth into the medium term to about 3.5%, with cumulative output losses of $28 trillion over 2020–2025.

The IMF said the unprecedented policy response to the pandemic worldwide has helped contain global financial stability risks in the near term. However, vulnerabilities have intensified since the pandemic and may create headwinds to the growth recovery.

"Triggers such as new virus outbreaks, policy missteps, or other shocks could interact with preexisting vulnerabilities and tip the economy into a more adverse scenario," the IMF said in its latest Global Financial Stability Report. "In such a scenario, more widespread bankruptcies could lead to a repricing of credit risk, tightening of bank lending standards, and a renewed sharp tightening of financial conditions."

Indebtedness in some sectors is reaching new highs due to additional borrowing by companies as they deal with cash shortages during the pandemic, according to Tobias Adrian, financial counselor and director of the IMF's Monetary and Capital Markets Department.

"This means that solvency risks may have shifted into the future and renewed liquidity pressures could easily morph into insolvencies, especially if the recovery is delayed," Adrian said.

In the banking sector, the IMF warned that a deeper recession may deplete the capital buffers of a "sizable weak tail of banks" to levels that could constrain their lending capacities.

Nonbank financial institutions are also facing high levels of "fragilities" that could spread through the financial system, with asset managers in danger of being forced into "fire sales" due to larger portfolio losses in another round of market turmoil, according to the IMF.

As economies chart their recovery from the coronavirus crisis, the IMF called for a continuation of accommodative monetary policy and liquidity support to aid the economic rebound.

In a post-pandemic world, countries could focus on rebuilding bank capital buffers and improving prudential supervision and the regulatory framework for nonbank financial institutions, the IMF said.