The International Monetary Fund is forecasting a deeper global recession than anticipated in 2020, and a more sluggish recovery next year, as the world battles the economic shock associated with the Covid-19 pandemic – and the organisation has warned an abrupt withdrawal of fiscal support could deepen the downturn.

With a spike in infections in Victoria prompting fears of a second wave in Australia, and with global infections continuing to rise, the IMF in its latest global outlook has urged all countries “including those that have seemingly passed peaks in infections” to ensure their health systems are adequately resourced to deal with the pandemic.

The IMF has also made the case for a continuation of fiscal support in countries where lockdowns remain in force. It says governments need to “cushion household income losses with sizeable, well-targeted measures as well as provide support to firms suffering the consequences of mandated restrictions on activity”.

While the IMF downgraded the global growth forecast, the treasurer Josh Frydenberg welcomed an upgrade in the economic outlook for Australia. “According to the IMF, the economic outlook for Australia is the second best among all advanced economies, second only to Korea,” the treasurer said.

But Frydenberg noted the IMF had also warned of the devastating impact a second Covid-19 outbreak could have on the global economy, with global growth 4.9% lower in 2021 and 3.3% lower in 2022 were a second outbreak to occur.

With the Morrison government currently pondering the future of its jobseeker and jobkeeper payments, the IMF has warned the exit from targeted support “such as wage subsidies for furloughed workers, cash transfers, enhanced eligibility criteria for unemployment insurance, credit guarantees for firms, and moratoria on debt service – should proceed gradually to avoid precipitating sudden income losses and bankruptcies just as the economy is beginning to regain its footing”.

Echoing that broad rationale, on Wednesday Australia’s small business ombudsman and major employer groups called on the government not to reduce jobseeker unemployment benefits to $40 a day. The ombudsman, Kate Carnell, warned the Senate Covid-19 committee the government’s plan to reintroduce childcare fees from 13 July would have a “significant impact” on small business owners struggling to get “back up and running” as restrictions ease.

In a chorus representing businesses large and small the Australian Industry Group, Business Council of Australia and Council of Small Business Organisations called on the government to retain higher unemployment benefits and not to scrap jobkeeper wage subsidies without further industry assistance.

The Morrison government has been highlighting the costs of the Covid-19 fiscal supports as part of preparing the public for a transition away from the special measures introduced to cushion people from the economic shock triggered by the pandemic. With a review of the jobkeeper payment due in July, the government over the past couple of weeks has become more pointed in telling voters current income support has a finite shelf life.

In its latest update to its world economic outlook, the IMF says it is appropriate that governments “gradually” unwind targeted support as economies begin to reopen.

But the IMF says stimulus will likely be required for some time to support recovery. “Policies should provide stimulus to lift demand and ease and incentivise the reallocation of resources away from sectors likely to emerge persistently smaller after the pandemic”.

It says when economies reopen and restrictions on social distancing ease, “fiscal policies should gradually transition away from firm support to better targeted household support, taking into account the extent of informality in the economy”.

“Employment support measures will need to encourage safe return to jobs and facilitate structural shifts in labour markets for a more resilient post–Covid-19 economy.

“Once the pandemic is under control, broad-based fiscal stimulus to support the recovery could focus on public investment, including on physical and digital infrastructure, health care systems, and the transition to a low-carbon economy.”

The shadow treasurer, Jim Chalmers, said the latest update from the IMF highlighted the risks of the government moving too quickly in removing support.

“Failing to heed the advice of the IMF, the Reserve Bank and others would mean even more Australians are left behind by this government during the first recession in three decades,” Chalmers said.

“Australians have worked together to combat the virus, but more work must be done by the Morrison government to ensure the hardest-hit Australians are not left out and left behind during this recession.”