## World Economic Outlook: October 2020 — Text ## Source details **Canonical URL:** [World Economic Outlook: October 2020 — Text](https://www.imf.org/-/media/files/publications/weo/2020/october/english/text.pdf) ## Other formats - [Markdown version](/-/media/files/publications/weo/2020/october/english/text.pdf.md) - [Structured JSON version](/-/media/files/publications/weo/2020/october/english/text.pdf.json) --- ### Assumptions and Conventions - Real effective exchange rates assumed constant at their average levels during July 24 to August 21, 2020, except currencies in ERM II assumed constant in nominal terms relative to the euro. - Established policies of national authorities assumed to be maintained. - Oil price assumptions: - Average price of oil: $41.69 a barrel in 2020 and $46.70 a barrel in 2021; assumed to remain unchanged in real terms over the medium term. - Interest rate assumptions: - Six-month LIBOR on US dollar deposits: average 0.7 percent in 2020 and 0.4 percent in 2021. - Three-month euro deposit rate: average –0.4 percent in 2020 and –0.5 percent in 2021. - Six-month Japanese yen deposit rate: average 0.0 percent in 2020 and 2021. - Projections are based on statistical information available through September 28, 2020. - Conventions include: “. . .” indicates data not available; “Billion” = thousand million; “trillion” = thousand billion; “Basis points” = hundredths of 1 percentage point. ### Global Outlook and Key Projections - Near-term: - Global growth projected at −4.4 percent in 2020. - Global growth projected at 5.2 percent in 2021. - Level of global GDP in 2021 expected to be 0.6 percent above that of 2019. - Medium-term: - Global growth expected to gradually slow to about 3.5 percent into the medium term. - After rebound in 2021, limited progress toward pre-pandemic projected path for 2020–25. - Select country and group projections (2019 / 2020 / 2021): - World output: 2.8 percent; −4.4 percent; 5.2 percent. - Advanced Economies: 1.7 percent; −5.8 percent; 3.9 percent. - United States: 2.2 percent; −4.3 percent; 3.1 percent. - Euro Area: 1.3 percent; −8.3 percent; 5.2 percent. - Emerging Market and Developing Economies: 3.7 percent; −3.3 percent; 6.0 percent. - China: 6.1 percent; 1.9 percent; 8.2 percent. - India (fiscal year basis): 4.2 percent; −10.3 percent; 8.8 percent. - Trade and prices: - World trade volume (goods and services): 1.0 percent; −10.4 percent; 8.3 percent. - Oil (US dollars, simple average): −10.2 percent; −32.1 percent; 12.0 percent. (Average price: $61.39 in 2019; assumed $41.69 in 2020 and $46.70 in 2021.) - Inflation: - Consumer prices, Advanced Economies: 1.4 percent; 0.8 percent; 1.6 percent. - Consumer prices, Emerging Market and Developing Economies: 5.1 percent; 5.0 percent; 4.7 percent. ### Human and Social Impact - Health and poverty: - More than one million lives lost to COVID-19 since the start of the year (as of text). - Close to 90 million people are expected to fall into extreme deprivation this year. - Education and human capital: - More than 1.6 billion learners worldwide affected by school and university closures. - School closures pose significant risk to long-term human capital accumulation. - Labor markets: - Global reduction in work hours in Q2 2020 vs Q4 2019 equivalent to the loss of 400 million full-time jobs (deepening from 155 million in Q1). - The crisis disproportionately affected women, the informally employed, and those with relatively lower educational attainment. ### Baseline Assumptions, Scarring, and Risks - Baseline assumptions: - Social distancing continues into 2021, fades as vaccine coverage expands and therapies improve. - Local transmission brought to low levels everywhere by end-2022. - Major central banks assumed to maintain current settings throughout forecast horizon to end-2025. - Financial conditions assumed to remain broadly at current levels. - Sources of scarring include: - Firm bankruptcies, adjustment costs, resource reallocation, discouraged workers’ exit. - Pre-pandemic forces: slow investment growth, modest human capital improvements, slower efficiency gains. - Key risks and uncertainties: - Path of the pandemic, public health responses, global spillovers from weak demand, tourism, remittances. - Possibility of renewed lockdowns, rising bankruptcies, sudden stops in lending, and tightening financial conditions. - Geopolitical tensions and trade/technology frictions, including Brexit timing risk. ### Scenarios — Downside and Upside (G20 Model) - Downside scenario — outcomes relative to baseline: - Global growth in 2020 roughly ¾ percentage point weaker and almost 3 percentage points weaker in 2021. - Level of global GDP roughly 1.5 percent below baseline by end-2025. - Debt dynamics by 2022: debt-to-GDP ratios rise well above 10 percentage points on average for advanced economies; rise by 5 percentage points for emerging markets. - Upside scenario — outcomes relative to baseline: - Global growth roughly ½ percentage point higher in 2021, rising to roughly 1 percentage point higher by 2023. - By 2025 level of global GDP roughly 2 percent above baseline. - Fiscal outcomes by end of WEO horizon: debt-to-GDP ratios fall by roughly 5 percentage points for both advanced and emerging market economies. ### Policy Actions and Recommendations — Near Term - Immediate public-health priorities: - Ensure health care systems cope: testing, contact tracing, personal protective equipment, ventilators, emergency and ICU capacity. - In countries with accelerating infections, use mitigation measures (lockdowns effective). - Economic policy near-term guidance: - Prevent premature withdrawal of policy support. - Continue support to preserve jobs: moratoria on debt service, equity-like support, wage subsidies, targeted temporary tax breaks, cash transfers, paid sick and family leave, expanded unemployment insurance. - Boost credit provision via central bank liquidity support, targeted relending facilities, regulatory easing on loan classification/provisioning. - Use accommodative monetary policy where inflation expectations are anchored. - For constrained countries: - Prioritize crisis countermeasures and reduce poorly targeted subsidies. - Seek creditor and donor help: debt restructuring, grants, concessional financing, debt service suspension initiatives. ### Policy Actions and Recommendations — Medium Term and Structural - Fiscal and structural priorities: - Design near-term support to lift potential output, ensure participatory growth, and protect vulnerable groups. - Investment priorities: health, education, high-return infrastructure that reduces carbon dependence, research to foster innovation and technology adoption. - Safeguard social spending and expand safety nets. - Increase progressivity of taxes where needed; ensure corporations pay fair share; eliminate wasteful spending. - Where fiscal rules constrain action, temporary suspension with commitment to gradual consolidation post-crisis. - Multilateral cooperation: - Fund advance purchase commitments for vaccines with strong multilateral components for equitable distribution. - Strengthen global financial safety net; IMF provided funding to about 80 countries at unprecedented speed since onset of crisis. - Joint action on climate mitigation combining rising carbon prices with green investment push. ### Financial Conditions and Debt Dynamics - Policy response size: - Discretionary revenue and spending measures in advanced economies amount to more than 9 percent of GDP, with another 11 percent in liquidity support. - Emerging market and developing economies: about 3.5 percent of GDP in discretionary budget measures and more than 2 percent in liquidity support. - Sovereign debt projections: - Advanced economies: sovereign debt to GDP projected to rise by 20 percentage points to about 125 percent of GDP by end-2021. - Emerging market and developing economies: rise by more than 10 percentage points to about 65 percent of GDP by end-2021. - Low interest rates mitigate debt service costs, but ratio of sovereign debt service to tax revenue expected to increase for several emerging markets and low-income countries. ### Labor Markets, Inequality, and Education - Unequal impact: - ILO estimate: 42 percent of informally employed women work in severely affected sectors vs about 32 percent of men in informal employment. - School closures increase risk of food insecurity, exposure to violence/exploitation, earlier marriages, teen pregnancies, child labor. - Inflation dynamics: - Advanced economies: inflation projected at 0.8 percent in 2020, 1.6 percent in 2021, stabilizing near 1.9 percent medium term. - Emerging market and developing economies: 5.0 percent in 2020, 4.7 percent in 2021, moderating thereafter. ### The Great Lockdown — Causes and Mobility Evidence - Lockdowns and voluntary social distancing: - Lockdowns and voluntary social distancing played near comparable roles in driving the recession. - A full lockdown tightening can reduce mobility by about 25 percent within a week. - A doubling of daily COVID-19 cases leads to a contraction in mobility by about 2 percent. - Lockdowns are more effective in curbing infections when introduced early and when sufficiently stringent; a stringent lockdown reduces cumulated infections by about 40 percent after 30 days. - Job postings and sectoral effects (Indeed data): - Contact-intensive jobs (hospitality, personal care, food) declined before stay-at-home orders — likely voluntary social distancing. - Manufacturing job postings declined closer to stay-at-home orders. - Removal of stay-at-home orders produced only marginal increases in job postings. - Distributional mobility effects (Vodafone data for Italy, Portugal, Spain): - Stay-at-home orders for ages 25–44 coincided with a drop of about 20 percent in the share leaving home. - Effect on women stronger by about 2 percent compared with men for ages 25–44. - Younger cohorts (ages 18–24 and 25–44) experienced stronger mobility reductions than older cohorts. ### SMEs, Liquidity, Insolvency, and Policy Options - SME distress estimates (Orbis data, 21 mostly advanced economies): - Firms in distress account for 9 to 13 percent of total SME in-sample employment, depending on distress measure. - Distress represents almost a doubling of SME jobs at risk due to liquidity risks (and a 50 percent increase due to insolvency risks) compared with no-COVID counterfactual. - Sectoral job-risk concentration (illiquidity measure): Arts and entertainment share climbs to 30 percent; Food and accommodation share climbs to 40 percent. - Policy simulations for SME support: - Giving all SMEs 5 percent of their pre-pandemic annual revenues (more than 4 percent of GDP) via government loans or equity-like injections: - Both ease liquidity risks similarly. - Only equity(-like) injections reduce insolvency risks and reduce share of jobs at risk by almost 3 percentage points relative to no-support panel. - Trade-offs: equity-like injections increase fiscal risks and may attract unviable firms. - Recommendations: - Extend support longer; consider equity-like interventions where fiscal space exists. - For larger firms: direct equity injections or junior debt with warrants. - For SMEs: combine grants with future temporary higher corporate tax, strengthen out-of-court restructuring, cut legal and financial bankruptcy costs, and develop distressed debt markets. ### Commodity Markets and Food Prices - Food and beverage price index increased by 0.7 percent (period in source). - Food consumer price subindex changes: United States +4.5 percent between February and June; euro area +1.3 percent; China −9.7 percent. - Rice price up 12.6 percent; Corn prices down 13.0 percent; Soybean prices down 13.0 percent. - Food prices projected to increase by 0.4 percent year over year in 2020 and by 4.3 percent in the year thereafter. - Upside risks: supply chain disruptions and export restrictions. ### Coal, Energy Transition, and Climate Mitigation (Chapter 3 Highlights) - Coal consumption and concentration: - Top five coal consumers (China, India, United States, Russia, Japan) account for 76.7 percent of global coal consumption. - China accounts for about half of global coal consumption. - Emerging markets account for 76.8 percent of coal consumption. - Industry accounts for about 20 percent of total coal consumption. - Coal externalities: - Coal is 2.2 times as carbon intense as natural gas when burned to generate heat and electricity. - Coal contributes about 44 percent of all CO2 emissions and 72 percent of all power sector emissions. - Coal transition empirical findings: - Per capita coal consumption peaks and then declines; turning point of absolute coal dependence ranges from $35,000 to $39,000 income per capita. - Average time to phase out coal once it reaches its largest share in the energy mix: 76 years. - For China, coal share peaked in 2013; implies at least another 38 years of coal consumption under business-as-usual. - Industrial coal share in emerging markets: 33 percent. - Coal-fired plants minimum design lifespan: 30–40 years. - Key statistics: - Turning point of absolute coal dependence: $35,000 to $39,000. - Average annual decline in coal per capita after peak across countries: 2.3 percent (1971–2017). - United Kingdom carbon price support: initially £9 a metric ton of CO2, gradually doubled to £18. - Policy recommendations regarding coal: - Combine carbon pricing with green investment and compensation for affected groups. - Provide financial and technical assistance to emerging markets to build grids accommodating intermittent renewables and limit funding of new coal plants. ### Mitigating Climate Change — Growth- and Distribution-Friendly Strategies (Chapter 3) - Objective in analysis: bring net carbon emissions to zero by 2050 (operationalized as gross emissions down by 80 percent with natural sinks and negative-emission technologies). - Recommended policy package components: - Green supply policies: - 80 percent subsidy rate on renewables production. - 10-year green public investment program starting at 1 percent of GDP, linearly declining to zero over 10 years; maintenance thereafter. - Carbon pricing: - Calibrated to achieve 80 percent gross emissions reduction by 2050. - High annual growth rate of carbon prices: 7 percent. - Needed carbon prices: start between $6 and $20 a ton of CO2; reach between $10 and $40 a ton of CO2 in 2030; between $40 and $150 a ton of CO2 in 2050. - Compensatory transfers: - Households receive compensation equal to one-fourth of carbon tax revenues to protect poor households. - Supportive macro policy: debt financing over first decade amid low-for-long interest rates. - Modeling outcomes (G-Cubed model): - Emissions reduced by about 75 percent from current levels, reaching about 9 gigatons by mid-century; net emissions to zero mid-century and negative thereafter. - Policy package initially boosts global GDP and employment (employment higher by 12 million people per year on average between 2021–2027). - After 15 years, GDP lower by up to about 1 percent relative to baseline; net drag about 0.7 percent on average between 2036–50. - Over long term, avoided damages yield large gains; estimated net output gains could reach up to 13 percent of global GDP by 2100 (depending on damage assumptions). - Distributional design and revenue recycling: - Recycling one-sixth to one-quarter of carbon revenues as targeted transfers could fully compensate the poorest 20 percent of households. - Fully compensating poorest 40 percent requires recycling between 40 and 55 percent of revenues. - Combining carbon pricing with green R&D subsidies significantly lowers required carbon prices. - International participation: - Advanced-economies-only action insufficient; top-five countries acting together (United States, Europe, China, Japan, India) would cut global emissions substantially (about 55 percent from baseline by mid-century). - Partial participation creates leakage via lower fossil-fuel prices and relocation of carbon-intensive activity. - Policy sequencing and timing: - Front-loaded green investment combined with gradually rising carbon prices is growth-friendly. - Use near-term window of low interest rates to finance green infrastructure. - Complementary labor policies: reskilling and support for reallocation of about 2 percent of jobs from high- to low-carbon sectors. ### Data, Standards, and Statistical Notes - WEO data and metadata provided “as is” and “as available”; historical data updated as new information becomes available. - Data refer to calendar years except for select fiscal-year countries. - Composite country-group figures represent calculations based on 90 percent or more of the weighted group data unless noted. - Statistical assumptions underpinning projections include exchange rate and LIBOR averages previously stated and the oil price assumptions listed above. *International Monetary Fund | October 2020 — World Economic Outlook: A Long and Difficult Ascent (text).* ### Preface ### Preface ### Assumptions and Conventions - Real effective exchange rates assumed constant at their average levels during July 24 to August 21, 2020, except currencies in ERM II assumed constant in nominal terms relative to the euro. - Established policies of national authorities assumed to be maintained (see Box A1 in the Statistical Appendix for specific fiscal and monetary policy assumptions for selected economies). - Oil price assumptions: - Average price of oil: $41.69 a barrel in 2020 and $46.70 a barrel in 2021; assumed to remain unchanged in real terms over the medium term. - Interest rate assumptions: - Six-month LIBOR on US dollar deposits: average 0.7 percent in 2020 and 0.4 percent in 2021. - Three-month euro deposit rate: average –0.4 percent in 2020 and –0.5 percent in 2021. - Six-month Japanese yen deposit rate: average 0.0 percent in 2020 and 2021. - Projections are based on statistical information available through September 28, 2020. - Conventions used throughout the WEO: - “. . .” indicates data not available or not applicable. - “–” between years or months (for example, 2019–20 or January–June) indicates the years or months covered. - “/” between years or months (for example, 2019/20) indicates a fiscal or financial year. - “Billion” means a thousand million; “trillion” means a thousand billion. - “Basis points” refers to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point). - Data refer to calendar years except for a few countries that use fiscal years (see Table F in the Statistical Appendix for exceptions). - Some figures for 2019 and earlier may be based on estimates rather than actual outturns (see Table G in the Statistical Appendix). - Composite country-group figures represent calculations based on 90 percent or more of the weighted group data, unless noted otherwise. - The terms “country” and “economy” include some territorial entities that are not states but for which statistical data are maintained separately. - Map boundaries, colors, denominations, and other information do not imply any IMF judgment on legal status or endorsement of boundaries. - Minor discrepancies between sums of constituent figures and totals reflect rounding. ### What’s New in this Publication - Following the recent release of the 2017 International Comparison Program (ICP) survey for new purchasing-power-parity benchmarks, the WEO’s estimates of purchasing-power-parity weights and GDP valued at purchasing power parity have been updated. (See Box 1.1 in the October 2020 WEO for details.) - Starting with the October 2020 WEO, data and forecasts for Bangladesh and Tonga are presented on a fiscal year basis. - Data for West Bank and Gaza are now included in the WEO and are added to the Middle East and Central Asia regional group. ### Further Information, Corrections, and Editions - Corrections and revisions discovered after publication are incorporated into the digital editions available from the IMF website and the IMF eLibrary; all substantive changes are listed in the online table of contents. - Print copies of this WEO can be ordered from the IMF bookstore at imfbk.st/29296. - Multiple digital editions of the WEO, including ePub, enhanced PDF, and HTML, are available on the IMF eLibrary at http://www.elibrary.imf.org/OCT20WEO. - A free PDF of the report and data sets for each chart is available from the IMF website at www.imf.org/publications/weo. ### Data: Availability, Quality, and Use - The WEO data and metadata are provided “as is” and “as available”; every effort is made to ensure timeliness, accuracy, and completeness, but these cannot be guaranteed. - Historical data and projections are based on information gathered by IMF country desk officers through missions and ongoing country analysis; historical data are updated continually as more information becomes available. - Structural breaks in data may be adjusted (for example, via splicing) to produce smooth series; IMF staff estimates may serve as proxies when complete information is unavailable. - WEO data can differ from other official sources, including the IMF’s International Financial Statistics. - Corrections and revisions made after publication are incorporated into electronic editions on the IMF eLibrary and IMF website; all substantive changes are listed in the online tables of contents. - For details on terms and conditions for using the WEO database, refer to the IMF Copyright and Usage website. ### Contact and Inquiries - Inquiries about the WEO content and the WEO database should be sent to: - World Economic Studies Division, Research Department, International Monetary Fund, 700 19th Street, NW, Washington, DC 20431, USA - Fax: (202) 623-6343 - Online Forum: www.imf.org/weoforum *Preface, World Economic Outlook: October 2020 (text - Preface).* ### PREFACE ### PREFACE ### Coordination and contributors - The analysis and projections are integral to the IMF’s surveillance of economic developments and policies and draw primarily on information the IMF staff gathers through its consultations with member countries. - Consultations were carried out in particular by the IMF’s area departments: African Department, Asia and Pacific Department, European Department, Middle East and Central Asia Department, and Western Hemisphere Department—together with the Strategy, Policy, and Review Department; the Monetary and Capital Markets Department; and the Fiscal Affairs Department. - The analysis in this report was coordinated in the Research Department under the general direction of Gita Gopinath, Economic Counsellor and Director of Research. - Project direction and chapter leadership: - Project directed by Gian Maria Milesi-Ferretti, Deputy Director, Research Department, and Malhar Nabar, Division Chief, Research Department. - Oya Celasun, Division Chief, Research Department directed Chapter 3. - Primary contributors: Philip Barrett, John Bluedorn, Christian Bogmans, Benjamin Carton, Francesca Caselli, Johannes Eugster, Francesco Grigoli, Florence Jaumotte, Toh Kuan, Weicheng Lian, Weifeng Liu, Adil Mohommad, Andrea Pescatori, Evgenia Pugacheva, Damiano Sandri, Marina Tavares, Nico Valckx, and Simon Voigts. - Other contributors include Gavin Asdorian, Srijoni Banerjee, Eric Bang, Thomas Brand, Luisa Calixto, Sophia Chen, Wenjie Chen, Gabriela Cugat, Sonali Das, Federico Diez, Angela Espiritu, Niels-Jakob Hansen, Jinjin He, Mandy Hemmati, Youyou Huang, Benjamin Hunt, Christopher Johns, Jaden Jonghyuk Kim, Lama Kiyasseh, Eduard Laurito, Jungjin Lee, Claire Mengyi Li, Chiara Maggi, Susanna Mursula, Futoshi Narita, Savannah Newman, Cynthia Nyanchama Nyakeri, Emory Oakes, Nicola Pierri, Yiyuan Qi, Daniela Rojas Fernandez, Max Rozycki, Susie Xiaohui Sun, Nicholas Tong, Shan Wang, Julia Xueliang Wang, Yarou Xu, Hannah Leheng Yang, and Huiyuan Zhao. - Editorial and production: Joseph Procopio (Communications Department) led the editorial team, with production and editorial support from Christine Ebrahimzadeh, and editorial assistance from Lucy Scott Morales, James Unwin, Harold Medina (and team), and Vector Talent Resources. - The analysis benefited from comments and suggestions by staff members from other IMF departments and by Executive Directors following their discussion of the report on September 30, 2020. Both projections and policy considerations are those of the IMF staff and should not be attributed to Executive Directors or to their national authorities. ### Human and social impact of COVID-19 - More than one million lives have been lost to COVID-19 since the start of the year and the toll continues to rise. - Close to 90 million people are expected to fall into extreme deprivation this year. - Employment and labor force participation remain well below pre-pandemic levels, and many more millions of jobs are at risk the longer this crisis continues. - The crisis disproportionately affected women, the informally employed, and those with relatively lower educational attainment. - School closures during the pandemic pose a significant new challenge that could set back human capital accumulation severely. ### Near-term and medium-term economic outlook - Near-term outlook: - Global growth is projected at −4.4 percent in 2020. - Global growth is projected at 5.2 percent in 2021. - Following the contraction in 2020 and recovery in 2021, the level of global GDP in 2021 is expected to be a modest 0.6 percent above that of 2019. - The growth projections imply wide negative output gaps and elevated unemployment rates this year and in 2021 across both advanced and emerging market economies. - Medium-term outlook: - After the rebound in 2021, global growth is expected to gradually slow to about 3.5 percent into the medium term. - The medium-term projections imply only limited progress toward catching up to the path of economic activity for 2020–25 projected before the pandemic for both advanced and emerging market and developing economies. - The pandemic will reverse the progress made since the 1990s in reducing global poverty and will increase inequality. - The subdued outlook comes with a significant projected increase in the stock of sovereign debt and downward revisions to potential output, implying a smaller tax base over the medium term. ### Baseline assumptions and scarring - Baseline projection assumptions: - Social distancing will continue into 2021 but will subsequently fade over time as vaccine coverage expands and therapies improve. - Local transmission is assumed to be brought to low levels everywhere by the end of 2022. - Economies will experience scarring from the depth of the recession and the need for structural change, entailing persistent effects on potential output. - Sources of scarring include: - Adjustment costs and productivity impacts for surviving firms as they upgrade workplace safety. - Amplification of the shock via firm bankruptcies. - Costly resource reallocation across sectors. - Discouraged workers’ exit from the workforce. - Compounded pre-pandemic forces: relatively slow investment growth, more modest improvements in human capital, and slower efficiency gains in combining technology with factors of production. ### Risks and uncertainty - The uncertainty surrounding the baseline projection is unusually large. - Key sources of uncertainty: - The path of the pandemic, the needed public health response, and the associated domestic activity disruptions, most notably for contact-intensive sectors. - The extent of global spillovers from soft demand, weaker tourism, and lower remittances. - Some economies have experienced worse prospects compared to the June forecast, notably emerging market and developing economies where infections are rising rapidly. - Emerging market and developing economies, excluding China, are projected to incur a greater loss of output over 2020-21 relative to the pre-pandemic projected path when compared to advanced economies. ### Policy actions and recommendations - Past policy responses: - Sizable, swift, and unprecedented fiscal, monetary, and regulatory responses have maintained disposable income for households, protected cash flow for firms, and supported credit provision. - Collectively these actions have so far prevented a recurrence of the financial catastrophe of 2008-09. - Notable policy innovations include the establishment of the European Union pandemic recovery package fund, the launch of asset purchases by emerging market central banks, and novel use of digital technologies to deliver social assistance. - Near-term policy guidance: - Preventing further setbacks will require that policy support is not prematurely withdrawn. - The path ahead requires skillful domestic policies that manage trade-offs between lifting near-term activity and addressing medium-term challenges. - Sustaining the recovery will require strong international cooperation on health and financial support for countries facing liquidity shortfalls. - To preserve jobs, governments where possible should continue to support viable but still vulnerable firms with moratoria on debt service and equity-like support. - Over time, policies should shift gradually to facilitating reallocation of workers from sectors likely to shrink on a long-term basis to growing sectors, with support for workers via income transfers, retraining, and reskilling programs. - For constrained countries: - Countries constrained by elevated debt and higher borrowing costs should create room for immediate spending needs by prioritizing crisis countermeasures and reducing poorly targeted subsidies. - Some will require additional help from creditors and donors through debt restructuring, grants, and concessional financing. - The IMF has been central to initiatives including a joint call with the World Bank on debt service suspension for low-income countries, calls for reform of the international debt architecture, and extension of funding at unprecedented speed to several member countries. - Health and vaccine policy: - Ensure all innovations in testing, treatments, or vaccines are produced at scale for the benefit of all countries. - Advance purchase commitments for vaccines under trial can help spur production and should include a strong multilateral component to help distribute doses to all countries at affordable prices. - Continued international support is needed to help countries with limited health care capacity through sharing equipment, know-how, and financial support from international health agencies. - Fiscal and structural priorities: - Near-term support policies should be designed to place economies on paths of stronger, equitable, and sustainable growth. - Policymakers can mitigate climate change and bolster recovery through a comprehensive package that includes a sizable green public infrastructure push, a gradual rise in carbon prices, and compensation for lower income households to make the transition fair. - Expanding safety nets can ensure the most vulnerable are protected while supporting near-term activity. - Investments in health and education (including to remedy losses incurred during the pandemic) can help achieve participatory and inclusive growth. - To ensure debt remains on a sustainable path over the medium-term, governments may need to increase the progressivity of their taxes and ensure that corporations pay their fair share of taxes while eliminating wasteful spending. *International Monetary Fund | October 2020* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Global outlook and risks - Activity picked up in May and June as economies reopened, with retail sales rising and industrial production remaining well below December levels. - Second quarter GDP outturns delivered positive surprises in some economies (China, United States, euro area) and weaker-than-projected outcomes in others (India, Mexico, Korea, Philippines). - Global trade began recovering in June as lockdowns were eased, with China an important contributor. - The pandemic continues to spread: by late September, confirmed infections worldwide exceeded 33 million, with over a million deaths—up from more than 7 million infections and 400,000 deaths at the time of the June 2020 WEO Update. - Reopening has stalled in many countries as infections rose, with some jurisdictions reinstating partial lockdowns. - A strong rebound occurred in the third quarter, but momentum entering the fourth quarter appears to be slowing; business surveys point to stronger activity in manufacturing but setbacks for services in some countries. ### Labor markets and inflation - Labor market impact: the global reduction in work hours in the second quarter of 2020 compared with the fourth quarter of 2019 was equivalent to the loss of 400 million full-time jobs, deepening from the equivalent 155 million full-time jobs lost in the first quarter. - Gender and informality effects: the International Labour Organization estimates that 42 percent of informally employed women work in severely affected sectors of the economy, compared with about 32 percent of men in informal employment. - Inflation: despite increases in prices for medical supplies and a lift in commodity prices from April troughs, weak aggregate demand has generally outweighed supply interruptions; inflation in advanced economies remains below pre-pandemic levels, while inflation in emerging market and developing economies declined sharply initially but has since picked up in some countries (for example, India, reflecting supply disruptions and a rise in food prices). ### Nature of the recession and sectoral implications - This recession is unique: service sectors reliant on face-to-face interactions—particularly wholesale and retail trade, hospitality, and arts and entertainment—have experienced larger contractions than manufacturing. - Without a vaccine and effective therapies, contact-intensive sectors face a particularly difficult path back to normalcy. ### Uncertainties and downside scenarios - A third set of factors comprises financial market sentiment and its implications for global capital flows. - Uncertainty surrounds damage to supply potential, depending on: persistence of the pandemic shock; size and effectiveness of policy response; and extent of sectoral resource mismatches. - Upside possibilities: progress with vaccines and treatments, changes in workplace and consumer behavior to reduce transmission, and extension of fiscal countermeasures into 2021 could lift activity above the baseline forecast. - Downside risks remain sizable: virus resurgence, slower-than-anticipated progress on treatments and vaccines, unequal access across countries, renewed social distancing and tighter lockdowns, rising bankruptcies compounding job and income losses, sudden stops in new lending or failure to roll over existing debt to vulnerable economies, and cross-border spillovers from weaker external demand. ### Policy priorities — near term and medium term - Design near-term support to guide economies toward stronger, equitable, and resilient growth while combating the deep recession. - Prioritize tax and spending measures that: - Help lift potential output. - Ensure participatory growth that benefits all. - Protect the vulnerable. - Favor additional debt financing when allocated to initiatives that increase the economy’s size and future tax base over wasteful current spending or ill-targeted subsidies. - Recommended investment priorities: - Health and education. - High-return infrastructure projects that help move the economy to lower carbon dependence. - Research spending to facilitate innovation and technology adoption. - Safeguard critical social spending to protect vulnerable groups and support near-term activity, given higher propensities to spend among recipients. - Adhere to highest standards of debt transparency to avoid future rollover difficulties and higher sovereign risk premiums. - Where fiscal rules constrain action, temporary suspension is warranted, combined with a commitment to a gradual consolidation path after the crisis to restore compliance with rules over the medium term. - Create room for immediate spending by prioritizing crisis countermeasures and reducing wasteful and poorly targeted subsidies. - Consider extending maturities on public debt and locking in low interest rates to reduce debt service. - Although new revenue measures during the crisis are difficult, authorities may need to consider raising progressive taxes on more affluent individuals and those relatively less affected by the crisis (including increasing tax rates on higher income brackets, high-end property, capital gains, and wealth) and changes to corporate taxation commensurate with profitability. - Cooperate internationally on the design of international corporate taxation to respond to digital economy challenges. ### Health policy and the path to reopening - All countries need to ensure health care systems can cope with elevated demand by securing adequate resources and prioritizing health care spending, including: - Testing. - Contact tracing. - Personal protective equipment. - Life-saving equipment (such as ventilators). - Facilities (emergency rooms, intensive care units, isolation wards). - Countries with rising infections need mitigation measures that slow transmission; lockdowns are effective in bringing down infections. - Economic policy should: - Cushion income losses for affected people and firms. - Support resource reallocation away from contact-intensive sectors. - Pursue retraining and reskilling where feasible, and provide extended income support during transitions. - Use broad-based accommodative monetary and fiscal responses, where fiscal space exists, to prevent deeper, longer-lasting downturns. - As countries reopen, policies should: - Gradually remove targeted support. - Facilitate reallocation of workers and resources to less affected sectors. - Provide stimulus where needed. - Redeploy some fiscal resources to public investment—renewable energy, improving power transmission efficiency, retrofitting buildings to reduce carbon footprint. - Expand social spending where safety net gaps exist (paid family and sick leave, unemployment insurance eligibility, health care benefit coverage). - Employ accommodative monetary policy where inflation expectations are anchored to contain borrowing costs. ### Multilateral cooperation and global public goods - Strong multilateral efforts are needed to fight the health and economic crisis. - Key priorities: - Fund advance purchase commitments for vaccines under trial to incentivize rapid scaling up of production and worldwide distribution of affordable doses (bolstering multilateral initiatives for vaccine development and manufacture, including the Coalition for Epidemic Preparedness Innovations and Gavi, the Vaccine Alliance). - Help countries with limited health care capacity through assistance with medical equipment, know-how, debt relief, grants, and concessional financing—particularly for low-income countries. - Where debt restructuring is needed, creditors and low-income-country and emerging market borrowers should quickly agree on mutually acceptable terms. - Strengthen the global financial safety net to help countries deal with external funding shortfalls; the IMF has provided funding from its various lending facilities to about 80 countries at unprecedented speed since the onset of the crisis. - Joint action on climate change mitigation is required: a package combining steadily rising carbon prices with a green investment push can reduce emissions consistent with the 2015 Paris Agreement targets, raise global activity through near-term green infrastructure investment, impose modest medium-term output costs during the transition away from fossil fuels, and significantly boost incomes in the second half of the century by avoiding climate damages and catastrophic risks. - Urgent steps to strengthen defenses against calamitous health crises include augmenting stockpiles of protective equipment and essential medical supplies, financing research, and ensuring adequate ongoing assistance to countries with limited health care capacity, including through support of international organizations. *Source: Executive Summary, WORLD ECONOMIC OUTLOOK: A LONG AND DIFFICULT ASCENT (text - EXECUTIVE SUMMARY).* ### 1. Advanced Economies ### 1. Advanced Economies ### Labor market and sectoral impacts - Weekly initial jobless claims in the United States continued close to 1 million into late September, indicating sustained widespread layoffs and adverse impacts on household income. - In the COVID-19 recession, service sectors have seen larger contractions than has manufacturing. - Sectoral groupings used: ISIC rev.4 categories (A = agriculture, forestry, and fishing; B = mining and quarrying; C = manufacturing; D&E = utilities; F = construction; G = wholesale and retail trade; H = transportation; I = accommodation and food services; J = information and communication; K = financial and insurance activities; L = real estate; M&N = professional and administrative services; O = public administration and defense; P = education; Q = human health and social work; R&S = arts, entertainment, recreation, and other services; T = activities of households as employers and undifferentiated goods-and-services-producing activities of households for own use; U = activities of extraterritorial organizations and bodies). ### Policy response and fiscal support - Massive policy support prevented worse outcomes. - Discretionary revenue and spending measures announced so far in advanced economies amount to more than 9 percent of GDP, with another 11 percent in various forms of liquidity support, including equity injections, asset purchases, loans, and credit guarantees. - The response in emerging market and developing economies is about 3.5 percent of GDP in discretionary budget measures and more than 2 percent in liquidity support. - Notable new initiatives include the €750 billion European Union pandemic recovery package–fund (more than half grant-based) and a wide range of temporary lifeline policies worldwide (cash and in-kind transfers; wage subsidies; expanded unemployment insurance coverage; tax deferrals; regulatory initiatives to ease classification rules and provisioning requirements for banks’ nonperforming loans; release of buffers). - Central bank actions in advanced economies involved more diverse, larger scales of asset purchases and relending facilities; the Federal Reserve announced a move to a flexible average inflation target of 2 percent over time. - Emerging market central banks combined interest rate cuts, new relending facilities, and, in many cases for the first time, asset purchases. ### Financial conditions and markets - Financial conditions have eased since June for advanced economies and for most emerging market and developing economies, implying a continuing disconnect between financial markets and the real economy. - Equity markets in advanced economies have mostly regained or exceeded start-of-year levels; sovereign bond yields are broadly unchanged or have declined since June; corporate spreads dropped further, particularly for high-yield credit. - Decline in interest rates reflects lower return on safe assets and compression of risk premiums. - Sovereign yields in emerging markets have generally declined; spreads over US Treasury securities compressed after the Federal Reserve’s March actions. - The dollar depreciated by over 4 ½ percent in real effective terms between April and late September; the euro appreciated by close to 4 percent over the same period. - Emerging market portfolio flows have partially recovered since March, aided by steps to support dollar liquidity (swap lines) and the recovery under way in China, but the recovery in portfolio flows is uneven with some countries experiencing large outflows. ### Considerations and assumptions for the forecast - Fundamental uncertainty remains regarding the pandemic and associated factors (path of the pandemic, adjustment costs, effectiveness of policy response, evolution of financial sentiment). - Baseline assumptions include: - Stronger-than-anticipated GDP outturns in the second quarter of 2020 relative to prior projections, providing an upward revision to the 2020 forecast. - Persistent social distancing and enhanced workplace safety standards continuing into 2021, fading over time as vaccine coverage expands and therapies improve, with local transmission brought to low levels everywhere by the end of 2022. - Even after approval, vaccine coverage is likely to expand only gradually as production and distribution scale up. - Possibility of renewed localized lockdowns where infections are rising; stringent nationwide shutdowns are not assumed to be repeated in the baseline. - Scarring: the deep 2020 downturn is assumed to damage supply potential to varying degrees (firm closures, exit of discouraged workers, resource mismatches). - Policy support: baseline reflects the $6 trillion direct tax and spending measures announced and implemented worldwide so far in response to the crisis. - Major central banks are assumed to maintain current settings throughout the forecast horizon to the end of 2025. - Financial conditions are assumed to remain broadly at current levels. - Commodity prices: average petroleum spot prices are projected at $41 in 2020 and $43.8 in 2021, with prices expected to rise thereafter toward $48; nonfuel commodity prices are expected to rise faster than assumed in April and June. ### Projections and near-term outlook - Global growth is projected at –4.4 percent in 2020, 0.8 percentage point above the June 2020 WEO Update forecast. - Global growth is projected at 5.2 percent in 2021, 0.2 percentage point lower than in the June 2020 WEO Update. - The projected 2021 rebound implies a small expected increase in global GDP over 2020–21 of 0.6 percentage point relative to 2019. - Growth in the advanced economy group is projected at –5.8 percent in 2020, 2.3 percentage points stronger than in the June 2020 WEO Update. - Advanced economy growth is projected to strengthen to 3.9 percent in 2021, leaving 2021 GDP for the group some 2 percent below what it was in 2019. - The United States is projected to contract by 4.3 percent in 2020, before growing at 3.1 percent in 2021. *Source: International Monetary Fund | World Economic Outlook: A Long and Difficult Ascent | October 2020 — Chapter 1: Global Prospects and Policies, "1. Advanced Economies."* ### CHAPTER 1 ### CHAPTER 1 gLOBAL PROsPECTs AND POLICIEs ### Overview of the World Economic Outlook Projections (Table 1.1 highlights) - World output: 2019 = 2.8 percent; 2020 = –4.4 percent; 2021 = 5.2 percent. Difference from June 2020 WEO Update: 2020 = 0.8; 2021 = –0.2. - Advanced Economies: 2019 = 1.7 percent; 2020 = –5.8 percent; 2021 = 3.9 percent. Difference from June 2020 WEO Update: 2020 = 2.3; 2021 = –0.9. - United States: 2019 = 2.2 percent; 2020 = –4.3 percent; 2021 = 3.1 percent. Difference from June 2020 WEO Update: 2020 = 3.7; 2021 = –1.4. - Euro Area: 2019 = 1.3 percent; 2020 = –8.3 percent; 2021 = 5.2 percent. Difference from June 2020 WEO Update: 2020 = 1.9; 2021 = –0.8. - Emerging Market and Developing Economies: 2019 = 3.7 percent; 2020 = –3.3 percent; 2021 = 6.0 percent. Difference from June 2020 WEO Update: 2020 = –0.2; 2021 = 0.2. - China: 2019 = 6.1 percent; 2020 = 1.9 percent; 2021 = 8.2 percent. Difference from June 2020 WEO Update: 2020 = 0.9; 2021 = 0.0. - India (fiscal year basis): 2019 = 4.2 percent; 2020 = –10.3 percent; 2021 = 8.8 percent. Difference from June 2020 WEO Update: 2020 = –5.8; 2021 = 2.8. - World trade volume (goods and services): 2019 = 1.0 percent; 2020 = –10.4 percent; 2021 = 8.3 percent. Difference from June 2020 WEO Update: 2020 = 1.5; 2021 = 0.3. - Oil (US dollars, simple average): 2019 = –10.2 percent; 2020 = –32.1 percent; 2021 = 12.0 percent. (Note: the average price of oil in US dollars a barrel was $61.39 in 2019; the assumed price, based on futures markets, is $41.69 in 2020 and $46.70 in 2021.) - Consumer prices, Advanced Economies: 2019 = 1.4 percent; 2020 = 0.8 percent; 2021 = 1.6 percent. - Consumer prices, Emerging Market and Developing Economies: 2019 = 5.1 percent; 2020 = 5.0 percent; 2021 = 4.7 percent. - London Interbank Offered Rate on US Dollar Deposits (six month): 2019 = 2.3 percent; 2020 = 0.7 percent; 2021 = 0.4 percent. ### Global and Regional Outlook (narrative highlights) - The euro area experiences a sharper downturn than the United States in the first half of 2020; 2021 rebound of 5.2 percent is stronger from a lower base. - Asian advanced economies have more moderate downturns than Europe due to a more contained pandemic and smaller GDP declines in H1 2020. - Emerging market and developing economies: growth forecast at –3.3 percent in 2020 (0.2 percentage point weaker than June 2020 WEO Update), strengthening to 6 percent in 2021. - China projected to grow about 10 percent over 2020–21 (1.9 percent in 2020 and 8.2 percent in 2021); activity normalized faster than expected after reopening and Q2 GDP surprised on strong policy support and resilient exports. - Emerging market and developing economies excluding China: projected growth of –5.7 percent in 2020 and 5 percent in 2021; rebound in 2021 not sufficient to regain 2019 level of activity by next year. - Low-income developing countries: projected growth of –1.2 percent in 2020, strengthening to 4.9 percent in 2021. ### Alternative weighting and market-exchange-rate projections (Table 1.2 highlights) - World output at market prices: 2019 = 2.4 percent; 2020 = –4.7 percent; 2021 = 4.8 percent. Difference from June 2020 WEO Update: 2020 = 1.4; 2021 = –0.5. - Advanced Economies (market prices): 2019 = 1.7 percent; 2020 = –5.8 percent; 2021 = 3.8 percent. - Emerging Market and Developing Economies (market prices): 2019 = 3.6 percent; 2020 = –3.0 percent; 2021 = 6.2 percent. - Note: market exchange rate weights allocate higher global GDP shares to slower-growing advanced economies than purchasing-power-parity weights; projections use a three-year trailing moving average of nominal US dollar GDP as weights. ### Labor markets and unemployment - Projections imply wide negative output gaps in 2020 and 2021 and elevated unemployment rates across advanced and emerging market economies. - Underemployment (including reduced-hours programs and involuntary part-time employment) in some advanced economies is significantly higher than headline unemployment. - Labor market data less comprehensive for emerging markets, but surveys and official estimates show unemployment rates in several emerging market economies projected to increase significantly in 2020. ### Medium-term growth and supply potential - After the 2021 rebound, baseline forecast envisages growth slowing to about 3.5 percent into the medium term. - Projected persistent scarring effects on supply potential from bankruptcies, lower labor force participation, and obstacles to resource reallocation; structural change expected (redeployment away from sectors constrained by distancing, workplace changes, adoption of technologies supporting remote work and online purchases). - Among the 10 largest advanced economies, medium-term potential GDP expected on average to remain 3.5 percent below the January 2020 WEO forecast. - Among the 10 largest emerging markets, the average decline in potential GDP is larger, at 5.5 percent. - Advanced economy group growth expected to slow to 1.7 percent over the medium term. - Emerging market and developing economies growth projected to decline to 4.7 percent by 2025 (below the 5.6 percent average of 2000–19). - Contributing factors: structural slowdown in China after a strong cyclical rebound in 2021; subdued commodity prices; weak external demand owing to moderating advanced economy growth; persistently lower cross-border travel affecting tourism-dependent economies. ### Challenges to debt sustainability - Sovereign debt to GDP in advanced economies projected to rise by 20 percentage points to about 125 percent of GDP by the end of 2021. - Sovereign debt to GDP in emerging market and developing economies projected to rise by more than 10 percentage points to about 65 percent of GDP by the end of 2021. - Low interest rates are mitigating debt service costs mainly for advanced economies with a large fraction of negative-yielding sovereign bonds. - The ratio of sovereign debt service to tax revenue is anticipated to increase for several emerging markets and low-income countries, implying less revenue available for social spending, poverty alleviation, inequality reduction, and addressing setbacks to human capital. ### Poverty, inequality, and human capital setbacks - Poverty: close to 90 million people could fall below the $1.90 a day income threshold of extreme deprivation in 2020. - Inequality: the pandemic disproportionately affects younger workers, women, workers in accommodation and food services, transportation, retail, and wholesale; low-wage earners and informally employed workers face higher risks of job loss than higher-wage and formally employed workers. - Preexisting trends of rising income inequality (relative to the early 1990s) are exacerbated by the crisis; contributing factors include skill-biased technological change, decline of unions, rising market concentration and monopsony power, and regressive tax policy changes. - Human capital: more than 1.6 billion learners worldwide affected by school and university closures (UNESCO 2020); school closures and childcare gaps limit parents’ ability to work, particularly affecting mothers, and pose risks to long-term human capital accumulation. *Source: IMF staff estimates. International Monetary Fund | October 2020.* ### Chapter 2). For children, schooling interruptions reduce ### Chapter 2). For children, schooling interruptions reduce ### Education and child welfare - Schooling interruptions reduce learning opportunities, particularly for underprivileged students whose parents may not be as well placed as affluent parents to provide supplementary instruction. - Evidence suggests that the loss of learning increases with the duration of interruption (Quinn and Polikoff 2017). - Online and distance learning can act as a temporary bridge, but are not an effective substitute (Baytiyeh 2018). - School closures exacerbate divisions in access to nutrition and safe environments: - Many schools provide free or subsidized meals to children from low-income households; closures may result in greater food insecurity and poorer nutrition for children from those homes (Anderson, Gallagher, and Ramirez Ritchie 2017; Ralston and others 2017). - Children home from school are more likely to be exposed to violence and exploitation; past evidence links school closures to earlier marriages, children forced into militias, sexual exploitation, teen pregnancies, and child labor (Korkoyah and Wreh 2015; UNDP 2015; UNESCO 2020). - Long-lasting human capital consequences if lost accumulation is not regained: - Lower lifetime schooling is associated with lower lifetime income (Card 1999). - Interrupted schooling is associated with lower earnings trajectories (Light 1995; Holmlund, Liu, and Skans 2008). ### Inequality, poverty, and fiscal implications - The subdued medium-term growth outlook is paired with prospects of elevated debt, more poverty, higher inequality, and severe setbacks to human capital accumulation. - Policymakers will face additional complexities related to the outlook for inflation and trade. ### Inflation outlook - Considerable uncertainty surrounds inflation projections; competing forces include: - Upward pressures: release of pent-up demand, higher production costs from persistent supply disruptions, and potential loss of monetary policy credibility (“fiscal dominance”) that can raise inflation expectations. - Downward pressures: persistent increases in precautionary saving, transfers of purchasing power to lenders with lower propensities to spend, and concerns about limits of monetary policy leading to sliding inflation expectations and disinflation. - Sectoral decomposition indicates a broad-based decline in inflation across cyclical sectors (furnishing, housing excluding energy, recreation, restaurants, and hotels) and noncyclical sectors (clothing and footwear, communications, education, health, transportation services, and miscellaneous goods and services). - Market-implied expectations and projections: - Inflation in the advanced economy group is projected at 0.8 percent in 2020, rising to 1.6 percent in 2021, and broadly stabilizing thereafter at 1.9 percent. - Inflation in the emerging market and developing economy group is projected at 5 percent in 2020, declining to 4.7 percent in 2021, and moderating thereafter to 4 percent over the medium term. ### Trade, remittances, and external positions - Global trade growth and projections: - Global trade is expected to contract by over 10 percent in 2020. - Trade volumes are expected to grow by about 8 percent in 2021 and by slightly more than 4 percent, on average, in subsequent years. - The contraction in 2020 reflects a sharp collapse in tourism and travel and weak final demand from consumers and firms in the synchronized global downturn; trade restrictions and supply chain disruptions are expected to play limited roles. - Tourism-dependent economies face particularly bleak trade outlooks due to restrictions on international travel and consumer fear of contagion; first-half balance of payments data show a collapse in net revenues from tourism and travel for affected countries (for instance, Greece, Iceland, Portugal, and Turkey). - Shifts in supply chains and reshoring may reduce foreign direct investment flows as a share of global GDP; FDI is expected to remain well below pre-pandemic-decade levels. - Remittances contracted sharply during the early lockdown period but have shown signs of recovery; significant downside risks exist for countries such as Bangladesh, Egypt, Guatemala, Pakistan, the Philippines, and those in sub-Saharan Africa more broadly. - Global current account deficits and surpluses: - Projected to shrink in 2020 to the lowest level in the past two decades and to remain broadly stable thereafter. - Among creditor countries, surpluses are projected to decline in east Asia and, to a lesser extent, in Germany and the Netherlands; the surplus in oil exporters is projected to turn into a modest deficit, while a modest increase is projected for China. - Among debtor countries, smaller deficits are projected for Latin America, India, and the United Kingdom, reflecting pronounced weakness in domestic demand and lower oil prices. - Creditor and debtor positions as a share of GDP are projected to widen in 2020 because of the drop in the denominator (sharp decline in activity) and then gradually shrink as GDP recovers. ### Risks and scenarios - Fundamental uncertainty about the pandemic’s evolution complicates quantitative assessment of risks around the baseline forecast. - Upside risks include: - The recession could be less severe if economic normalization proceeds faster than expected without rekindling infections. - Extensions of fiscal countermeasures beyond those implemented and announced so far would lift global growth above the projected baseline in 2021. - Faster productivity growth could be engendered by changes in production, distribution, and payment systems. *International Monetary Fund | October 2020* ### CHAPTER 1 ### CHAPTER 1 ### Upside Risks to Recovery - Advances in therapies may allow health care systems to better manage infection loads, while changes in the workplace and by consumers to reduce transmission may allow activity to return more quickly to pre-pandemic levels without triggering repeated waves of infection. - Production of a safe, effective vaccine would prevail over all other upside risk factors. If produced at the needed scale and distributed worldwide at affordable prices, such a vaccine would lift sentiment and yield better growth outcomes than in the baseline, including by allowing for a fuller recovery in contact-intensive sectors and travel. - Scenario Box 1 presents growth projections under alternative scenarios (referenced in source). ### Downside Risks (significant) - Recurring outbreaks and unequal or slower access to treatments and vaccines could lead to renewed social distancing and tighter lockdowns, reducing economic activity and amplifying cross-border spillovers from weaker external demand. - Premature withdrawal of policy support, or poor targeting of measures because of design and implementation challenges, could lead to the dissolution of otherwise viable and productive economic relationships, exacerbating misallocation. - Financial conditions may tighten again (as in March), exposing vulnerabilities; a sudden stop in new lending (or failure to roll over existing debt) would tip some economies into debt crises and slow activity further. - Liquidity shortfalls and insolvencies: - Deep recessions cause widespread liquidity shortfalls as firms suffer immediate revenue losses but still face payroll, fixed costs, and debt service obligations. - Prolonged liquidity shortfalls can translate into bankruptcies and firm closures; there have been a few prominent bankruptcies in retail and rental car sectors. - The rate of corporate bond defaults more broadly is at its highest since the global financial crisis (June 2020 GFSR Update). - Aggressive and swift policy countermeasures have likely prevented more widespread bankruptcies so far, but the risk of a wider cross-section of firms experiencing deep liquidity shortfalls and bankruptcies is tangible (Box 1.3). - Such events would cause large job and income losses, weaken demand, deplete bank capital buffers, and constrain credit supply. - Intensifying social unrest: - Instances of social unrest increased globally in 2019 before declining during the early part of the pandemic (Box 1.4). - In June, social unrest increased in the United States and spread worldwide in protests against institutional racism and racial inequality. - More widespread or longer-lived protests could hurt sentiment, weigh on activity, and complicate reform efforts, harming medium-term growth or public finance sustainability. - Geopolitical tensions: - Geopolitical tensions seemed to de-escalate during the pandemic (Figure 1.21) but could again flare up. - Frayed ties among the OPEC+ coalition pose risks for global oil supply; a renewed plunge in prices as seen in March would severely hurt activity in oil exporters and lead to weaker growth than projected. - Trade policy uncertainty and technology frictions: - Despite reaffirmation of the Phase One trade deal between the United States and China, tensions remain elevated. - The United Kingdom’s transitional arrangement with the European Union expires on December 31, 2020; failure to agree and ratify a trade deal before then would raise trade barriers significantly and could disrupt cross-border production arrangements. - The bulk of the distortionary tariff and nontariff barriers instituted over the past two years remain in place (Figure 1.22). - The World Trade Organization Appellate Body has ceased functioning because of the impasse over appointments, casting doubt over enforceability of WTO legal commitments. - Spread of trade disputes to the technology domain risks bifurcation of technology standards and platforms, threatening global supply chains. - The trade agreement between Canada, Mexico, and the United States came into force on July 1, helping to lower near-term trade policy uncertainty, but lingering frictions (for example, on aluminum, rules of origin in the auto sector, and dairy trade) could hamper implementation. - Weather-related natural disasters: - Increased frequency and intensity of tropical storms, floods, heat waves, droughts, and wildfires have inflicted devastating humanitarian tolls and livelihood loss in many regions (for example, Australia, the Caribbean, eastern and southern Africa, south Asia). - Climate change contributes to more frequent and intense weather-related disasters, with visible impacts beyond the struck regions. - Such disasters can contribute to cross-border migration and financial stress (for example, in the insurance sector), add to disease burdens, and have persistent effects long after the event (for example, heavy rainfall in parts of eastern Africa contributing to an extreme locust infestation—the worst in decades—that has imperiled food supplies). ### Near-Term Policy Priorities: Ensure Adequate Resources for Health Care, Limit Economic Damage - Immediate dual priority: ensure adequate resources for health care systems and limit economic damage. - All major economies are expected to operate well below capacity over 2020 and 2021 (Figure 1.24). ### Difficult Trade-Offs: Near-Term Imperatives and Medium-Term Challenges - Policymakers must combat the deep near-term recession while addressing complex challenges to place economies on paths of higher productivity growth, equitable gains, and sustainable debt. - Trade-offs exist between supporting near-term growth and avoiding a further buildup of debt that will be difficult to service given the crisis’s hit to potential output. - Near-term support policies should be designed to further longer-term objectives: stronger, equitable, and resilient growth. - Tax and spending measures should privilege initiatives that: - Help lift potential output. - Ensure participatory growth that benefits all. - Protect the vulnerable. - Additional debt incurred to finance such initiatives is more likely to pay for itself by increasing the overall size of the economy and future tax base, compared with borrowing for ill-targeted subsidies or wasteful current spending. - Recommended investment priorities: health, education, high-return infrastructure projects that also reduce carbon dependence, and research spending to facilitate innovation and technology adoption—the principal drivers of long-term productivity growth. - Safeguarding critical social spending can protect the vulnerable and support near-term activity, as such outlays go to groups with a higher propensity to spend disposable income. - Adhering to the highest standards of debt transparency is essential to avoid future rollover difficulties and higher sovereign risk premiums that raise borrowing costs. ### Enhancing Multilateral Cooperation - The global nature of the shock and cross-border spillovers call for significant multilateral efforts to fight the health and economic crisis. - Multilateral cooperation to support health care systems: - Fund advance purchase commitments of vaccines undergoing trials to encourage rapid scaling up of manufacture and distribution of affordable doses worldwide (examples include the Coalition for Epidemic Preparedness Innovations and Gavi, the Vaccine Alliance). - Support countries with limited health care capacity through stepped-up medical assistance. - Remove trade restrictions on essential medical supplies and share information on the pandemic and on the search for vaccines and therapies. - Financial support for constrained countries: - Several emerging market and developing economies—low-income countries in particular—require support through debt relief, grants, and concessional financing. - Building on the Group of Twenty initiative for a temporary standstill on official debt service payments by low-income countries, private creditors should extend similar treatment so those countries can conserve international liquidity and direct resources to priority health care spending and relief measures. - Where debt restructuring is needed, all creditors and low-income country and emerging market borrowers should quickly agree on mutually acceptable terms. - The global financial safety net can help countries facing external funding shortfalls. - As part of its COVID-19 response, the IMF has expanded its lending toolkit to include a renewable and replenishable credit line for members with strong policy frameworks and fundamentals, provided new financing through other lending facilities, temporarily increased access limits to its emergency financing facilities, and improved its ability to provide grant-based debt service relief. ### National-Level Policies - Create room to accommodate elevated spending on crisis countermeasures: - A sizable and aggressive economic policy response is underway in several countries, notably in advanced economies whose status as issuers of reserve currencies provides more latitude for countering the crisis compared with emerging market and developing economies. - The longer the crisis persists, the greater the fiscal demands on governments—for health care spending, unemployment benefits, cash transfers, and countercyclical initiatives. - While the crisis lasts, governments should mitigate the downturn and be ready to adapt strategy to the pandemic’s evolution and its impact on activity. - Where fiscal rules constrain action, temporary suspension of the rules would be warranted, combined with a commitment to a gradual consolidation path after the crisis to restore compliance over the medium term. - Room for immediate spending needs could be created by prioritizing crisis countermeasures and reducing wasteful and poorly targeted subsidies. - Prudent debt management—extending maturities on government borrowing and locking in low interest rates where possible—can save debt service expenses and free up resources for crisis mitigation efforts (see IMF 2020 recommendations referenced in source). - Although instituting new revenue measures during the crisis will be difficult, governments may need to consider raising progressive taxes on more affluent individuals and those relatively less affected by the crisis (including increasing tax rates on higher income brackets, high-end property, capital gains, and wealth) as well as changes to corporate taxation to ensure firms pay taxes commensurate with their capacity. *Source: CHAPTER 1, WORLD ECONOMIC OUTLOOK: A LONG AND DIFFICULT ASCENT, International Monetary Fund | October 2020* ### CHAPTER 1 ### CHAPTER 1 gLOBAL PROsPECTs AND POLICIEs ### Immediate public-health and economic policy priorities - Ensure health care systems can cope with elevated demand by securing adequate resources and prioritizing health care spending on testing; contact tracing; personal protective equipment; life-saving equipment, such as ventilators; and facilities such as emergency rooms, intensive care units, and isolation wards. - In countries where infections are accelerating, the foremost priority is to slow transmission; lockdowns are effective in bringing down infections (see Chapter 2). - Economic policy countermeasures to limit damage while the pandemic is accelerating: - Targeted temporary tax breaks for affected people and firms. - Wage subsidies for furloughed workers. - Cash transfers. - Allowances for postponements of financial payments. - Paid sick and family leave. - Expanded eligibility criteria for unemployment insurance and better coverage of self-employed workers. - Temporary credit guarantees and loan restructuring to help solvent-but-illiquid firms remain afloat and preserve employment relationships. - Retraining and reskilling should be pursued where feasible; displaced workers will need extended income support during retraining and job search. - Broad-based monetary, financial regulatory, and fiscal responses can prevent deeper and longer-lasting downturns: - Boost credit provision via central bank liquidity support and targeted relending facilities, or regulatory actions to temporarily ease loan classification standards and provisioning requirements. - Contain increases in borrowing costs through central bank policy rate cuts where rates are not at the effective lower bound, or through asset purchases and forward guidance where rates are at that limit. - Emerging market central banks launching asset purchases should communicate objectives and consistency with price stability to mitigate perceived fiscal dominance, inflation, and capital flight. - Fiscal stimulus through public infrastructure investment or across-the-board tax cuts (where financing constraints permit) can support confidence, protect corporate cash flow, and limit bankruptcies. - Policy design should avoid locking people and inputs into sectors unlikely to return to pre-pandemic vitality while supporting the vulnerable. ### Supporting recovery where reopening is under way - Unwinding targeted support should be calibrated to the pace of recovery and start only after activity picks up durably; premature scaling back risks pushing the economy back into recession. - Unwinding depends on economic structure: - Economies with large shares of self-employed and significant informality may need extended cash and in-kind transfers to households. - Economies where medium and large enterprises account for much employment may need continued credit guarantees, liquidity support, and wage subsidies. - Redeploy freed fiscal resources to public investment, with examples including investments in renewable energy, improvements in the efficiency of power transmission, and retrofitting buildings to reduce their carbon footprint (see also Chapter 2 of the October 2020 Fiscal Monitor). - As lifelines are unwound, expand social spending to protect the most vulnerable (for example, paid and family sick leave, expanded eligibility for unemployment insurance, strengthened health care benefit coverage). - Complement with hiring subsidies, retraining spending, and income support for displaced workers to smooth transitions; reduce labor market rigidities that deter hiring. - Accommodative monetary policy can help during the transition where inflation expectations are anchored by keeping borrowing costs low and credit conditions supportive. ### Limiting the damage in countries with large informal sectors - Standard relief measures relying on tax registries and bank account access may be ineffective where informality is large. - Deliver relief via digital payment systems where possible (examples cited in Benin and Côte d’Ivoire); use centralized databases with assigned identification numbers to target assistance (example cited in Togo). - Where individuals lack mobile phones or identification numbers, deliver in-kind support of food, medicine, and essentials through local governments, community organizations, and specialized stores stocking subsidized goods. - Strengthen mechanisms for automatic, timely, and temporary support in downturns (rules-based fiscal stimulus triggered by deteriorating macroeconomic conditions, such as temporary targeted cash transfers activating when unemployment or jobless claims rise above a threshold). ### Policies to address medium- and long-term challenges - The pandemic is transformational with likely damages to supply potential, buildup of debt, implications for inequality, and a setback to human capital accumulation. - Key policy priorities include: - Repair balance sheets and dispose of distressed debt to enable investment recovery. - Address labor market rigidities and reduce barriers to entry to facilitate redeployment to growing sectors. - Use competition policy and merger scrutiny to prevent increased concentration and market power from reducing dynamism and innovation (see Chapter 3 of the April 2019 WEO). ### Catalyzing stronger, environmentally sustainable growth - Productivity growth had already slowed across advanced and emerging market and developing economies in the 15 years before the pandemic. - Damage to supply potential reflects slow investment growth, modest improvements in human capital, and slower efficiency gains combining technology with factors of production, partly reflecting sectoral mismatches. - Policy initiatives: - Green investment push to increase reliance on renewables, improve grid efficiency, and retrofit buildings to increase energy conservation. - The European Union’s agreement to target 30 percent of the Next Generation recovery fund to climate-change-related spending is cited as a step in this direction. - Promote investment in new growth areas including e-commerce, increased digitalization, data-enabled services, medicine, and biotechnology. ### Boosting human capital accumulation - Global loss of learning as schools and universities stay closed for much of 2020 is likely to be a long-lasting legacy; virtual learning may be an inadequate substitute even where connectivity is widespread. - Makeup strategies once pandemic is under control could include: - Funding adjustments to the length of the school year. - Training teachers on remedial approaches to correct learning losses. - Instituting or expanding supplementary after-school tutoring programs. - Educational and vocational programs should accommodate training needs for jobs likely to be in high demand (emergency first responders, nurses, lab technicians, and broader digital literacy to enable teleworking). - Even with vocational adaptations, take-up may fall short if training requires substantively different and challenging skills, risking persistent increases in dropouts and numbers of people neither in education, employment, nor training. ### Making gains more equitable - To counter likely increases in inequality, social spending measures beyond education include: - Strengthening social assistance (for example, conditional cash transfers, food stamps and in-kind nutrition, medical payments for low-income households). - Expanding social insurance (relaxing unemployment insurance eligibility, extending paid family and sick leave). - Investments in retraining and reskilling to boost reemployment prospects for displaced workers. ### Resolving debt overhangs - Elevated debt levels entering the crisis are set to rise further, limiting scope for productivity-boosting and equity-enhancing actions. - Sovereign debt overhang: - Governments with large debt stocks should consider options to raise revenues and gradually decrease expenditures over the medium term, including increasing progressivity in the tax code. - Expand the tax base by reducing corporate tax breaks, applying tighter caps on personal income tax deductions, instituting value-added taxes where absent, and improving tax registries and electronic filing. - Scale back poorly targeted and wasteful subsidies. - Sovereign debt restructuring may be needed in some cases; restructuring options include maturity extensions, interest rate reductions, principal reductions (haircuts), and other debt swaps with renegotiated terms; collective action clauses may need to be activated. - Corporate debt overhang: - Triage firms into viable (restructure and provide liquidity) versus unviable (liquidate to reallocate capital and labor). - For systemically important firms, consider equity injections; for previously viable firms, tax measures such as loss carrybacks could help. - Strengthen out-of-court restructuring frameworks and standardized restructuring solutions and incentives (deadlines, fines, threat of liquidation) to expedite cases. - Supervisors should enhance regulatory oversight to manage a rise in nonperforming loans (robust provisioning, write-offs, income recognition); banks should strengthen internal nonperforming loan management. - Support development of distressed debt markets by increasing debtor information access, removing regulatory barriers (for example, enabling nonbanks to own and manage nonperforming loans), and improving collateral valuations. - Amend tax rules that inhibit debt restructurings or write-offs. - For large firms, consider direct equity injections or junior debt claims with warrants so the public can benefit from eventual returns to profitability. - For unlisted SMEs, consider grants today that are partially recovered by a temporarily higher corporate tax rate in future. - Ensure efficient and equitable corporate bankruptcy frameworks to apportion losses across investors, banks, and owners when liquidation is necessary. ### Multilateral policies (introductory) - Intensifying trade and technology tensions between countries could drag global growth sharply lower than the baseline projection. *International Monetary Fund | October 2020 — CHAPTER 1* ### CHAPTER 1 ### CHAPTER 1 gLOBAL PROsPECTs AND POLICIEs ### Scenario Box 1 — Alternative Scenarios for the Fight against COVID‑19 - Model and setup: - The G20 Model is used to estimate the potential impact on activity of two alternative paths for the evolution of the fight against COVID-19. - The downside scenario assumes containment proves more difficult and protracted until a vaccine is widely available. - The upside scenario assumes that all dimensions of the fight against the virus go well. - Downside scenario — key assumptions and channels: - Measures to contain the spread slightly increase the direct drag on activity in the second half of 2020. - Progress on vaccines, treatments, and adherence to social distancing is slower in 2021 than in the baseline. - Deterioration in contact‑intensive sectors with income spillovers to other sectors; domestic demand effects amplified via trade. - Financial conditions tighten: corporate spreads rise in advanced economies; corporate and sovereign spreads widen in emerging market economies; increase in 2020 is mild but more substantive in 2021. - Fiscal response: advanced economies increase transfers beyond automatic stabilizers; emerging market economies constrained with only automatic stabilizers operating. - Monetary policy: advanced economies with constrained conventional policy space use unconventional measures to contain increases in long‑term interest rates. - Scarring: additional persistent damage to supply capacity — loss in productive capital, persistent rise in the natural rate of unemployment, temporarily weaker productivity growth largely felt in 2022 and beyond. - Downside scenario — quantitative outcomes: - Relative to the baseline, global growth in 2020 is roughly ¾ percentage point weaker and almost 3 percentage points weaker in 2021. - After 2021 growth rises above baseline for several years, but the level of global GDP is still roughly 1.5 percent below baseline by the end of the World Economic Outlook horizon in 2025. - The negative impact on the level of GDP is roughly twice as large for emerging market economies as for advanced economies. - Debt dynamics by 2022: - Debt-to-GDP ratios rise by well above 10 percentage points, on average, for advanced economies. - Debt-to-GDP ratios rise by 5 percentage points for emerging market economies. - Upside scenario — key assumptions and channels: - Advances quickly reduce fatality rates, reducing fear and restoring confidence. - Early and substantial ramp-up in vaccine production and cooperation in global supply chains leads to earlier, widespread vaccine availability. - Openness and transparency in science increase confidence in vaccine efficacy and safety, leading to widespread vaccinations. - Contact‑intensive sectors bounce back more quickly; overall confidence raises spending across sectors and improves firms’ prospects, easing risk premiums. - Faster bounce-back reduces bankruptcies, labor market dislocation, and slowing in productivity growth; improvements in supply side factors start in 2023 and grow. - Policy response: fiscal withdrawal limited to automatic stabilizers; monetary authorities accommodate faster growth without imperiling price stability objectives. - Upside scenario — quantitative outcomes: - Global growth is roughly ½ percentage point higher in 2021, rising to roughly 1 percentage point higher by 2023. - In 2024 the pickup moderates, with growth slightly below baseline by 2025. - By 2025 the level of global GDP is roughly 2 percent above the baseline, with the improvement in emerging market economies almost double that in advanced economies. - Fiscal outcomes by the end of the WEO horizon: debt-to-GDP ratios fall by roughly 5 percentage points for both advanced and emerging market economies (and could improve further if discretionary measures are unwound faster than assumed). ### Box 1.1 — Revised World Economic Outlook Purchasing‑Power‑Parity Weights - ICP 2017 release and use: - The International Comparison Program (ICP) released new purchasing power parities (PPPs) for the reference year 2017 in May 2020 for 176 economies; revised 2011 results and annual PPP estimates for 2012–16 were also released. - Revised PPPs used in the October 2020 WEO are based on 2011–17 data from the ICP 2017 survey, extended forward and backward using growth rates in relative GDP deflators (country GDP deflator divided by the US GDP deflator). - PPP‑based GDP is used as weights to compute regional and global real GDP growth and other real sector aggregates. - Main changes in world GDP shares (highlights): - The share of emerging market and developing economies in world GDP rises while that of advanced economies falls during 2011–19 based on ICP 2017 (columns 1–3), as was the case based on ICP 2011 (columns 4–6). The focus is on weight revisions for a given year. - The main change: advanced economies’ share of the global economy for 2019 is now estimated at 43 percent—higher than the previous calculation of 40 percent. - Euro area countries and the United States are estimated to have higher shares in 2019 than before. - Revisions for China and India together mostly account for smaller shares of emerging Asia and emerging market and developing economies as a whole in the new weights. - Latin America and the Caribbean and emerging Europe have slightly larger global weight; Middle East and Central Asia has a smaller global weight; sub‑Saharan Africa is virtually unchanged. - At market exchange rates, emerging market and developing economies represent 41 percent of global GDP in 2019 versus 57 percent at PPP. - China PPP revision: - China’s 2019 GDP share has been revised down: ICP 2017 estimate is 17.4 percent versus ICP 2011 estimate of 19.2 percent. - The PPP conversion rate depreciated relative to previous estimates, implying that increases in overall prices in China were underestimated by extrapolations derived from ICP 2011. - Impact of PPP revision on aggregate growth (Table 1.1.2 summary): - Aggregating the June 2020 WEO Update country forecasts with ICP 2017 yields slightly lower global growth because of the lower weight on fast‑growing emerging Asia and larger weight on advanced economies. - Selected aggregate growth rates (percent): - June 2020 WEO Revised with ICP 2017: - World: 2011–17 = 3.6; 2018 = 3.5; 2019 = 2.8; 2020 = –5.2; 2021 = 5.4 - Advanced Economies: 2011–17 = 1.9; 2018 = 2.2; 2019 = 1.7; 2020 = –8.1; 2021 = 4.8 - Emerging Market and Developing Economies: 2011–17 = 5.0; 2018 = 4.5; 2019 = 3.6; 2020 = –3.1; 2021 = 5.8 - June 2020 WEO Based on ICP 2011: - World: 2011–17 = 3.7; 2018 = 3.6; 2019 = 2.9; 2020 = –4.9; 2021 = 5.4 - Advanced Economies: 2011–17 = 1.9; 2018 = 2.2; 2019 = 1.7; 2020 = –8.0; 2021 = 4.8 - Emerging Market and Developing Economies: 2011–17 = 5.1; 2018 = 4.5; 2019 = 3.7; 2020 = –3.0; 2021 = 5.9 - Differences (percentage points): - World: 2011–17 = –0.05; 2018 = –0.08; 2019 = –0.08; 2020 = –0.24; 2021 = –0.04 - Advanced Economies: 2011–17 = 0.00; 2018 = 0.00; 2019 = 0.00; 2020 = –0.07; 2021 = 0.04 - Emerging Market and Developing Economies: 2011–17 = –0.04; 2018 = –0.03; 2019 = –0.05; 2020 = –0.13; 2021 = –0.05 - Additional notes: - The six‑year gap between ICP cycles can produce sizable discrepancies between new PPPs and extrapolated PPPs from a previous cycle because of updated information and structural changes in economies. - Extrapolation assumes similar structural evolution to the numeraire country (the United States), which can be inaccurate when comparing developing economies undergoing rapid structural change. *International Monetary Fund | October 2020* ### Box 1.1 (continued) ### Box 1.1 (continued) ### Stocktaking: Progress on inclusiveness prior to the pandemic - Emerging market and developing economies grew by 4.1 percent on average in the two decades prior to the COVID-19 crisis—one percentage point higher than during 1980–99. - Per capita growth: 2.4 percent in 2000–19 versus 1.0 percent in 1980–99. - Extreme poverty (people living on less than $1.90 a day, 2011 PPP): - Declined from 25 percent in 2002 to 12 percent in 2018 (simple averages). - The poverty gap index implies the average annual money transfer per person living in poverty necessary to end extreme poverty declined from $240 to $184 (for perfectly targeted transfers). - Health indicators: - Life expectancy exhibited strong “convergence,” with larger increases for countries with lower initial life expectancy. - Other improvements include mortality under age five, maternal mortality, and access to clean water, though many health systems remain fragile. - Income inequality: - Gini coefficient declined by 3 percentage points—from 44 to 41 on average (2002–18). - The Palma ratio indicates the top 10 percent’s total income is twice that of the bottom 40 percent in emerging market and developing economies (compared with 25 percent difference for advanced economies, on average). - Other inclusiveness dimensions: - Share of inactive youth (not in education nor in employment) has hovered around 20 percent. - Inequality in education (distribution of years of schooling) has only marginally declined. - Gender gaps remain high in labor force participation; female educational attainment remains lower than male in most economies, especially low-income countries. ### The impact of the pandemic on inclusiveness - Macroeconomic shock: - Real GDP in emerging market and developing economies is expected to decline by 3.3 percent in 2020. - Poverty: - The World Bank estimates COVID-19 will increase the global share of people living on less than $1.90 a day by 1.14 percentage points, representing almost 90 million people newly living in extreme poverty—the first increase since 1998. - Life expectancy: - COVID-19 impact on life expectancy is currently projected to be moderate, but downside risks arise from fragile health systems and interruptions in treatments for HIV, malaria, and tuberculosis. - Median age considerations: with a median age of 27 years in many emerging market and developing economies, the mortality burden so far is several times smaller than in advanced economies. - Inequality and distributional effects: - Past pandemics widened income inequality (reference net Gini index change of 1¼ percent). - COVID-19 is expected to have a larger impact because containment measures disproportionately affect the most vulnerable. - Parsimonious estimates using telework ability indicate: - Telework ability is generally lower for low-income earners than high-income earners. - Applying the IMF’s real GDP projections distributed across income quintiles in proportion to telework ability yields an average Gini increase of 2.6 percentage points to 42.7 for emerging market and developing economies in 2020—broadly comparable to the level in 2008, implying reversal of gains since the global financial crisis. - Gender equality could experience a sharp setback under current circumstances. - Welfare beyond GDP: - Using the Jones and Klenow (2016) welfare measure (factors: real consumption per capita; life expectancy; leisure time; consumption inequality): - Average welfare improvement in 56 emerging market and developing economies from 2002 to 2019 was equivalent to a 6 percent increase in annual consumption levels in every year. - This exceeded per capita real GDP growth in the same period by 1.3 percentage points; the excess stems almost entirely from longer life expectancy. - A setback in welfare in 2020 could exceed 8 percent, driven largely by the excess change in inequality under parsimonious estimates. - Policy implication: - Redistribution policies and measures to support affected people and firms are essential to mitigate sizable adverse impacts on inequality and welfare. ### Small and medium enterprises (SMEs): liquidity and solvency concerns under COVID-19 - Method and scope: - Analysis uses Orbis data for SMEs across 21 mostly advanced economies. - Liquidity risk: whether a firm has enough cash at end-2020 to cover operational and financial expenses, assuming it can roll over maturing debt but cannot take on additional debt. - Insolvency risk: whether a firm’s net equity is projected to become negative at end-2020. - Key findings: - Firms in distress account for 9 to 13 percent of total SME (in-sample) employment, depending on the distress measure chosen (insolvency or illiquidity). - This represents almost a doubling of SME jobs at risk due to liquidity risks (and a 50 percent increase due to insolvency risks) compared with a scenario without COVID-19. - Sectoral job-risk concentration (using illiquidity as distress measure): - Arts and entertainment: share of jobs at risk climbs to 30 percent. - Food and accommodation: share of jobs at risk climbs to 40 percent. - Notes on government support: - Massive government support provided by most countries dampens these projections, but quantification is difficult due to diverse forms and take-up rates. - Preliminary simulations suggest announced government support could have significantly dampened rises in liquidity shortages and insolvency rates in some European countries. *Source: World Economic Outlook: A Long and Difficult Ascent, Box 1.1 (continued) and Box 1.2, International Monetary Fund | October 2020.* ### 1. Share of SME Jobs at Risk, by Scenario ### 1. Share of SME Jobs at Risk, by Scenario ### Key findings on SME solvency and jobs at risk - The magnitude of the COVID-19 shock, uncertainty about its duration, and macro-financial amplifiers associated with mass bankruptcies justify ampler-than-usual recourse to solvency support. - Standard advice—providing liquidity to illiquid but solvent firms, and restructuring insolvent firms to facilitate resource reallocation—remains relevant, but the scale of the shock implies greater emphasis on solvency support. - Giving all SMEs 5 percent of their pre-pandemic annual revenues (accounting for more than 4 percent of GDP) as government support was analyzed under two illustrative options: government loans and equity(-like) injections. - Only the equity(-like) injections would reduce insolvency risks; they would reduce the share of jobs at risk by almost 3 percentage points relative to panel 1 of Figure 1.3.1. - Both types of policy imply a cash transfer of a similar amount and thereby are equally effective at easing liquidity risks. - Equity(-like) injections increase fiscal risks, particularly if firms still end up defaulting, because equity(-like) claims would then be junior to debt claims. ### Policy scenarios and measurement - Scenarios examined: - No policy intervention (blue bars). - Government loans (red bars). - Equity-like injections (yellow bars). - Measurement note: The bars measure the change in the share of SME firms with negative equity under a scenario with no policy intervention (blue bars), government loans (red bars), and equity-like injections (yellow bars). The changes are computed comparing the WEO baseline scenario with COVID-19 to a counterfactual scenario for 2020 without COVID-19. Data are aggregated from the firm to the country level using sectoral weights, and across countries using GDP weights. SME = small and medium enterprise; WEO = World Economic Outlook. ### Trade-offs and risks of solvency support - Important trade-offs when providing solvency support: - Balancing reach and cost-effectiveness of support. - Minimizing unwarranted bankruptcies. - Containing fiscal costs. - Promoting firm (and job) preservation and resource reallocation. - Fiscal and moral-hazard concerns: - Equity(-like) injections entail greater fiscal risks, including losses if firms default and equity claims are junior to debt. - Equity-like injections into SMEs may attract not only viable firms but also unviable firms “gambling for resurrection,” increasing fiscal exposure. ### Policy recommendations and options - Extend support to firms for longer and consider equity(-like) interventions—at least in countries with available fiscal space. - For larger firms: - Options include direct equity injections or junior debt claims together with warrants. - For SMEs: - Combining grants with a temporarily higher future corporate tax rate would act like an equity injection; this could raise tax administration challenges and would need careful calibration. - Additional supportive measures: - Cut the legal and financial costs of bankruptcy procedures to alleviate risks of overwhelming bankruptcy courts. _Italic: Box 1.3. Rising Small and Medium Enterprise Bankruptcy and Insolvency Risks: Assessment and Policy Options — authors Philip Barrett and Sophia Chen; Luisa Calixto provided research assistance._ ### 10.4 percent in 2021 due to the effects of heightened ### 10.4 percent in 2021 due to the effects of heightened ### Food Prices and Commodity Price Developments - The IMF’s food and beverage price index increased by 0.7 percent. - Prices of most staple crops, including wheat, maize, soybeans, and palm oil, have been stable or have declined since the beginning of the pandemic due to large global supplies and the initial collapse of crude oil prices. - The harmonized consumer price subindex for food and nonalcoholic beverages increased by 4.5 percent between February and June in the United States and by 1.3 percent in the euro area; in China the food consumer price subindex fell by 9.7 percent. - Rice price is still up by 12.6 percent. - Corn prices plummeted by 13.0 percent, reaching a 10-year low in May. - Soybean prices declined by 13.0 percent beginning in February, despite China ramping up buying in June as part of the 2020 US-China trade deal. - Led by pork, the meat price index fell by 7.1 percent from the April baseline; wholesale pork prices declined by 4.5 percent as several meat processing facilities in the United States closed after employees were infected by the coronavirus. - Wholesale price declines spilled over to other meats and seafood, which saw similar downward trends; retail prices generally increased due to a wedge between wholesale and retail channels. ### Commodity Prices during the COVID-19 Pandemic (Figure 1.SF.4 highlights) - Dark fill sections represent the percent change in commodity prices for February–April 2020, while light fill sections represent the percent change for April–August 2020. - Commodity categories referenced include: Energy; Base metals and raw materials; Agriculture; Precious metals. - Specific commodity movements noted in the figure include changes for APSP, Silver, LNG NE Asia, Iron ore, NG US HH, Copper, NG EU, Platinum, Nickel, S&P 500, Aluminum, Gold, Seafood index, Vegetable oil index, Cobalt, Cotton, Swine, Soybeans, Oranges, Palladium, Cocoa, Coal South Africa, Arabica coffee, Corn, Wheat, Rice Thailand, Coal Australia. ### Food Price Projections and Risks - Food prices are projected to increase slightly, by 0.4 percent year over year in 2020 and then increase 4.3 percent in the year thereafter. - Drivers of the projected increase include tighter supply conditions (meats, for example) and expected delays in the supply chain. - Further supply chain disruptions and export restrictions in large food exporters are a significant source of upside risk. - Renewed tensions between the United States and China could disrupt food trade and lower US food prices while increasing them in competing exporters. ### Coal: Past, Present, and Future — Overview - Coal accounts for just under half of global CO2 emissions and nearly three-quarters of all power sector CO2 emissions. - The unprecedented drop in electricity demand in 2020 favored renewables over traditional fossil fuel sources, such as coal and natural gas. - In Europe, where electricity consumption fell by more than 10 percent in April, the share of coal (fossil fuels) in power generation declined to below 8 (30) percent—a historical low. As electricity demand recovered, use of coal resumed globally. ### Coal Usage, Industrialization, and Energy Transition - Coal use expanded dramatically during the industrial revolution from the 18th century onward due to technological innovations including the steam engine and coal-fueled furnaces. - Until the early interwar period, coal consumption and its share in the energy mix grew in almost every country. - After the 1930s and especially after World War II, cleaner fossil fuel alternatives—such as oil and natural gas—increasingly displaced coal in transportation, residential, commercial sectors, and power generation. - The share of coal in energy troughed in 1973, globally. - The coal decline was interrupted in the 1970s and partially reversed due to: (1) energy security concerns (oil shocks of the 1970s), (2) growing electrification of energy end-uses, and (3) fast economic growth in emerging markets. ### Global Coal Consumption and Concentration - The top five coal-consuming countries (China, India, United States, Russia, Japan) account for 76.7 percent of global coal consumption. - China accounts for about half of global coal consumption. - Emerging markets account for 76.8 percent of coal consumption. - Globally, industry takes about 20 percent of total coal consumption (Table 1.SF.1). ### Coal Consumption by Sector (Table 1.SF.1) - Power Generation: OECD 20.1, Non-OECD 50.7, Total 70.8 (percent). - Industry: OECD 2.2, Non-OECD 19.4, Total 21.6 (percent). - Others: OECD 0.9, Non-OECD 6.7, Total 7.6 (percent). - Total: OECD 23.2, Non-OECD 76.8, Total 100.0 (percent). ### Coal’s Negative Externalities: Health, Environment, and Carbon Emissions - Coal-fired thermal power plants release sulfur dioxide, nitrogen oxide, particulate matter, and mercury into the air and water bodies, which are hazardous to human health and degrade the environment. - During the Great Smog of London (December 5–9, 1952), UK government medical reports estimate that 4,000 people died as a direct result of the smog and 100,000 more were made ill. - Coal is 2.2 times as carbon intense as natural gas when burned to generate both heat and electricity (Figure 1.SF.8). - Coal contributes about 44 percent of all CO2 emissions and 72 percent of all power sector emissions (Figure 1.SF.9). - According to the International Energy Agency, the share of energy in total greenhouse gas emissions was 74.2 percent in 2015. ### How Fast and When Do Countries Lessen Their Dependence on Coal? - Per capita coal consumption has already peaked in 73 out of the 84 countries whose share of coal in total energy consumption at some point crossed 5 percent. - The average annual decline across these countries was 2.3 percent between 1971 and 2017. - On average, it takes 43 years to phase out coal after the peak in coal consumption per capita has been reached. - Contrasting energy mixes across income groups: poor countries rely primarily on biomass; middle-income countries have strong dependence on coal; at high incomes the coal share in energy decreases as nuclear and natural gas options grow. ### Quality Ladder Hypothesis and Coal Affordability - The quality ladder hypothesis: as income rises, energy sources are chosen increasingly for efficiency, convenience, low environmental impact, and safety. - Biofuels occupy the low rungs; coal, oil, and hydro the middle rungs; nuclear, natural gas, and renewables the upper rungs. - The marginal cost of operating a coal-fired power plant is one of the lowest; the cost of wind and solar has substantially declined at the plant level, but full ramp-up of renewables faces decreasing returns due to intermittency. ### Empirical Analysis of Income and Coal Dependence - A panel regression tests the relationship between income per capita and coal dependence, defined as the share of coal in total primary energy supply (relative coal dependence) or as coal consumption per capita (absolute coal dependence). - The analysis controls for country-specific factors including the share of manufacturing in nominal value added, coal reserves per capita, and hydropower potential. - Results strongly support an inverse U-shaped relationship between income and the share of coal in the energy mix, with coal attaining its maximum share at an income level of $9,600 per capita. - Between 1971 and 2017, income per capita contributed to reductions in the coal share of 6.4 percentage points in the United States and 5.2 percentage points in Japan and to increases of 12.2 percentage points in India. *Source: International Monetary Fund, World Economic Outlook: A Long and Difficult Ascent, October 2020.* ### 11.3 percentage points in China. ### 11.3 percentage points in China. ### Findings on coal dependence and drivers - Energy endowments, such as hydropower and coal reserves, play a quantitatively important role—more so than manufacturing and environmental regulation, for which modest effects are found. - Harsher winters are associated with higher use of coal. - The relationship between coal consumption per capita and income is highly nonlinear and follows an S-shape: - At low income levels, coal consumption growth accelerates. - Growth reaches its maximum at the middle income level. - Coal consumption per capita then levels off. - The turning point of absolute coal dependence, after which coal consumption declines, ranges from $35,000 to $39,000. - The “share (or relative) turning point” occurs before the “per capita (or absolute) turning point.” At middle and high income levels, coal’s share in the energy mix declines even while coal consumption per capita may continue to grow for some time to satisfy rising energy demand. - Combining estimates: - It takes, on average, 76 years to phase out coal once it reaches its largest share in the energy mix. - For the United Kingdom, it took almost 100 years to accomplish near-elimination of coal. - For China, whose coal share peaked in 2013, it implies at least another 38 years of coal consumption under business-as-usual conditions. - Industrial use of coal is hard to replace and represents 33 percent of coal consumption in emerging markets, where most industrial sector coal usage is concentrated. - Coal-fired power plants are long-lived assets with a minimum design lifespan of 30–40 years, making obsolescence slow without large changes in levelized cost of electricity or policy intervention. - A large part of the variation in coal dependence is unexplained, possibly reflecting political economy factors and the value of coal reserves being multiples of GDP in some countries. ### Coal phaseouts and recent historical examples - Table of selected recent fast coal phaseouts (Country — Year — Five-Year Reduction (Percent) — Starting Share (Percent) — Mostly Replaced by): - United Kingdom — 2018– — 12.4 — 17.0 — Natural Gas - Israel — 2018– — 9.4 — 29.8 — Natural Gas - Greece — 2018– — 8.9 — 29.9 — Natural Gas - Kazakhstan — 2016– — 8.1 — 51.3 — Natural Gas - Spain — 2010– — 6.8 — 12.8 — Mixed - Australia — 2014– — 6.5 — 39.7 — Natural Gas - Portugal — 2010– — 6.3 — 13.5 — Natural Gas - China — 2017– — 6.2 — 69.7 — Mixed - Denmark — 2018– — 5.9 — 15.7 — Biofuel - Ukraine — 2017– — 5.8 — 35.8 — Nuclear - United States — 2018– — 5.3 — 19.6 — Natural Gas - Fastest recent transitions away from coal have been driven by natural gas, at times helped by renewables. - The United Kingdom introduced a carbon price support in 2013: initially set at £9 a metric ton of CO2 and gradually doubled to £18. This policy stimulated a rapid decline in coal usage between 2013 and 2018 as coal was replaced by natural gas. - In the United States, the shale gas revolution pushed down natural gas prices and contributed to a more modest decline in coal usage. ### COVID-19 impacts and near-term dynamics - The COVID-19 pandemic led to a sharp reduction in coal consumption in many coal consumer countries. - Renewables’ marginal costs are extremely low; natural gas and coal accounted for most of the decline in electricity generation, leading in some regions to record-high renewables shares in electricity production. - Two considerations temper optimism: - Downward pressure on natural gas prices was even stronger than on coal, in part because of lack of storage for natural gas. - Where electricity demand recovered, coal usage resumed. - Pandemic effects on medium-term outlook: - If reduction in electricity demand is more permanent, utilization of existing coal-fired power plants could fall, encouraging closures—especially in advanced economies. - In emerging markets, electricity demand is still expected to grow strongly; a reduction in coal prices and lower wholesale electricity prices may slow investment in renewables, benefiting coal absent policy intervention. ### Technology, policy, and recommendations - Carbon-capture and storage may be viable but is currently expensive to retrofit existing plants or build new coal plants with such technology in the absence of substantial carbon pricing. - Some argue CO2 emission opportunity costs of further investment in carbon capture and storage may be large because proven technologies, such as wind and solar, can already be used to lower carbon emissions. - Intermittency of renewables remains an unresolved problem at high grid penetration and may still require natural gas or coal in some locations. - Policy recommendations and possible accelerants of coal decline: - Governments willing to compensate losers from a coal phaseout could accelerate the decline. - The COVID-19 pandemic could be used as an opportunity to accelerate coal phaseout. - In emerging markets, reducing capital constraints to favor investment in renewables can minimize coal lock-in. - The international community can provide financial and technical assistance for building grids that accommodate intermittent renewables and limit funding of new coal plants where alternatives are available. ### Key statistics and tables (preserved figures) - Turning point of absolute coal dependence: $35,000 to $39,000. - Time from share turning point to per capita turning point assuming income per capita growth of 4 percent a year: 33 years. - Average time to phase out coal once it reaches largest share in the energy mix: 76 years. - United Kingdom phaseout duration: almost 100 years. - China coal share peak: 2013; implies at least another 38 years under business-as-usual. - Industrial coal share in emerging markets: 33 percent. - Coal-fired power plants minimum design lifespan: 30–40 years. - United Kingdom carbon price support: initially £9 a metric ton of CO2, gradually doubled to £18. - Table 1.SF.2. Energy Mix, by Income Groups, 2017 (Primary Energy Share from: Biomass / Coal / Crude Oil / Natural Gas / Hydropower / Renewables / Nuclear) — (Percent) - Low-Income Countries: 80.8 / 2.3 / 13.3 / 0.9 / 2.8 / 1.6 / 0.0 - Lower-Middle-Income Countries: 26.2 / 26.9 / 26.6 / 14.4 / 1.8 / 2.3 / 1.8 - Upper-Middle-Income Countries: 5.2 / 40.9 / 25.0 / 21.5 / 3.4 / 1.4 / 2.5 - High-Income Countries: 5.7 / 15.8 / 36.6 / 29.0 / 2.1 / 1.6 / 9.2 - World: 12.9 / 28.0 / 29.9 / 23.3 / 2.6 / 1.6 / 1.6 - Table 1.SF.3. Selected Recent Fast Coal Phaseouts (see "Coal phaseouts and recent historical examples" above for full entries and figures). ### Conclusions - Reducing carbon emissions from coal would substantially fight climate change and amplify benefits of electrification, including electric vehicles charged with low-carbon electricity. - Moving away from coal usually starts in high-income nations and takes decades to complete; the pandemic’s effect is probably temporary. - Countries where per capita coal consumption has not yet peaked (including China, India, and Indonesia) account for the lion’s share of global coal consumption; global decline in coal will therefore take years without significant policy actions. - Further significant reductions in prices of low-carbon alternatives such as solar and wind may help, but to avoid intermittency issues natural gas is likely needed as the closest substitute for coal, even if electricity demand does not fully recover. *Source: International Monetary Fund, World Economic Outlook October 2020 — Special Feature: Commodity Market Developments and Forecasts (text excerpt).* ### CHAPTER 1 ### CHAPTER 1 ### Western Hemisphere Economies: Key Projections and Statistics (Annex Table 1.1.3) - Regional aggregate (North America): Real GDP projections — 2019: 1.9; 2020: –4.9; 2021: 3.3. Consumer Prices — 2019: 2.0; 2020: 1.6; 2021: 2.7. Current Account Balance (percent of GDP) — 2019: –2.1; 2020: –2.0; 2021: –2.0. - United States: Real GDP — 2019: 2.2; 2020: –4.3; 2021: 3.1. Consumer Prices — 2019: 1.8; 2020: 1.5; 2021: 2.8. Current Account Balance — 2019: –2.2; 2020: –2.1; 2021: –2.1. Unemployment — 2019: 3.7; 2020: 8.9; 2021: 7.3. - Canada: Real GDP — 2019: 1.7; 2020: –7.1; 2021: 5.2. Consumer Prices — 2019: 1.9; 2020: 0.6; 2021: 1.3. Current Account Balance — 2019: –2.0; 2020: –2.0; 2021: –2.4. Unemployment — 2019: 5.7; 2020: 9.7; 2021: 7.9. - Mexico: Real GDP — 2019: –0.3; 2020: –9.0; 2021: 3.5. Consumer Prices — 2019: 3.6; 2020: 3.4; 2021: 3.3. Current Account Balance — 2019: –0.3; 2020: 1.2; 2021: –0.1. Unemployment — 2019: 3.5; 2020: 5.2; 2021: 5.8. - South America aggregate: Real GDP — 2019: –0.2; 2020: –8.1; 2021: 3.6. Consumer Prices — 2019: 10.1; 2020: 7.9; 2021: 8.6. Current Account Balance — 2019: –2.3; 2020: –0.6; 2021: –0.7. - Brazil: Real GDP — 2019: 1.1; 2020: –5.8; 2021: 2.8. Consumer Prices — 2019: 3.7; 2020: 2.7; 2021: 2.9. Current Account Balance — 2019: –2.8; 2020: 0.3; 2021: 0.0. Unemployment — 2019: 11.9; 2020: 13.4; 2021: 14.1. - Argentina: Real GDP — 2019: –2.1; 2020: –11.8; 2021: 4.9. Consumer Prices — 2019: 53.5; 2020: 3.5. Current Account Balance — 2019: –0.9; 2020: 0.7; 2021: 1.2. Unemployment — 2019: 9.8; 2020: 11.0; 2021: 10.1. - Peru: Real GDP — 2019: 2.2; 2020: –13.9; 2021: 7.3. Consumer Prices — 2019: 2.1; 2020: 1.8; 2021: 1.9. Current Account Balance — 2019: –1.4; 2020: –1.1; 2021: –0.3. Unemployment — 2019: 6.6; 2020: 12.5; 2021: 8.8. - Venezuela: Real GDP — 2019: –35.0; 2020: –25.0; 2021: –10.0. Consumer Prices — 2019: 19,906; 2020: 6,500; 2021: 6,500. Current Account Balance — 2019: 8.4; 2020: –4.1; 2021: –4.1. Unemployment — 2019: 47.6; 2020: 54.4; 2021: 57.3. - Latin America and the Caribbean (memorandum): Real GDP — 2019: 0.0; 2020: –8.1; 2021: 3.6. Consumer Prices — 2019: 7.7; 2020: 6.2; 2021: 6.7. Current Account Balance — 2019: –1.7; 2020: –0.5; 2021: –0.8. ### Middle Eastern and Central Asian Economies: Key Projections and Statistics (Annex Table 1.1.4) - Regional aggregate (Middle East and Central Asia): Real GDP — 2019: 1.4; 2020: –4.1; 2021: 3.0. Consumer Prices — 2019: 7.8; 2020: 9.3; 2021: 9.3. Current Account Balance — 2019: 0.7; 2020: –3.7; 2021: –2.7. - Oil exporters (aggregate): Real GDP — 2019: 0.3; 2020: –6.0; 2021: 3.3. Consumer Prices — 2019: 6.3; 2020: 6.3; 2021: 7.3. Current Account Balance — 2019: 2.9; 2020: –3.3; 2021: –2.0. - Saudi Arabia: Real GDP — 2019: 0.3; 2020: –5.4; 2021: 3.1. Consumer Prices — 2019: –2.1; 2020: 3.6; 2021: 3.7. Current Account Balance — 2019: 5.9; 2020: –2.5; 2021: –1.6. Unemployment — 2019: 5.6. - Iran: Real GDP — 2019: –6.5; 2020: –5.0; 2021: 3.2. Consumer Prices — 2019: 41.0; 2020: 30.5; 2021: 30.0. Current Account Balance — 2019: 1.1; 2020: –0.5; 2021: 0.3. Unemployment — 2019: 10.7; 2020: 12.2; 2021: 12.4. - United Arab Emirates: Real GDP — 2019: 1.7; 2020: –6.6; 2021: 1.3. Consumer Prices — 2019: –1.9; 2020: –1.5; 2021: 1.5. Current Account Balance — 2019: 8.4; 2020: 3.6; 2021: 7.5. - Iraq: Real GDP — 2019: 4.4; 2020: –12.1; 2021: 2.5. Consumer Prices — 2019: –0.2; 2020: 0.8; 2021: 1.0. Current Account Balance — 2019: 1.1; 2020: –12.6; 2021: –12.1. - Algeria: Real GDP — 2019: 0.8; 2020: –5.5; 2021: 3.2. Consumer Prices — 2019: 2.0; 2020: 3.5; 2021: 3.8. Current Account Balance — 2019: –10.1; 2020: –10.8; 2021: –16.6. Unemployment — 2019: 11.4; 2020: 14.1; 2021: 14.3. - Kazakhstan: Real GDP — 2019: 4.5; 2020: –2.7; 2021: 3.0. Consumer Prices — 2019: 5.2; 2020: 6.9; 2021: 6.2. Current Account Balance — 2019: –3.6; 2020: –3.3; 2021: –2.8. Unemployment — 2019: 4.8; 2020: 7.8; 2021: 5.8. - Oil importers (aggregate): Real GDP — 2019: 3.2; 2020: –1.1; 2021: 2.5. Consumer Prices — 2019: 10.3; 2020: 12.4; 2021: 11.3. Current Account Balance — 2019: –5.8; 2020: –4.5; 2021: –4.7. - Egypt: Real GDP — 2019: 5.6; 2020: 3.5; 2021: 2.8. Consumer Prices — 2019: 13.9; 2020: 5.7; 2021: 6.2. Current Account Balance — 2019: –3.6; 2020: –3.2; 2021: –4.2. Unemployment — 2019: 8.6; 2020: 8.3; 2021: 9.7. - Pakistan: Real GDP — 2019: 1.9; 2020: –0.4; 2021: 1.0. Consumer Prices — 2019: 6.7; 2020: 10.7; 2021: 8.8. Current Account Balance — 2019: –4.9; 2020: –1.1; 2021: –2.5. Unemployment — 2019: 4.1; 2020: 4.5; 2021: 5.1. - Lebanon (country note highlighted in table): Real GDP — 2019: –6.9; 2020: –25.0. Consumer Prices — 2019: 2.9; 2020: 85.5. Current Account Balance — 2019: –27.4; 2020: –16.3. ### Sub-Saharan African Economies: Key Projections and Statistics (Annex Table 1.1.5) - Sub-Saharan Africa (aggregate): Real GDP — 2019: 3.2; 2020: –3.0; 2021: 3.1. Consumer Prices — 2019: 8.5; 2020: 10.6; 2021: 7.9. Current Account Balance — 2019: –3.6; 2020: –4.8; 2021: –4.1. - Oil exporters (aggregate): Real GDP — 2019: 1.6; 2020: –4.1; 2021: 2.0. Consumer Prices — 2019: 11.7; 2020: 13.4; 2021: 13.4. Current Account Balance — 2019: –2.1; 2020: –3.7; 2021: –2.2. - Nigeria: Real GDP — 2019: 2.2; 2020: –4.3; 2021: 1.7. Consumer Prices — 2019: 11.4; 2020: 12.9; 2021: 12.7. Current Account Balance — 2019: –3.8; 2020: –3.6; 2021: –2.0. - Angola: Real GDP — 2019: –0.9; 2020: –4.0; 2021: 3.2. Consumer Prices — 2019: 17.1; 2020: 21.0; 2021: 20.6. Current Account Balance — 2019: 5.7; 2020: –1.3; 2021: 0.1. - Middle-income countries (aggregate): Real GDP — 2019: 2.2; 2020: –5.1; 2021: 3.8. Consumer Prices — 2019: 4.0; 2020: 4.3; 2021: 4.4. Current Account Balance — 2019: –3.2; 2020: –3.1; 2021: –2.9. - South Africa: Real GDP — 2019: 0.2; 2020: –8.0; 2021: 3.0. Consumer Prices — 2019: 4.1; 2020: 3.3; 2021: 3.9. Current Account Balance — 2019: –3.0; 2020: –1.6; 2021: –1.8. Unemployment — 2019: 28.7; 2020: 37.0; 2021: 36.5. - Low-income countries (aggregate): Real GDP — 2019: 5.9; 2020: 0.1; 2021: 3.4. Consumer Prices — 2019: 10.1; 2020: 14.4; 2021: 6.3. Current Account Balance — 2019: –5.9; 2020: –7.7; 2021: –7.6. - Ethiopia: Real GDP — 2019: 9.0; 2020: 1.9; 2021: 0.0. Consumer Prices — 2019: 15.8; 2020: 20.2; 2021: 11.5. Current Account Balance — 2019: –5.3; 2020: –4.5; 2021: –4.6. - Kenya: Real GDP — 2019: 5.4; 2020: 1.0; 2021: 4.7. Consumer Prices — 2019: 5.2; 2020: 5.3; 2021: 5.0. Current Account Balance — 2019: –5.8; 2020: –4.9; 2021: –5.4. ### Summary of World Real per Capita Output (Annex Table 1.1.6) - World average real per capita output (annual percent change): 2002–11: 2.4; 2012: 1.9; 2013: 2.0; 2014: 2.1; 2015: 2.1; 2016: 2.0; 2017: 2.6; 2018: 2.4; 2019: 1.6; 2020: –5.6; 2021: 4.0. - Advanced Economies: 2019: 1.3; 2020: –6.2; 2021: 3.6. - United States (per capita): 2019: 2.4; 2020: 1.7; 2021: –4.7; 2020 and 2021 figures listed in table row: 2019: 2.4; 2020: 1.7; 2021: –4.7; 2021 projection: 2.6 (note: table rows show multi-year series). - Euro Area (aggregate footnote): 2019: 1.7; 2020: 1.2; 2020 projection: –8.5; 2021 projection: 5.1. - China: 2002–11 average: 10.1; 2012: 7.4; 2013: 7.3; 2014: 6.7; 2015: 6.4; 2016: 6.2; 2017: 6.4; 2018: 6.3; 2019: 5.8; 2020: 1.5; 2021: 7.9. - India (note to see country-specific note in Statistical Appendix): 2002–11 average: 6.1; 2012: 4.2; 2013: 5.1; 2014: 6.2; 2015: 6.8; 2016: 7.1; 2017: 5.9; 2018: 5.0; 2019: 3.0; 2020: –11.2; 2021: 7.7. - Emerging Market and Developing Economies (aggregate): 2019: 2.3; 2020: –4.7; 2021: 4.8. - Latin America and the Caribbean (per capita): 2019: –1.3; 2020: –9.1; 2021: 2.7. - Sub-Saharan Africa (per capita): 2019: 0.4; 2020: –5.6; 2021: 0.5. - Memorandum — European Union: 2019: 1.1; 2020: –7.8; 2021: 5.0. *Source: IMF staff estimates.* ### CHAPTER 1 ### CHAPTER 1 ### Overview and objectives - Authors: Francesca Caselli, Francesco Grigoli (co-lead), Weicheng Lian, and Damiano Sandri (co-lead), with support from Jungjin Lee and Xiaohui Sun. - Timeframe and context: To contain the coronavirus (COVID-19) pandemic most countries imposed stringent lockdown measures in the first half of 2020; the chapter analyzes the nature of the economic crisis in the first seven months of the pandemic. - Principal question: To what extent was the economic contraction driven by government lockdowns versus voluntary social distancing, and what are the implications for the recovery path and policy? ### Key findings on causes of the recession - Lockdowns were an important factor in the recession, but voluntary social distancing in response to rising infections also contributed very substantially to the economic contraction. - The analysis suggests lockdowns and voluntary social distancing played a near comparable role in driving the economic recession. - Voluntary distancing reduced mobility more strongly in advanced economies, where people can work from home more easily and sustain temporary unemployment because of personal savings and government benefits. - Easing lockdowns can lead to a partial recovery, but economic activity is likely to remain subdued until health risks abate because voluntary social distancing persists while infections remain high. - Easing lockdowns tends to have a positive effect on mobility, but the impact is weaker than that of tightening lockdowns. ### Cross-country evidence - Sample coverage: up to 52 advanced, emerging market, and developing economies for cross-country association analysis. - Correlations observed: - Countries that implemented more stringent lockdowns experienced larger growth declines relative to pre–COVID-19 forecasts for 2020:H1. - More stringent lockdowns are associated with lower consumption, investment, industrial production, retail sales, purchasing managers’ indices for manufacturing and services, and higher unemployment rates. - Controls and robustness: - Associations persist with and without controlling for the strength of the local epidemic (total confirmed COVID-19 cases scaled by population). - Caveats: cross-country correlations are subject to omitted variable and endogeneity concerns (government decisions to impose lockdowns are not random and may reflect time-invariant country characteristics). ### High-frequency evidence (mobility and job postings) - Data sources: - Google Community Mobility Reports (attendance rates relative to precrisis levels). - Indeed anonymized daily job postings for 22 countries (provided to IMF). - National-level regression framework: - Uses local projections with country fixed effects and time dummies. - Controls for the number of COVID-19 cases and includes lags of the mobility indicator to address endogeneity (measure the impact of a lockdown tightening at a given epidemic stage). - Sample size for mobility regressions: 128 countries (national-level). - Main result: Lockdowns tend to have a statistically significant negative effect on mobility (regressions report confidence intervals; shaded areas correspond to 90 percent confidence intervals computed with standard errors clustered at the country level). - Additional empirical details: - For monthly indicators other than GDP, the analysis considers the first three months after COVID-19 cases reach 100 in a country to compare outcomes during the same epidemic phase. - The GDP forecast errors are defined as the deviations from January 2020 WEO projections for 2020:H1. - Normalized coefficients show the impact of a one-standard-deviation increase in the lockdown index on each economic variable, normalized by its own standard deviation. Vertical lines refer to 90 percent confidence bands. ### Uneven distributional effects - New evidence using Vodafone anonymized aggregated mobility indicators for some European countries: - Lockdowns tend to have a larger effect on women’s mobility than on men’s, especially at the time of school closures, suggesting women bear a disproportionate childcare burden that may jeopardize employment opportunities. - Lockdowns tend to have a stronger impact on the mobility of younger cohorts, who are economically more vulnerable because they generally rely on labor income and have less stable jobs. - Implication: Targeted policy actions are needed to protect employment prospects of women and younger cohorts and prevent widening inequality. ### Lockdowns and infections - Lockdowns can substantially reduce confirmed COVID-19 cases, with effects materializing after a few weeks of delay given incubation and testing times. - Lockdowns are more effective in curbing infections if introduced early in a country’s epidemic and if they are sufficiently stringent. - Policy implication: Although lockdowns involve short-term economic costs, they may enable a faster recovery by containing the epidemic and reducing voluntary social distancing over time—potentially producing positive overall economic effects. ### Policy recommendations and implications - Macroeconomic policy: - Policymakers should be wary of removing policy support too quickly given persistent voluntary social distancing and subdued activity while health risks persist. - Social and labor market policies: - Protect the most vulnerable and find ways to support economic activity compatible with social distancing. - Targeted interventions to protect women and younger cohorts to avoid widening inequality. - Measures to support safe economic activity and reduce transmission with lower economic costs than full lockdowns: - Reduce contact intensity in the workplace and make the workplace safer (for example, promote contactless payments). - Facilitate gradual reallocation of resources toward less-contact-intensive sectors. - Enhance work from home by improving internet connectivity and supporting investment in information technology. - Expand testing and contact tracing, promote the use of face masks, and encourage work from home. - Deploy targeted measures as understanding of virus transmission improves—e.g., focus on protecting vulnerable people and restricting large indoor gatherings. ### Data and methodological notes - Lockdown stringency: index averages subindicators from the University of Oxford’s Coronavirus Government Response Tracker (school closures, workplace closures, cancellations of public events, restrictions on gatherings, public transportation closures, stay-at-home requirements, restrictions on internal movement, and controls on international travel). - Mobility data caveat: Google mobility data are based on cell phone locations for smartphone users who agree to share location data; representativeness may be limited, especially in poorer countries with lower smartphone penetration. - Confidential Vodafone data: aggregated at the provincial level including at least 50 customers; data sharing followed technical and organizational controls and an ethical assessment. - See Online Annexes referenced for additional methodological and data details (Online Annex 2.1, Online Annex 2.2, Online Annex 2.3). *International Monetary Fund | October 2020* ### 1. Impact of a Full Lockdown on Mobility ### 1. Impact of a Full Lockdown on Mobility ### Effects of Lockdowns on Mobility - A full lockdown tightening can reduce mobility by about 25 percent within a week. - Mobility starts to resume gradually after the lockdown tightening shock dissipates. - Results from subnational analyses of 15 Group of Twenty countries confirm that lockdowns tend to have a strong negative impact on mobility; these findings are robust to controlling for COVID-19 cases at both the regional and national levels. - The impact of lockdowns on mobility is weaker when COVID-19 cases are higher (high and low cases correspond to the 75th and 25th percentile of the cross-country distribution of log of daily COVID-19 cases, respectively). - Easing lockdowns tends to have a positive effect on mobility, but the magnitude is weaker compared with the impact from a lockdown tightening; this difference is statistically significant. - Shaded areas in related figures correspond to 90 percent confidence intervals computed with standard errors clustered at the country level (or Driscoll-Kraay standard errors where noted). ### Voluntary Social Distancing (Response to Rising Infections) - A doubling of daily COVID-19 cases leads to a contraction in mobility by about 2 percent. - Voluntary social distancing contributes substantially to mobility declines and is captured by the response of mobility to rising COVID-19 infections for a given lockdown stringency. - The contribution of voluntary social distancing was: - Roughly similar to lockdowns in emerging markets. - Smaller in low-income countries. - Larger in advanced economies. - Possible reasons for cross-country differences: people in more economically developed countries can work from home more easily and rely on personal savings or social security benefits; people in low-income countries often cannot afford to opt for voluntary social distancing. - Results are robust to controlling for COVID-19 deaths instead of cases; normalizing cases or deaths by population is irrelevant given regressions include country fixed effects. ### Interaction between Lockdowns and Voluntary Behavior; Policy Implications - The large contribution of voluntary social distancing suggests lifting lockdowns can lead to only a partial rebound in economic activity if health risks persist. - The impact of lockdowns on mobility materializes more weakly when infections are relatively high, indicating people may remain cautious even after lockdowns are lifted. - Because easing lockdowns produces a smaller mobility boost than tightening produces a reduction, economies will likely operate below potential as long as health concerns persist. - Policy recommendations highlighted: - Avoid removing policy support too hastily to prevent precipitating a further downturn; continue protecting the most vulnerable through social safety net spending. - Support economic activity consistent with persistent social distancing by: - Reducing contact intensity and making workplaces safer (for example by promoting contactless payments). - Facilitating reallocation of resources toward less-contact-intensive sectors. - Enhancing working from home (for example by improving internet access and supporting firm investment in information technology). ### Lockdowns and Job Postings - Both a lockdown tightening and an increase in COVID-19 cases lead to a statistically significant negative effect on job postings. - During the first three months of each country’s epidemic, both lockdowns and voluntary social distancing played an important role in driving the reduction in job postings; the contribution of voluntary social distancing is relatively higher in samples with mostly advanced economies. - Sectoral patterns (Indeed data): - Contact-intensive jobs (hospitality, personal care, food) declined before stay-at-home orders, likely due to voluntary social distancing. - Manufacturing job postings declined closer to the adoption of stay-at-home orders, reflecting lockdown impact. - Job postings in contact-intensive sectors declined more than in manufacturing, reflecting a larger drop in aggregate demand because of voluntary social distancing. - Removal of stay-at-home orders has coincided with only a marginal increase in job postings, even in less-contact-intensive manufacturing. ### Unequal Effects across Gender and Age Groups - Vodafone mobility data for Italy, Portugal, and Spain (provincial level, gender and age indices) show: - Stay-at-home orders for people aged 25 to 44 coincided with a drop of about 20 percent in the fraction of people who leave their homes on a given day. - The effect on women was stronger by about 2 percent compared with men for ages 25 to 44; this difference is modest but statistically significant. - The gender gap widened at the time of school closures in some regions (school closures preceded national lockdowns in parts of northern Italy), suggesting women may take on more childcare responsibilities when schools close. - The gender difference is smaller for ages 45 to 64. - Age-group effects: - Stay-at-home orders led to a considerable reduction in mobility across all age categories. - The effects were considerably stronger for younger cohorts: particularly ages 18–24 and ages 25–44. - The impact was substantially weaker for ages 65+, whose mobility was already lower before stay-at-home orders. - Implications: - Lockdowns tend to have a disproportionate impact on younger workers and women, potentially widening intergenerational and gender inequality. - Targeted policy interventions (for example, parental leave) are suggested to support women and avoid long-lasting effects on their employment opportunities. - Limitations noted in the analysis: restricted country sample, lack of employment-status information before and after lockdowns, and other factors affecting gender inequality during the pandemic. ### Lockdowns and COVID-19 Infections (Effectiveness) - A stringent lockdown leads to a reduction in cumulated infections of about 40 percent after 30 days. - Effects of lockdowns on confirmed COVID-19 cases tend to materialize after at least two weeks, consistent with the COVID-19 incubation period and time required for testing. - Early adoption of lockdowns yields better epidemiological outcomes: - Countries that imposed lockdowns faster experienced better infection trajectories since the first COVID-19 case. - Differences are more striking when countries are grouped by the number of COVID-19 cases at the time of lockdowns. - Policy-relevant timing insight: adopt lockdowns before infection rates increase too rapidly to maximize epidemiological benefits. *Source: IMF staff calculations, Chapter 2, "THE GREAT LOCKDOWN: DISSECTING THE ECONOMIC EFFECTS" (October 2020).* ### 1. Response of Infections to a Full Lockdown ### 1. Response of Infections to a Full Lockdown ### Effect of timing of lockdowns on infections - Countries that adopted lockdowns when COVID-19 cases were still low witnessed considerably fewer infections during the first three months of the epidemic compared with countries that introduced lockdowns when cases were already high. - Lockdowns are powerful instruments to reduce infections, especially when they are introduced early in a country’s epidemic and when they are sufficiently stringent. - A lockdown tightening corresponds to an increase in the index by 100 units. ### Trade-offs between lockdowns, voluntary social distancing, and the economy - Lockdowns reduce infections but involve short-term economic costs; however, rising infections also have severe detrimental effects on economic activity because of voluntary social distancing. - By bringing infections under control, lockdowns may pave the way to a faster economic recovery as people feel more comfortable about resuming normal activities; the short-term economic costs of lockdowns could be compensated through higher future economic activity, possibly even leading to positive net effects on the economy. - Lifting lockdowns tends to have a more modest impact on mobility compared with the impact of a lockdown tightening. - As long as significant health risks persist, economic activity is likely to remain subdued; policymakers should refrain from withdrawing policy support too quickly and preserve spending on social safety nets. - Policy support should be consistent with persistent social distancing, for example by: - encouraging work from home, - facilitating a reallocation of resources toward less-contact-intensive sectors, - promoting the adoption of new technologies to limit the contact intensity within given sectors. ### Individual lockdown measures and nonlinear effects - The analysis uses a lockdown stringency index combining measures such as travel restrictions, school and workplace closures, and stay-at-home orders. - Disentangling the effects of individual measures is difficult because measures are highly correlated and typically introduced in rapid succession; the empirical analysis tends to capture the marginal impact of a given measure conditional on those already in place. - When the lockdown stringency index is already relatively high, introduction of additional measures has a weaker marginal impact on mobility—lockdowns have marginally weaker negative economic effects as they become more stringent. - Conversely, lockdowns become progressively more effective in reducing COVID-19 cases when they become sufficiently stringent; mild lockdowns appear ineffective in curbing infections. - Interpretation: preventing only a few instances of personal contacts (for example, by closing schools alone) is not enough to reduce community spread significantly—additional measures such as workplace closures or stay-at-home orders are needed to effectively bring the virus under control. - Policy implication: to achieve a given reduction in infections, policymakers may want to opt for stringent lockdowns over a shorter period rather than prolonged mild lockdowns; tighter lockdowns appear to entail only modest additional economic costs while leading to a considerably stronger decline in infections. - Caveat: these results need reexamination as the pandemic evolves and as interventions such as contact tracing and broader use of face masks expand—if such measures succeed in limiting infections, mild lockdowns could be sufficient to contain new localized flare-ups. ### Unequal effects and vulnerable groups - Lockdowns disproportionately affect economically vulnerable segments of the population. - Mobility data provided by Vodafone for some European countries show that lockdown measures—especially school closures—tend to generate a larger drop in women’s mobility, likely reflecting women’s disproportionate role in childcare and jeopardizing their employment opportunities. - Lockdowns tend to generate a sharper reduction in the mobility of younger cohorts; younger workers rely on labor income and often have temporary job contracts that are at greater risk of being terminated. - Targeted policy interventions recommended: - strengthening unemployment benefits for vulnerable categories, - supporting paid leave for parents, to avoid widening gender and intergenerational inequality. ### Evidence on voluntary social distancing versus mandated lockdowns - Voluntary social distancing has made an important contribution to the recession, particularly in advanced economies where teleworking, higher personal savings, and more generous social security benefits make staying at home easier. - The important role of voluntary social distancing cautions against expecting a quick economic rebound once lockdowns are lifted, especially if lockdowns are lifted prematurely when infections remain relatively high. ### Role of information technology in moderating labor market effects (US evidence) - Information technology (IT) adoption can dampen the economic effect of the pandemic by facilitating teleworking, promoting online sales, or organizing contactless delivery. - Employment has been more resilient in US states where firms use information technology more intensively. - Using individual-level data from the Current Population Survey: - The increase in the probability of being unemployed associated with a large drop in mobility (one standard deviation, equal to 10 percentage points) is 25 percent larger in metropolitan statistical areas with low levels of information technology adoption than in those with high levels (5 percentage points versus 4 percentage points). - IT cushions the unemployment impact of mobility for both male and female and for both white and nonwhite workers; effects differ across education categories (see original analysis for details). ### Policy recommendations and areas for future research - Policymakers should consider rapidly adopting tight lockdowns when infections increase rather than relying on delayed mild measures, given: - lockdowns’ greater effectiveness at high stringency in reducing infections, - decreasing marginal economic costs as stringency rises, - and the economic harm caused by uncontrolled infections via voluntary social distancing. - Policymakers should also pursue alternative ways to contain infections that may have lower economic costs, in line with public health advice: - expanding testing and contact tracing, - promoting the use of face masks, - encouraging working from home. - Important caveats and research needs: - Identification concerns cannot be fully dismissed, including the measurement of voluntary social distancing. - Analysis relies on short-term indicators such as mobility and job postings, which provide an imperfect measure of economic activity; findings should be reexamined as more conventional economic indicators become available. - The analysis focuses on economic consequences and neglects side effects (for example, on educational attainment and mental health), which are crucial areas for future research. - A crucial area of future research is to examine the effectiveness of more-targeted instruments compared with blunt lockdowns (for example, restrictions on dense indoor gatherings or measures to isolate people who are more vulnerable to the virus). *Source: text - 1. Response of Infections to a Full Lockdown (from the IMF World Economic Outlook chapter provided).* ### 3. Dampening Effects of IT on ### 3. Dampening Effects of IT on Unemployment, by Worker Type ### Unemployment and Lockdowns in the United States - Charts included in the source relate unemployment rate increases to mobility drops. - Chart axis/values shown in source: - Unemployment rate increase: 0, 5, 10, 15, 20, 25, 30, 35 - Mobility drop: 0.2, 0.3, 0.4, 0.5, 0.6 ### Unemployment and Mobility in the United States - The material links higher mobility reductions with larger increases in unemployment rates across U.S. observations presented in the charts. ### The Role of Information Technology Adoption during the COVID-19 Pandemic: Evidence from the United States - Information technology (IT) adoption can mitigate the labor-market impact of the coronavirus pandemic. - The shielding effect of IT adoption is not uniform across worker types: - IT adoption helps protect workers with higher levels of educational attainment. - IT adoption does less to mitigate the impact for individuals who have a low level of education. - Policy-relevant implication: - Even though IT adoption may, in the aggregate, significantly shield labor markets against the effects of the coronavirus pandemic, it may also contribute to widening inequality between individuals with high and low levels of educational attainment. ### Key takeaways - IT adoption played a measurable dampening role on unemployment during COVID-19 in the United States sample discussed. - Distributional consequences are important: benefits of IT-mediated resilience accrued more to higher-educated workers than to lower-educated workers, implying potential increases in inequality without compensating policy measures. *WORLD ECONOMIC OUTLOOK: A LONg AND DIFFICULT AsCENT International Monetary Fund | October 2020* ### Introduction ### Introduction ### Global warming status and risks - The increase in the average temperature over the surface of the planet since the industrial revolution is estimated at about 1°C and is believed to be accelerating. - Each successive decade since the 1980s has been warmer than the previous one; the past five years (2015–19) were the warmest ever reported, and 2019 was likely the second-warmest year on record. - Global sea levels are rising, and evidence is mounting that the world is closer to abrupt and irreversible changes—so-called tipping points—than previously thought. - Scientific studies attribute most of global warming to emissions of greenhouse gases associated with human activity, especially from the carbon released by burning fossil fuels. - Scientists have warned that temperature increases relative to preindustrial levels need to be kept well below 2°C—and ideally 1.5°C—to avoid reaching climate tipping points and imposing severe stress on natural and socioeconomic systems. - The objective of limiting temperature increases by 2100 to 1.5°C–2°C was endorsed worldwide by policymakers in the 2015 Paris Agreement. - Net carbon emissions need to decline to zero by mid-century to meet these goals; this implies eliminating carbon emissions or removing remaining emissions from the atmosphere by natural or artificial sinks. - Even with drastic emissions reductions, temperatures may temporarily overshoot targets until atmospheric carbon stocks are sufficiently reduced by absorption. ### Current policy gap and physical impacts - Tangible policy responses to reduce greenhouse gas emissions have been grossly insufficient to date. - While the COVID-19 crisis has reduced emissions, this decline is expected to be temporary; under unchanged policies, emissions will continue to rise relentlessly. - Under unchanged policies, global temperatures could increase by an additional 2–5°C by the end of this century, reaching levels not seen in millions of years and imposing growing physical and economic damage and increasing the risk of catastrophic outcomes. - Damages from climate change include lower productivity (agriculture, fisheries, heat-exposed labor), more frequent disruption of economic activity, greater physical destruction of productive capital and infrastructure, deterioration of health and possible loss of life, and diversion of resources toward adaptation and reconstruction. - The response of temperatures to accumulated carbon (“climate sensitivity”) and damages for given temperature increases are subject to uncertainty; many damages, including catastrophic risk, are insufficiently captured by existing estimates. - More recent studies that account for nonlinear effects and long-lasting reductions in economic growth indicate much higher damages than earlier projections. ### Probabilities, exposure, and impacts cited - Under the current trajectory of emissions, the probability of keeping global warming below 1.5°C would drop to 50 percent in about 15 years. - Absent climate change mitigation policies or massive migration, one-third of the global population could experience mean annual temperatures above 29°C by 2070. Such temperatures are currently found in only 0.8 percent of Earth’s land surface, mostly in Africa, and are projected to cover 19 percent of land by 2070. ### COVID-19: challenges and opportunities for mitigation - The COVID-19 crisis creates both challenges and opportunities for the climate change mitigation agenda. - Challenges: the economic transformation required for mitigation may lower growth during the transition, especially in countries reliant on fossil fuel exports and in countries with rapid economic and population growth; the current global recession makes it more challenging to enact mitigation policies. - Opportunities: the crisis has led to a major retrenchment in investment, allowing policies to influence the composition of recovery capital spending to be consistent with decarbonization; fiscal stimulus can be used to boost green and resilient public infrastructure. ### Policy objectives and assumed global target - This chapter takes the goal of reducing net carbon emissions to zero by 2050 as given and analyzes ways to design mitigation policies mindful of political feasibility. - Each country/region is assumed to reduce emissions to the same extent in the chapter’s scenarios, with the exception of a group of selected oil-exporting and other economies where emissions are assumed to remain at current levels. ### Policy toolkit for decarbonization - Two broad policy sets: - Price carbon-intensive energy through carbon taxes or carbon emission trading programs to internalize the emission externality; the chapter focuses on a carbon tax but notes feebates and direct mandates/regulations as alternative or complementary tools. - Directly increase the abundance and lower the cost of low-carbon energy and tackle broader market failures via subsidies and price guarantees, direct public investment in low-carbon technologies and infrastructure, and research and development subsidies. - Other policy options: - Negative emission technologies (for example, carbon capture and storage) are assumed to play a role in modeled strategies. - Solar radiation modification measures could be effective in theory but involve large uncertainties, risks, and knowledge gaps. ### Fossil fuel underpricing and subsidy figures - Fossil fuels are now massively underpriced, reflecting undercharging for production and environmental costs. - Coady and others (2019) estimate global energy subsidies—the gap between existing and efficient prices—at $4.7 trillion in 2015, or about 6.3 percent of global GDP. - A narrower subsidy measure reflecting only differences between consumer payments and opportunity cost of supplying fuel was estimated at $305 billion globally in 2015. ### Trade-offs, sequencing, and potential for green growth - The optimal mix and sequencing of mitigation policy tools, and their macroeconomic implications, remain debated. - Concerns: carbon pricing could weaken short- to medium-term growth by raising living costs (especially for the poor), displacing workers, and reducing profits in carbon-intensive activities. - Mitigating measures: using carbon pricing revenues to fund productive investment or reduce distortionary taxes can reduce adverse effects. - Arguments for green growth: government support for sustainable investment and technologies—together with higher expected carbon prices—can stimulate activity in the short to medium term through higher net investment, especially when the economy is below potential. - Innovation-focused decarbonization policies (for example, research subsidies) could trigger waves of technological change that boost productivity and growth in the medium to long term. - Feebates are described as sectoral measures that impose a sliding scale of fees on higher-emission goods and subsidies for lower-emission goods; they are a hybrid between carbon pricing and green supply policies and may be more politically acceptable. ### Analytical approach of the chapter - The chapter approaches mitigation policy questions in three ways: - Empirical stock-taking of mitigation policies implemented over the past 25 years in a large sample of countries, focusing on the power sector and examining impacts on the shift from high- to low-carbon activities and overall activity. - Macroeconomic simulations using three models to examine mitigation policies needed to reach net zero emissions by 2050 and how to design them to be growth-friendly. - Distributional analysis modeling impacts on household consumption and labor income, and evaluating different uses of carbon revenues to protect those most affected. ### Key findings summarized - Climate change mitigation policies have contributed importantly to reallocating innovation, electricity generation, and employment toward low-carbon activities, broadly without harming overall activity. - Model simulations suggest that getting to net zero emissions by 2050 is still within reach, though the window to keep temperature increases to safe levels is closing rapidly. - Achieving net zero by 2050 would put the global economy on a sustainable growth path in the second half of the century. *Source: Introduction, Chapter 3, “Mitigating Climate Change—Growth- and Distribution-Friendly Strategies,” World Economic Outlook: A Long and Difficult Ascent.* ### CHAPTER 3 MITIgATINg CLIMATE CHANgE—gROWTH- AND DIsTRIBUTION-FRIENDLY sTRATEgIEs ### CHAPTER 3 MITIgATINg CLIMATE CHANgE—gROWTH- AND DIsTRIBUTION-FRIENDLY sTRATEgIEs ### Overview: timing, tools, and net benefits - Initial green investment push combined with initially moderate and gradually rising carbon prices would deliver needed emission reductions with reasonable output effects. - A green fiscal stimulus would: - support global GDP and employment during the recovery from the COVID-19 crisis, - lay the ground for higher carbon prices by boosting productivity in low-carbon sectors. - Preannounced and gradually rising carbon prices become a powerful tool as recovery takes hold to deliver quick and substantial reductions needed to reach net zero emissions by 2050. - Along the transition, higher carbon prices entail global output losses, but: - these losses would be moderate relative to expected income gains from avoided climate damage in the second half of the century and beyond. - growth in the medium and long term will be harmed considerably unless climate change is addressed, making the benefits from mitigation much higher than temporary benefits from inaction. - Complementary policy: early green research and development subsidies to amplify innovation incentives sparked by carbon pricing. ### Distributional and country-difference considerations - Transition costs differ across countries: - Countries with fast economic and population growth (such as India and, to a lesser extent, China), those with heavy reliance on high-carbon energy (such as China), and most oil producers are likely to bear larger transition costs. - For fast-growing countries, transition costs remain small given projected growth over the next 30 years (even under mitigation) and should be weighed against substantial avoided damage and co-benefits (reduced local pollution and mortality). - Global mitigation requires joint action by largest economies; unilateral action by advanced economies alone would not keep emissions and temperature increases to safe levels. - For fossil fuel producers, economic diversification will be difficult, but many can benefit from global mitigation. ### Revenue recycling and social protection measures - Carbon pricing disproportionally affects poorer households; revenue recycling can offset impacts: - Recycling one-sixth to one-quarter of carbon revenues as targeted transfers could fully compensate the poorest 20 percent of households. - Fully compensating the poorest 40 percent of households would require recycling between 40 and 55 percent of the carbon revenues. - Limited government spending on low-carbon sectors would support job transitions from high-carbon to low-carbon sectors. - Conscious and determined government action to build inclusion is key to social and political acceptability. ### The Mitigation Toolkit: historical experience and effects - Clean energy innovation and investment increased dramatically over past two decades amid tightening environmental policies. - Key observed historical changes and statistics: - Clean energy innovation (measured by patent applications) doubled in share of total energy innovation. - Clean electricity innovation now accounts for half of total electricity innovation in the top five innovating countries (up from 15 percent in 1990). - Global share of solar and wind power in electricity generation increased from virtually zero in 2000 to 6 ½ percent in 2020, with much higher shares in some European Union countries. - The renewable share growth accelerated: global renewable share was increasing at a pace of ½ percentage point a year by 2010, and that number reached 1 percentage point by 2016. - Environmental policy instruments: - Emission limits and research and development subsidies (“nonmarket instruments”) widely used since the 1990s and became more stringent over time. - Use of market instruments (trading programs and feed-in tariffs) picked up since early 2000s. - Carbon taxes have yet to become binding constraints in most countries. ### Econometric findings on policy impacts (1990–2015 sample, ~30 economies) - Tighter environmental policies were estimated to have contributed to: - 30 percent of the increase in global clean energy innovation, equivalent to the effect of a permanent rise in oil prices of $66 a barrel. - Higher oil prices explain the rest of the increase up to 2010, though this reversed after 2010. - 55 percent of the increase in the share of renewables in electricity generation. - Tighter policies were associated with declines in the share of coal and an ambiguous effect on the share of natural gas. - Environmental policies contributed to more electricity innovation overall and shifted electricity innovation toward clean and “gray” electricity technologies at the expense of dirty technologies. - Policy instruments found effective in spurring clean innovation: - Research and development subsidies, trading programs, emission limits, and feed-in tariffs. - Oil prices were also important determinants of clean energy innovation. - Investment in renewable electricity generation was especially responsive to: - Feed-in tariffs and trading programs (including green certificate programs and emission trading programs). ### Employment and sectoral effects - Decarbonization policies can lead to job losses in carbon-intensive activities (coal mining, shale oil and gas production, carbon-intensive manufacturing, transportation). - Net employment effects depend on: - job creation in low-carbon activities (renewables, services), - extent of substitution between high- and low-emission activities, - relative capital- and labor-intensity of sectors (high-carbon sectors typically more capital intensive; low-carbon sectors typically more labor intensive). - Evidence from firms suggests: - Job losses in some high-emission sectors can be offset by job creation in some low-emission sectors. - Net effect on aggregate jobs is typically small and indeterminate. - Job effects tend to be larger and net negative in response to changes in nonmarket policies, whereas market policies (feed-in tariffs and trading programs) have a more muted and net positive effect. - Impact on fossil fuel industry employment is not significant (opposing effects of tax-based policies negative and trading-based policies positive). - Production in renewable energy is more job intensive than fossil-fuel-based electricity generation, but substitution may be incomplete because mitigation also reduces energy demand and intensity. ### How to reach net zero emissions by 2050: mechanisms and macro channels - Ambitious mitigation requires general equilibrium analysis because policies affect the economy via multiple channels with both negative and positive output effects. - Core mechanism: change in relative prices between fossil fuel energy and low-carbon energy and changes in the overall energy price. - Carbon pricing and green supply policies increase the price of fossil fuel energy relative to low-carbon energy by raising the price of carbon and/or lowering the price of renewables. - This relative price change raises demand for renewable energy and other low-carbon activities, reallocating investment, innovation, and employment. - Net macroeconomic outcomes depend on: - speed at which high-carbon sectors contract versus scale-up of low-carbon sectors (adjustment costs of capital can hinder rapid scaling up), - relative capital- and labor-intensity of contracting and expanding sectors, - potential wealth effects and stranded assets due to obsolescence of carbon-intensive activities, affecting financial portfolios in advanced economies and the net worth of fuel exporters. *Source: CHAPTER 3 MITIgATINg CLIMATE CHANgE—gROWTH- AND DIsTRIBUTION-FRIENDLY sTRATEgIEs (International Monetary Fund | October 2020).* ### CHAPTER 3 MITIgATINg CLIMATE CHANgE—gROWTH- AND DIsTRIBUTION-FRIENDLY sTRATEgIEs ### CHAPTER 3 MITIgATINg CLIMATE CHANgE—gROWTH- AND DIsTRIBUTION-FRIENDLY sTRATEgIEs ### Energy price effects and green supply policies - Carbon taxes increase the overall energy price, encourage energy efficiency, and discourage energy usage; they can hurt economic activity but revenues can be recycled to offset costs. - Green supply policies lower the overall price of energy and can potentially boost GDP depending on financing (taxes versus borrowing); they do not incentivize energy efficiency and can be accompanied by greater energy consumption. - When combined, green supply policies and carbon pricing can prompt declines in emissions consistent with substantial mitigation without major shrinkage of output and consumption during the transition. - Revenues from carbon pricing can be used to: directly incentivize the supply of clean energy; finance green public infrastructure that reduces energy intensity or raises renewable power efficiency; and provide transfers to households to protect the poor and increase political acceptability. ### Innovation, research, and amplifying mechanisms - Higher carbon prices expand markets for low-carbon activities and shrink those for carbon-intensive ones, incentivizing greener research and development and lowering prices of green technologies over time. - Green research and development subsidies alongside carbon taxes are justified to resolve multiple market failures, including knowledge spillovers, path dependency, and financing difficulties for high-uncertainty innovations. - Green R&D and supply policies lower the energy price overall, boosting output but partly offsetting emissions reductions through higher energy consumption. - More active government involvement and international cooperation may be needed to assist in developing technologies that support the low-carbon transition. ### A comprehensive mitigation package (design and instruments) - Objective: Bring net carbon emissions to zero by 2050, operationalized as a reduction in gross emissions by 80 percent, assuming expansion of natural sinks and some deployment of negative emission technologies. - Exception: Selected oil-exporting and other economies are assumed to keep emissions at current levels because economic activity shrinks substantially due to the fall in global oil demand. - Package components: - Green supply policies: - 80 percent subsidy rate on renewables production. - A 10-year green public investment program starting at 1 percent of GDP and linearly declining to zero over 10 years; after that, additional public investment maintains the green capital stock created. - Public investment assumed in renewable and other low-carbon energy sectors, transport infrastructure, and energy-efficiency services for buildings. - Carbon pricing: - Calibrated to achieve the 80 percent reduction in emissions by 2050 after accounting for emission reductions from the green fiscal stimulus. - High annual growth rate of carbon prices: 7 percent, to ensure low initial levels and gradual phase-in. - Needed carbon prices: start between $6 and $20 a ton of CO2 (depending on the country); reach between $10 and $40 a ton of CO2 in 2030; and are between $40 and $150 a ton of CO2 in 2050. - The real price of carbon continues to grow until 2080. - Compensatory transfers: - Households receive compensation equal to one-fourth of carbon tax revenues to protect purchasing power of poor households. - Supportive macroeconomic policies: - The package implies fiscal easing that requires debt financing for the first decade and occurs amid low-for-long interest rates. ### Model simulations and baseline projections - Modeling frameworks: - Policy simulations use the G-Cubed global macroeconomic model with 10 countries/regions, detailed energy sectors, forward-looking agents, real and nominal rigidities, and fiscal and monetary policies. - Long-term dynamics of temperatures and avoided damages use an integrated assessment model with different climate-damage functions. - Baseline (absence of new mitigation policies): - Global carbon emissions projected to continue to rise at an average annual pace of 1.7 percent and reach 57.5 gigatons by 2050. - Global growth assumed to progressively decline from 3.7 percent in 2021 to 2.1 percent in 2050. - Improvements in energy efficiency and some penetration of renewables under current policies are insufficient to offset population and economic growth driving emissions. ### Policy-package outcomes and transition costs - Emissions and temperature: - Under the policy package, global carbon emissions are reduced by about 75 percent from current levels, reaching about 9 gigatons by mid-century. - The package brings net emissions to zero around mid-century and to negative levels thereafter with deployment of carbon capture and storage (CCS). - Over the long term, temperature increases are kept down to 2°C after some modest initial overshooting. - Short- and medium-run macroeconomic effects: - The policy package delivers a net positive effect on global growth in the initial years, supporting recovery from the COVID-19 crisis. - After 15 years, GDP is lower by up to about 1 percent relative to its baseline level under unchanged policies. - The policy package raises output in the first 15 years by about 0.7 percent of global GDP each year (on average over that period). - Net drag of the policy package on global output is about 0.7 percent, on average, between 2036–50, and slightly more than 1 percent by 2050. - Average annual growth is higher in the 2020s thanks to the green fiscal stimulus, then lower by only one-tenth of a percentage point in the 2030s and by less than one-tenth of a percentage point in the 2040s. - Role of instruments: - Carbon pricing is the dominant driver of emission reductions because it increases energy efficiency. - The green fiscal stimulus meaningfully reduces emissions but to a much smaller extent than carbon pricing. - Green fiscal stimulus boosts GDP directly via higher investment and indirectly by lowering future carbon taxes needed to meet targets; it helps offset carbon tax costs in initial years. - Long-run benefits and avoided damages: - Estimates of damages from climate change vary substantially with assumptions; more recent studies point to much larger damages. - Based on damage estimates used, projected net output gains from mitigating climate change increase rapidly after 2050, reaching up to 13 percent of global GDP by 2100. - Avoided damages include higher productivity and fewer natural disasters, implying output higher relative to unchanged policies from mid-century onward. *Source: CHAPTER 3 MITIgATINg CLIMATE CHANgE—gROWTH- AND DIsTRIBUTION-FRIENDLY sTRATEgIEs (text).* ### CHAPTER 3 MITIgATINg CLIMATE CHANgE—gROWTH- AND DIsTRIBUTION-FRIENDLY sTRATEgIEs ### CHAPTER 3 MITIgATINg CLIMATE CHANgE—gROWTH- AND DIsTRIBUTION-FRIENDLY sTRATEgIEs ### Summary of modeling approach - Model: G-Cubed global macroeconomic model (McKibbin and Wilcoxen (1999, 2013); Liu and others (2020)). - Policy package calibrated to reduce gross emissions by 80 percent in every country/region by 2050 and comprises: - gradually rising carbon taxes; - a green fiscal stimulus consisting of green infrastructure investment and a subsidy for renewables production; - compensatory transfers to households. - Simulations also show effects of avoided damages from climate change resulting from implementation of the package. ### Global macroeconomic and emissions outcomes - Emissions and output trajectory: - The package would initially boost global GDP, supporting recovery from the COVID-19 crisis, and then weigh on global activity for a period as the investment push wanes and carbon prices continue to rise. - In the second half of the century, reductions in emissions place the global economy on a stronger and more sustainable path. - Emissions target: gross emissions reduced by 80 percent in every country/region by 2050 (policy calibration). - Private investment: - The package leads to a sharp global contraction in private investment because the carbon tax acts as a negative wealth shock and reduces the long-term desired capital stock. - Expanding low-carbon sectors are less capital intensive than contracting high-carbon sectors, further reducing demand for capital investment. - Renewable energy sector is smaller than fossil fuel sector and takes time to expand due to capital adjustment costs, although green infrastructure investment and subsidies help incentivize private investment in renewables and other low-carbon sectors. - Fiscal effects: - The policy package initially deteriorates the fiscal balance and requires debt financing because carbon revenues are smaller than initial spending on infrastructure, subsidies, and compensatory transfers. - Carbon tax revenues are thereafter broadly sufficient to finance the additional green infrastructure and transfers to poor households. - Employment: - Employment is boosted initially. Global employment would be higher by a total of 12 million people, on average, each year between 2021 and 2027. - Followed by a small decline relative to the baseline employment path during the transition until the economy reaches a higher output and growth path. - The scenario entails a substantial reallocation of about 2 percent of jobs from high- to low-carbon sectors, requiring reskilling and government support. - Sectoral reallocation: - Expanding low-carbon sectors (renewables, services, energy efficiency, retrofitting, electric car production) are typically more labor intensive than shrinking high-carbon sectors (fossil fuel energy, transportation, heavy manufacturing) and can create many jobs. - Timing and policy sequencing: - A mix of carbon pricing and an initial green stimulus would help with near-term recovery from the COVID-19 crisis while putting the global economy on a sustainable growth path at moderate transitional growth costs. - The next decade is identified as the best time for governments to invest and borrow, given low interest rates for many large emitters. - As the recovery takes hold, further increases in carbon taxes are essential to generate needed substantial declines in emissions and would imply only moderate growth costs. - Long-term gains: - Over the longer term, the economy would be on a higher growth and output path because substantial damages from climate change would be avoided. ### Cross-country differences and co-benefits - Heterogeneity in transitional costs: - Some advanced economies may experience smaller economic costs throughout the transition—or even gain (for example, Europe), because they start with larger renewable sectors and lower adjustment costs per unit of additional investment. - The United States and China have large amounts of fossil fuel capital relative to non-fossil-fuel capital; investment reductions in these industries offset renewables investment, which faces larger adjustment costs to ramp up. - Countries with fast economic or population growth (India, especially; China, to a lesser extent) and most oil producers are bound to experience larger economic costs from forgoing cheap forms of energy such as coal or oil. - Example magnitudes: - India’s GDP would be 277 percent higher in 2050 than today under the policy package, compared with 287 percent higher under unchanged policies. - Net gains from climate change mitigation for India—relative to inaction—would be up to 60–80 percent of GDP by 2100. - Co-benefits from reduced air pollution and other externalities: - Estimated co-benefits per country (examples): - China: about 0.7 percent of GDP immediately and 3.5 percent of GDP by 2050. - India: about 0.3 percent immediately and 1.4 percent by 2050. - Nationally efficient CO2 price level estimate: on average, $57.5 a ton (in 2010), range between $11 and $85 for countries/regions in the G-Cubed model (reflecting primarily health co-benefits from reduced air pollution and, in some cases, reductions in automobile externalities). - Quasi-experimental evidence cited: an increase of 10 micrograms per cubic meter in PM10 reduces life expectancy by 0.64 year; bringing all of China into compliance with its Class I standard for PM10 would save 3.7 billion life-years (Ebenstein and others (2017) as cited). - Reducing PM2.5 in China from prevailing average to WHO-recommended level would reduce health care spending by $42 billion relative to 2015 spending levels, or about 7 percent of national annual health care spending (Barwick and others 2018, as cited). - Net effects when combining output and co-benefits: - For China and several other countries, combining real GDP effects and co-benefits yields net benefits throughout the transition; for India, Russia, and others transitional costs are smaller when co-benefits are included. ### Partial participation and leakage - Advanced-economies-only scenario: - Advanced economies’ share in global emissions is projected to drop to 23 percent in 2050 from 32 percent under unchanged policies. - If only advanced economies enact mitigation policies and reduce gross emissions by 80 percent by 2050, global emissions still increase to 48 gigatons by 2050 (partial participation leakage). - Rationale: two types of leakages—(1) lower demand from advanced economies depresses global fossil fuel prices and increases consumption by other countries; (2) carbon-intensive activities may relocate to countries where carbon is not taxed. - Top-five countries acting together: - If the United States, Europe, China, Japan, and India act together (the five largest countries/economic regions), global emissions would be reduced by about 55 percent from baseline levels and 25 percent from current levels by mid-century, producing effects on participating countries’ GDP very similar to the global-action scenario. ### Employment and job creation intensity - Job multipliers: - Renewable-based electricity generation and energy-efficiency-enhancing investment are more job-intensive than generation of electricity from fossil fuels. - Energy-efficiency, renewables, and certain low-carbon technologies generate higher job-years per gigawatt hour (levelized over lifetime) than fossil fuel generation, supporting job creation during asset creation and operation/maintenance phases. ### Policy implications and recommendations (implicit from simulations) - Combine carbon pricing with an initial green fiscal stimulus (infrastructure investment and renewables subsidies) and compensatory transfers to households to: - Support near-term recovery and employment growth; - Reduce transitional growth costs while ensuring distributional protection for affected households and workers; - Allow carbon revenues over time to finance green investment and transfers. - Use the near-term window of low interest rates to finance green infrastructure, given affordability and desirable timing. - Implement accompanying labor market policies to manage reallocation of about 2 percent of jobs from high- to low-carbon sectors: reskilling, retraining, and targeted support for displaced workers. - Pursue broad international participation to avoid leakage: joint action by the largest emitters (top five) produces major global emissions reductions; action by advanced economies alone is insufficient to keep temperature increases to safe levels. *Source: IMF staff estimates, simulations with the G-Cubed global macroeconomic model and related figures in Chapter 3.* ### 1. Global CO ### 1. Global CO ### Role of carbon pricing and green fiscal policy - A carbon price floor among the largest emitters—possibly with a lower price floor or transfers for lower-income countries—would be an effective arrangement to scale up Paris Agreement commitments and help reassure against potential losses in international competitiveness from higher energy costs. - Carbon pricing is critical to mitigation because higher carbon prices incentivize energy efficiency and reallocate resources from high- to low-carbon activities. - The transitional costs of carbon pricing consistent with net zero emissions by mid-century would be manageable in the context of projected global growth over the next three decades and could be reduced further by technological innovation and green R&D subsidies. - The window for attaining net zero emissions by 2050 and holding temperature increases to safe levels is rapidly closing. ### Distributional and sectoral impacts; inclusion strategies - Low-income households are more likely than high-income households to be hurt by carbon pricing because they spend a relatively larger share of income on energy-intensive goods. - Low-income households are more likely to experience losses in labor income because they tend to be employed in low-skill occupations in carbon-intensive sectors (manufacturing, transportation, energy). - Public opinion: Low-skilled workers are less likely than high-skilled workers to favor protecting the environment over boosting economic growth; support is lowest among lower-skilled workers employed in carbon-intensive sectors. - Carbon pricing can produce enough revenue to: - Finance targeted income support for low-income households. - Support policies that facilitate job transitions if revenues are well targeted. ### Revenue recycling and options evaluated (model simulations) - Simulation design: a $50 tax per ton of CO2 where revenue is used for different recycling options (multisector heterogeneous agent model calibrated to the United States and China). - Key simulation outcomes: - Targeted cash transfers to the bottom two quintiles can raise consumption for low-income households. - To keep consumption of the lowest quintile broadly constant, it would require redistributing about one-quarter and one-sixth of the carbon revenues, respectively, to this group in the United States and China. - To protect consumption levels of the lowest two quintiles would require redistributing 55 percent and 40 percent of revenues, respectively, in the United States and China. - Fully rebating carbon revenues through universal transfers would avert declines in consumption of the bottom two quintiles but at a much higher fiscal cost. - Increasing government spending on low-carbon goods and services would prevent a decline in aggregate employment and spur reallocation toward low-carbon sectors but would not protect consumption of poorer households as effectively as targeted transfers. - Feebates modeled as a $50/ton of CO2 tax on dirty energy consumption with revenue financing subsidies to promote clean energy: - Feebates reduce carbon emissions, stimulate employment for low-skilled workers (given higher labor intensity in renewables), but have smaller effects on bottom-quintile consumption and inequality compared with carbon taxes plus transfers unless accompanied by redistribution. ### Returns to supporting technological innovation - Combining a plausible endogenous technological response to carbon prices with a green research and development subsidy of 70 percent allows achieving a similar emission target with a carbon price path at about half the prices required in the G-Cubed scenario. - In the presence of endogenous technical change and R&D subsidies, transitional costs of mitigation are significantly lower, and global GDP returns toward baseline earlier—around the mid-2040s—than without innovation. - The beneficial impact of innovation is mostly in the medium to longer term (after 2030) because innovation response and diffusion of knowledge take time; immediate effects are limited by the modest initial size of the green energy sector. ### Sector priorities and technological potentials - Electricity and heating generate roughly 40 percent of total global carbon emissions; three-quarters of these emissions are from coal-based electricity generation. - Raising the share of renewables in electricity is a first step to decarbonization because substitute low-carbon technologies are already available and economically competitive: - Example: cost of electricity from wind has declined by 70 percent (Lazard 2019). - In the G-Cubed simulation, about two-thirds of emission reductions in the first 10 years are achieved in electricity generation. - Low-carbon electricity also facilitates decarbonization of other end uses as they electrify (automobiles, heating, etc.). ### Impacts on fossil fuel exporters and policy options - Fossil fuel exporters are bound to experience the largest economic losses from the global transition to a low-carbon path due to lower global demand for fossil fuels and an industrial structure reliant on cheap energy. - Imposing an export tax (royalty) on oil sales—if agreed among oil producers—could maximize revenue extraction from oil reserves while contributing to global decarbonization, though political feasibility varies. - Many oil exporters face climate-related damages (for example, hotter temperatures and worsening water scarcity in the Middle East) and are pursuing economic diversification and policies to strengthen non-oil sectors (better business regulation, greater credit availability, labor market reforms, and increased non-oil revenue sources). ### Policy recommendations and concluding observations - An initial green investment push combined with steadily rising carbon prices would deliver needed emission reductions at reasonable transitional global output effects. - A green fiscal stimulus would strengthen the macroeconomy in the short term and help lower adjustment costs to higher carbon prices. - To build inclusion and political support, governments can use carbon tax revenues to: - Support job transitions (reskilling, place-based policies for affected regions). - Provide targeted cash transfers to protect poorer households’ purchasing power. - International coordination is essential: the five largest countries/economic union—the United States, China, the European Union, Japan, and India—acting jointly can significantly reduce global emissions; broader international policy coordination and burden sharing deserve further study but are outside this chapter’s scope. - Decarbonization is a structural transformation with unequal impacts; place-based policies and targeted supports will be needed for communities disproportionately affected by labor shedding in high-carbon sectors. *Source: IMF staff estimates and simulations, chapter content from the IMF World Economic Outlook: A Long and Difficult Ascent (October 2020).* ### CHAPTER 3 MITIgATINg CLIMATE CHANgE—gROWTH- AND DIsTRIBUTION-FRIENDLY sTRATEgIEs ### CHAPTER 3 MITIgATINg CLIMATE CHANgE—gROWTH- AND DIsTRIBUTION-FRIENDLY sTRATEgIEs ### Glossary (Box 3.1) - Avoided damages: The value of avoided climate-change-induced events, such as crop loss, rises in sea level, and extreme weather. - Carbon dioxide (CO2): The main greenhouse gas, produced from burning fossil fuels, manufacturing cement, and forestry practices. CO2 emissions remain in the atmosphere for an average of 100 years. - Carbon tax: A tax imposed on CO2 emissions released largely through the combustion of carbon-based fossil fuels. Administratively, implementation is easiest by taxing the supply of fossil fuels—coal, oil, and natural gas—in proportion to their carbon content. - Clean energy innovation: The number of patent applications in climate change mitigation technologies related to energy generation, transmission, and distribution. - Co-benefits: Reductions in mortality risks and improved health from less air pollution (as a result of lower use of coal and natural gas) and reduced road congestion, traffic accident risk, and road damage. - Distribution-friendly policy: A policy that attempts to mitigate the policy’s negative effects on low-income groups’ consumption (or some other measure of household well-being). - Economies of scale: Cost advantages for businesses as a result of their scale of operation, with unit costs of output decreasing with increasing scale. - Emission trading system: A market-based policy to reduce emissions (sometimes referred to as “cap and trade”). Covered sources are required to hold allowances for each ton of their emissions or (in an upstream program) the embodied emission content in fuels. The total quantity of allowances is fixed, and market trading of allowances establishes a market price for emissions. Auctioning the allowances is a valuable source of government revenue. - Externality: A cost imposed by the actions of individuals or firms on other individuals or firms (possibly in the future, as in the case of climate change) that the former does not take into account. - Feebate: A sliding scale of fees on firms with emission rates (for example, CO2 per kilowatt-hour) above a “pivot point” level and corresponding subsidies for firms with emission rates below the pivot point. Alternatively, a feebate can be applied to energy consumption rates (for example, gasoline per mile driven) rather than emission rates. Feebates can exploit many (but not all) of the mitigation opportunities promoted by carbon taxes but without a large increase in energy prices. - Feed-in tariffs: Long-term contracts that guarantee producers of renewable electricity a fixed price for every unit of electricity delivered to the grid. - Gray technologies: Technologies that tend to improve the pollution effect of “dirty” technologies. Examples include technologies that use the heat from fuel or waste incineration or fuels from nonfossil sources. - Green supply policies: Policies aimed at boosting the supply of renewable energy and energy efficiency, including subsidies and investment programs. - Green/white certificates: Titles, respectively, for reaching renewable energy/energy saving targets. - Greenhouse gas: A gas in the atmosphere that allows incoming solar radiation to pass through but traps and absorbs heat radiated from Earth. CO2 is easily the most predominant greenhouse gas. - High-carbon activities: Activities that either involve generation of carbon-based energy or emit relatively high amounts of CO2. - Nationally Determined Contribution (NDC): Climate strategies, including mitigation commitments, submitted by 190 parties to the Paris Agreement. Countries are required to report progress on implementing NDCs every two years and (from 2020 onward) to submit revised NDCs (which are expected to contain progressively more stringent mitigation pledges) every five years. - Paris Agreement: An international accord (ratified in 2016) on climate mitigation, adaptation, and financing. The agreement’s central objective is to contain global average temperature increases to 1.5–2°C above preindustrial levels. - Renewable energy: Typically includes energy generated from solar photovoltaic, solar thermal, wind, geothermal, biomass, and hydroelectric sources. Hydroelectric is often subdivided into “large” and “small” because of the major environmental impact of the former. - Research and development: Innovative activities by corporations and governments with the goal of developing new products and technologies. - Revenue recycling: Use of (carbon) tax revenues for purposes such as lowering other taxes on households and firms or funding public investment. ### Box 3.2 — Zooming In on the Electricity Sector: Simulation Design - Model: Modified Global Integrated Monetary and Fiscal model (Laxton and others 2010) including an electricity sector with generation from coal, natural gas, renewables, nuclear, and hydroelectric processes. - Intermittency treatment: Renewable intermittency captured by pairing renewable electricity generation with a flexible backup capacity that covers output shortfalls. - Policy experiment: Illustrative $50 carbon price in the United States, Europe, and China, phased in over 10 years. - Policy package components (in simulations): - Front-loaded renewables investment subsidies (in each of the three regions). - In the short term, an accommodative monetary policy (in each region). - For China, additionally, a doubling of nuclear and hydro capacities over 20 years. - Model used for figure: CarMMa (Carbon Mitigation Macro Model). ### Key quantitative simulation outcomes and mechanisms - United States results: - Electricity sector emissions decline by 35 percent relative to baseline by 2030. - Carbon price revenues: roughly 0.2 percent of GDP when fully in place after 10 years. - Financing the subsidy before revenues fully emerge leads to a total increase in the debt-to-output ratio of roughly 1 percent of GDP. - Output impact: output declines below baseline by ½ percent over 10 years. - Mechanism: Carbon price discriminates by carbon intensity, disadvantaging coal (and to a lesser extent gas); decline in renewable prices due to subsidy rebalances the electricity mix away from coal toward renewables. Gas decline is dampened by its role as backup capacity for renewables. - Labor and investment reallocation from coal toward renewables offsets a large portion of coal-sector losses. - European Union results: - Initial electricity mix: coal and renewables both have a share of about 20 percent. - Natural gas share is considerably smaller than in the United States, constraining grid flexibility and limiting further expansion of renewables. - Result: Carbon price achieves a somewhat milder reduction in emissions than in the United States given less room to cut coal and more limited means for renewables to expand. - China results: - Initial coal-generated electricity share: almost 70 percent. - Carbon price increases the share of renewables by about 20 percentage points. - With limited availability of natural gas, renewables must be backed up by coal itself (assuming flexibility retrofits), reducing the scope for coal reductions. - Supplementing renewables subsidies with expansion in nuclear power helps crowd out coal-based generation. - Emissions: Percentage decline in emissions is of the same order as in other regions; in absolute terms, the decline is about three times greater than in the United States owing to China’s greater initial emissions. - Overall assessment: - Policy mix (carbon price phased in over 10 years plus front-loaded renewables subsidy and accommodative monetary policy) is highly effective at curbing electricity-related emissions at modest macroeconomic costs, especially if labor reallocation can be facilitated. - Storage technology for renewable electricity, if feasible in the near term, would amplify renewables penetration resulting from the carbon price. - Despite modest macroeconomic costs, current policy action and plans for phasing out coal generally fall short of what is needed to avoid irreversible climate damage. - According to the International Energy Agency (IEA 2019), under current and proposed investment plans and policies, power generation from coal alone would use up most of the remaining carbon budget. ### Policy design and fiscal notes from the simulation - Budget neutrality: The policy mix is budget neutral when the carbon price is fully in place after 10 years (carbon revenues finance the renewables subsidy). - Transitional financing: Front-loaded subsidy financed through debt before carbon revenues fully emerge, leading to a roughly 1 percent of GDP increase in debt-to-output ratio (United States simulation). - Complementary policies highlighted: - Front-loaded renewables investment subsidies to accelerate deployment. - Accommodative monetary policy in the short term to mitigate macroeconomic adjustment costs. - For China, targeted expansion of nuclear and hydro capacities over 20 years to reduce coal dependence. *International Monetary Fund | October 2020* ### CHAPTER 3 MITIgATINg CLIMATE CHANgE—gROWTH- AND DIsTRIBUTION-FRIENDLY sTRATEgIEs ### CHAPTER 3 MITIgATINg CLIMATE CHANgE—gROWTH- AND DIsTRIBUTION-FRIENDLY sTRATEgIEs ### Key references and evidence base - Dechezleprêtre, Antoine, and David Popp. 2017. “Fiscal and Regulatory Instruments for Clean Technology Development in the European Union.” In Energy Tax and Regulatory Policy in Europe: Reform Priorities, edited by Ian Parry, Karen Pittel, and Herman Vollebergh. Cambridge, MA: MIT Press. - Dell, Melissa, Benjamin F. Jones, and Benjamin A. Olken. 2012. “Temperature Shocks and Economic Growth: Evidence from the Last Half Century.” American Economic Journal: Macroeconomics 4 (3): 66–95. - Ebenstein, Avraham, Maoyong Fan, Michael Greenstone, Guojun He, and Maigeng Zhou. 2017. “New Evidence on the Impact of Sustained Exposure to Air Pollution on Life Expectancy from China’s Huai River Policy. Proceedings of the National Academy of Sciences 114 (39): 10384–89. - Gillingham, Kenneth, and James H. Stock. 2018. “The Cost of Reducing Greenhouse Gas Emissions.” Journal of Economic Perspectives 32 (4): 53–72. - High-Level Commission on Carbon Prices. 2017. Report of the High-Level Commission on Carbon Prices. Washington, DC: World Bank. License: Creative Commons Attribution CC BY 3.0 IGO. - Intergovernmental Panel on Climate Change (IPCC). 2014. “Summary for Policymakers.” In Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change. - International Energy Agency (IEA). 2019. World Energy Outlook. Paris. - International Monetary Fund (IMF). 2019. “Fiscal Policies for Paris Climate Strategies—From Principle to Practice.” IMF Policy Paper 19/010, Washington, DC. - McCollum, David L., Wenji Zhou, Christoph Bertram, Harmen-Sytze De Boer, Valentina Bosetti, Sebastian Busch, Jacques Després, and others. 2018. “Energy Investment Needs for Fulfilling the Paris Agreement and Achieving the Sustainable Development Goals.” Nature Energy 3 (7): 589–99. - Nordhaus, William D. 2015. “Climate Clubs: Overcoming Free-Riding in International Climate Policy.” American Economic Review 105 (4): 1339–70. - Stern, Nicholas. 2007. The Economics of Climate Change: The Stern Review. Cambridge, UK: Cambridge University Press. - Additional empirical, modeling, and policy analyses cited in the chapter include works on carbon pricing, distributional impacts of climate policy, technology diffusion, renewable energy investment, employment effects of green transition, and climate tipping points. ### Statistical Appendix — assumptions and projections - Data in the statistical tables compiled on the basis of information available through September 28, 2020. - Figures for 2020–21 are shown with the same degree of precision as historical figures solely for convenience; they are projections and the same degree of accuracy is not to be inferred. Assumptions underpinning 2020–21 projections: - Real effective exchange rates for the advanced economies are assumed to remain constant at their average levels measured during July 24–August 21, 2020. - These assumptions imply average US dollar–special drawing right (SDR) conversion rates of 1.391 and 1.430 for 2020 and 2021, respectively. - US dollar–euro conversion rates of 1.143 and 1.230 for 2020 and 2021, respectively. - Yen–US dollar conversion rates of 107.2 and 105.9 for 2020 and 2021, respectively. - It is assumed that the price of oil will average $41.69 a barrel in 2020 and $46.70 a barrel in 2021. - National authorities’ established policies are assumed to be maintained. - LIBOR assumptions: - LIBOR on six-month US dollar deposits will average 0.7 percent in 2020 and 0.4 percent in 2021. - LIBOR on three-month euro deposits will average –0.4 percent in 2020 and –0.5 percent in 2021. - LIBOR on six-month yen deposits will average 0.0 percent in 2020 and 2021. Euro conversion rates (fixed, as of January 1, 1999 decision; listed values preserved): - 1 euro = 13.7603 Austrian schillings - 1 euro = 40.3399 Belgian francs - 1 euro = 0.585274 Cyprus pound - 1 euro = 1.95583 Deutsche marks - 1 euro = 15.6466 Estonian krooni - 1 euro = 5.94573 Finnish markkaa - 1 euro = 6.55957 French francs - 1 euro = 340.750 Greek drachmas - 1 euro = 0.787564 Irish pound - 1 euro = 1,936.27 Italian lire - 1 euro = 0.702804 Latvian lat - 1 euro = 3.45280 Lithuanian litas - 1 euro = 40.3399 Luxembourg francs - 1 euro = 0.42930 Maltese lira - 1 euro = 2.20371 Netherlands guilders - 1 euro = 200.482 Portuguese escudos - 1 euro = 30.1260 Slovak koruna - 1 euro = 239.640 Slovenian tolars - 1 euro = 166.386 Spanish pesetas ### What’s new in the October 2020 WEO statistical updates - Following the recent release of the 2017 International Comparison Program (ICP) survey for new purchasing-power-parity benchmarks, the WEO’s estimates of purchasing-power-parity weights and GDP valued at purchasing power parity have been updated. - Starting with the October 2020 WEO, data and forecasts for Bangladesh and Tonga are presented on a fiscal year basis. - Data for West Bank and Gaza are now included in the WEO. West Bank and Gaza is added to the Middle East and Central Asia regional group. ### Data and conventions — coverage and standards - Data and projections for 195 economies form the statistical basis of the WEO database. - The database is maintained jointly by the IMF’s Research Department and regional departments, with regular updates based on consistent global assumptions. - Most countries’ macroeconomic data as presented in the WEO conform broadly to the 2008 version of the System of National Accounts (SNA 2008). - The IMF’s sector statistical standards referenced include: - Balance of Payments and International Investment Position Manual (BPM6), sixth edition. - Monetary and Financial Statistics Manual and Compilation Guide (MFSMCG). - Government Finance Statistics Manual 2014 (GFSM 2014). - The WEO database reflects information from both national source agencies and international organizations, aiming to harmonize methodologies for national statistics compilation. *Source: CHAPTER 3 MITIgATINg CLIMATE CHANgE—gROWTH- AND DIsTRIBUTION-FRIENDLY sTRATEgIEs, text - CHAPTER 3 MITIgATINg CLIMATE CHANgE—gROWTH- AND DIsTRIBUTION-FRIENDLY sTRATEgIEs (IMF, October 2020).* ### 2008. These standards reflect the IMF’s special interest ### text - 2008. These standards reflect the IMF’s special interest ### Standards adoption and data adaptation - The adoption process for new statistical manuals begins in earnest when the manuals are released in 2008. - Full concordance with the manuals depends on national statistical compilers providing revised country data; WEO estimates are only partly adapted to these manuals. - For many countries, conversion to the updated standards will have only a small impact on major balances and aggregates. - Many countries have partly adopted the latest standards and will continue implementation over a number of years. ### Fiscal gross and net debt data: sources and comparability - Fiscal gross and net debt data reported in the WEO are drawn from official data sources and IMF staff estimates. - Attempts are made to align gross and net debt data with the definitions in the GFSM, but data limitations or specific country circumstances can cause deviations from the formal definitions. - Differences in sectoral and instrument coverage mean the data are not universally comparable. - As more information becomes available, changes in either data sources or instrument coverage can give rise to data revisions that can sometimes be substantial. - For clarification on deviations in sectoral or instrument coverage, users should refer to the metadata for the online WEO database. ### Composite data and weighting conventions - Composite data for country groups in the WEO are either sums or weighted averages of data for individual countries. - Unless noted otherwise, multiyear averages of growth rates are expressed as compound annual rates of change. - Arithmetically weighted averages are used for all data for the emerging market and developing economies group—except: - Inflation and money growth, for which geometric averages are used. - Conventions: - Country group composites for exchange rates, interest rates, and growth rates of monetary aggregates are weighted by GDP converted to US dollars at market exchange rates (averaged over the preceding three years) as a share of group GDP. - Composites for other data relating to the domestic economy, whether growth rates or ratios, are weighted by GDP valued at purchasing power parity as a share of total world or group GDP. - Annual inflation rates are simple percentage changes from the previous years, except for emerging market and developing economies, for which the rates are based on logarithmic differences. - Composites for real GDP per capita in purchasing power parity terms are sums of individual country data after conversion to the international dollar in the years indicated. - Unless noted otherwise, composites for all sectors for the euro area are corrected for reporting discrepancies in intra-area transactions. - Unadjusted annual GDP data are used for the euro area and for the majority of individual countries, except for Cyprus, Ireland, Portugal, and Spain, which report calendar-adjusted data. - For data prior to 1999, data aggregations apply 1995 European currency unit exchange rates. - Composites for fiscal data are sums of individual country data after conversion to US dollars at the average market exchange rates in the years indicated. - Composite unemployment rates and employment growth are weighted by labor force as a share of group labor force. - Composites relating to external sector statistics are sums of individual country data after conversion to US dollars at the average market exchange rates in the years indicated for balance of payments data. - Composites of changes in foreign trade volumes and prices are arithmetic averages of percent changes for individual countries weighted by the US dollar value of exports or imports as a share of total world or group exports or imports (in the preceding year). - Unless noted otherwise, group composites are computed if 90 percent or more of the share of group weights is represented. - Data refer to calendar years, except for a few countries that use fiscal years; Table F lists economies with exceptional reporting periods. - For some countries, the figures for 2019 and earlier are based on estimates rather than actual outturns; Table G lists the latest actual outturns for the indicators in the national accounts, prices, government finance, and balance of payments indicators for each country. - Note: Averages for real GDP, inflation, GDP per capita, and commodity prices are calculated based on the compound annual rate of change, except the unemployment rate, which is based on the simple arithmetic average. ### Country notes and special cases - Albania: Projections were prepared prior to the first Post-Program Monitoring mission that ended on September 28 and therefore do not reflect updates made during the mission. - Argentina: - Fiscal and inflation variables are excluded from publication for 2021–25 and 2020–25, respectively, as these are to a large extent linked to still-pending program negotiations. - The official national consumer price index (CPI) for Argentina starts in December 2016. - For earlier periods, CPI data reflect: - Greater Buenos Aires Area CPI (prior to December 2013), - national CPI (IPCNu, December 2013 to October 2015), - City of Buenos Aires CPI (November 2015 to April 2016), - Greater Buenos Aires Area CPI (May 2016 to December 2016). - Given limited comparability of these series, the average CPI inflation for 2014–16 and end-of-period inflation for 2015–16 are not reported in the October 2020 WEO. - Argentina discontinued publication of labor market data in December 2015; new series became available starting in the second quarter of 2016. - Australia: Projections do not reflect the October 6 Commonwealth budget, which was released after the cutoff date (September 28) for the October 2020 WEO. - Bangladesh: Data and forecasts are presented on a fiscal year basis starting with the October 2020 WEO; real GDP and purchasing-power-parity GDP aggregates that include Bangladesh are based on calendar year data. - Belarus: Projections were prepared before the presidential elections of August 9, 2020. - Dominican Republic: Fiscal series coverage: - Public debt, debt service, and cyclically adjusted/structural balances are for the consolidated public sector (central government, rest of the nonfinancial public sector, and the central bank). - Remaining fiscal series are for the central government. - Ecuador: - Fiscal data reflect net lending/borrowing for the nonfinancial public sector. - Ecuadorian authorities, with technical support from the IMF, are undertaking revisions of historical fiscal data for net lending/borrowing of the nonfinancial public sector over 2012–17 to correct statistical errors at the subnational level and ensure consistency between above-the-line and financing data by subsectors. - India: Real GDP growth rates are calculated as per national accounts: - For 1998 to 2011, with base year 2004/05. - Thereafter, with base year 2011/12. - Lebanon: Projections for 2021–25 are omitted due to an unusually high degree of uncertainty. - Libya: Reliability of data, especially national accounts and medium-term projections, is low against the backdrop of a civil war and weak capacity. - Syria: Data are excluded from 2011 onward because of the uncertain political situation. - Ukraine: Revised national accounts data are available beginning in 2000 and exclude Crimea and Sevastopol from 2010. - Uruguay: Starting from October 2018, Uruguay’s public pension system has been receiving transfers in the context of a new law that compensates persons affected by the creation of the mixed pension system. These funds are recorded as revenues, consistent with the IMF’s methodology; therefore, data and projections for 2018–21 are affected by these transfers. *Source: text - 2008. These standards reflect the IMF’s special interest* ### 1.3 percent of GDP in 2018 and 1.2 percent of ### 1.3 percent of GDP in 2018 and 1.2 percent of GDP in 2019, and are projected to be 0.8 percent of GDP in 2020, 0.2 percent of GDP in 2021, and zero percent thereafter ### Fiscal data coverage and revisions (Uruguay) - Coverage of the fiscal data for Uruguay was changed from consolidated public sector to nonfinancial public sector with the October 2019 WEO. - Nonfinancial public sector coverage includes central government, local government, social security funds, nonfinancial public corporations, and Banco de Seguros del Estado. - Historical data were revised accordingly. - Under the nonfinancial public sector perimeter (which excludes the central bank): - Assets and liabilities held by the nonfinancial public sector where the counterpart is the central bank are not netted out in debt figures. - Capitalization bonds issued in the past by the government to the central bank are now part of the nonfinancial public sector debt. - Gross and net debt estimates for 2008–11 are preliminary. - Reference: See IMF Country Report 19/64 for further details. ### Fiscal series coverage note (public pension disclaimer) - The disclaimer about the public pension system applies only to the revenues and net lending/borrowing series. ### Venezuela: data and projection caveats - Projecting the economic outlook in Venezuela is complicated by: - Lack of discussions with the authorities (the last Article IV consultation took place in 2004). - Incomplete understanding of the reported data. - Difficulties in interpreting certain reported economic indicators given economic developments. - Fiscal accounts for Venezuela include: - Budgetary central government; social security; FOGADE (insurance deposit institution); and a sample of public enterprises, including Petróleos de Venezuela, S.A. (PDVSA). - Data for 2018–19 are IMF staff estimates. - Effects of hyperinflation and paucity of reported data mean IMF staff’s projected macroeconomic indicators need to be interpreted with caution: - Nominal GDP is estimated assuming the GDP deflator rises in line with the IMF staff’s projection of average inflation. - Public external debt in relation to GDP is projected using the IMF staff’s estimate of the average exchange rate for the year. - Wide uncertainty surrounds these projections. - Venezuela’s consumer prices are excluded from all WEO group composites. ### Zimbabwe: currency redenomination and data revisions - In 2019 Zimbabwe authorities introduced the Real Time Gross Settlement dollar, later renamed the Zimbabwe dollar, and are in the process of redenominating their national accounts statistics. - Current data are subject to revision. - The Zimbabwe dollar previously ceased circulating in 2009 and, between 2009 and 2019, Zimbabwe operated under a multi-currency regime with the US dollar as the unit of account. ### Country classification in the WEO - The WEO divides the world into two major groups: advanced economies and emerging market and developing economies. - Classification is not based on strict criteria and has evolved; objective is to facilitate analysis. - Some territorial entities included are not states as understood by international law and practice; the terms “country” and “economy” do not always refer to a territorial entity that is a state. - Some countries remain outside the country classification and are not included in the analysis (example: Cuba and the Democratic People’s Republic of Korea are not IMF members and therefore not monitored by the IMF). ### Composition and subgroups - Advanced Economies: - 39 advanced economies listed in Table B. - Subgroup of major advanced economies (largest by GDP at market exchange rates): United States, Japan, Germany, France, Italy, United Kingdom, Canada (Group of Seven). - Euro area members distinguished as a subgroup; euro area composites cover current members for all years. - Emerging Market and Developing Economies: - Comprise 156 economies (all not classified as advanced). - Regional breakdowns: emerging and developing Asia; emerging and developing Europe; Latin America and the Caribbean; Middle East and Central Asia (including Caucasus and Central Asia; and Middle East, North Africa, Afghanistan, and Pakistan); and sub-Saharan Africa. - Analytical classifications by: - Source of export earnings (fuel vs. nonfuel; focus on nonfuel primary products: SITCs 0, 1, 2, 4, and 68). Economies categorized if main source exceeded 50 percent of total exports on average between 2015 and 2019. - Financial criteria: net creditor economies, net debtor economies, heavily indebted poor countries (HIPCs), and low-income developing countries (LIDCs). - Net debtor economies: latest net international investment position < zero or cumulative current account balances from 1972 (or earliest available data) to 2019 negative. - Net debtor economies further differentiated by debt-servicing experience (economies with arrears and/or rescheduling during 2015–19 noted). - HIPC group: countries considered for the HIPC Initiative. - LIDCs: per capita income below $2,700 in 2016 (World Bank Atlas method), plus structural and external-financial characteristics. ### Exceptional reporting periods and key data documentation - Table F lists economies with exceptional national accounts or government finance reporting periods (examples include The Bahamas Jul/Jun; India Apr/Mar national accounts and prices). - Table G provides Key Data Documentation including: - Country currency, national accounts historical data source, latest actual annual data, base year, statistical manual in use, use of chain-weighted methodology, CPI historical data source and latest actual annual data. - Government finance historical data source, subsectors coverage, accounting practice, balance of payments historical data source, latest actual annual data, and balance of payments manual in use. - Notes: - Unless noted otherwise, all data refer to calendar years. - Definitions and abbreviations: BPM = Balance of Payments Manual; CPI = consumer price index; ESA = European System of National Accounts; SNA = System of National Accounts; CB = central bank; MoF = Ministry of Finance; NSO = National Statistics Office; etc. ### Fiscal policy assumptions used in the WEO projections - Short-term fiscal policy assumptions: - Normally based on officially announced budgets, adjusted for IMF staff/authorities differences in macro assumptions and projected fiscal outturns. - If no official budget, projections incorporate policy measures judged likely to be implemented. - Medium-term fiscal projections are judgments about the most likely path of policies. - Where IMF staff lacks information on authorities’ intentions, an unchanged structural primary balance is assumed unless indicated otherwise. - Country-specific summary assumptions (selected examples with exact references to sources and assumptions preserved): - Argentina: based on budget outturn and budget plans for federal and provincial governments and IMF staff macro projections. - Australia: based on Australian Bureau of Statistics, fiscal year 2019/20 mid-year reviews, Economic and Fiscal Outlook July 2020, and IMF staff estimates and projections. - Brazil: fiscal projections for 2020 reflect policy announcements as of July 31; medium-term assumes compliance with constitutional spending ceiling. - China: large fiscal expansion estimated for 2020 based on budgeted and announced tax and expenditure measures; 2021 projects a mild expansion given a relatively large output gap. - India: historical data based on budgetary execution; projections based on available fiscal plans with IMF staff adjustments; subnational data incorporated with lag. - Italy: estimates and projections informed by fiscal plans in government’s 2020 budget and approved supplementary budgets; stock of maturing postal saving bonds included in debt projections. - United States: fiscal projections based on January 2020 Congressional Budget Office baseline, adjusted for IMF staff policy and macro assumptions; incorporate Coronavirus Preparedness and Response Supplemental Appropriations Act, Families First Coronavirus Response Act, and Paycheck Protection Program and Health Care Enhancement Act; projections converted to a general government basis and use SNA 2008/GFSM 2014 conventions. ### Monetary policy assumptions used in the WEO projections - Assumptions based on established policy framework in each country; generally a nonaccommodative stance over business cycle. - London interbank offered rate on six-month US dollar deposits assumed to average 0.7 percent in 2020 and 0.4 percent in 2021. - Rate on three-month euro deposits assumed to average –0.4 percent in 2020 and –0.5 percent in 2021. - Interest rate on six-month Japanese yen deposits assumed to average 0.0 percent in 2020 and in 2021. - Country-specific notes (selected): - China: monetary policy expected to be accommodative in 2020 and supportive in 2021 (but to a lower degree). - India: projections consistent with achieving Reserve Bank of India’s inflation target over the medium term. - Saudi Arabia: assumptions based on continuation of exchange rate peg to the US dollar. - United Kingdom: short-term interest rate path based on market interest rate expectations. - United States: IMF staff expects the Federal Open Market Committee to continue to adjust the federal funds target rate in line with the broader macroeconomic outlook. ### Statistical Appendix: key tables and summary figures (high-level) - Table A: Classification by WEO groups and their shares in aggregate GDP, exports of goods and services, and population, 2019 — includes many exact percent shares and number of economies in groups (e.g., Advanced Economies 39; Emerging Market and Developing Economies 156). - Table A1: Summary of World Output (Real GDP annual percent change) — world growth projections include: - World: 2019 = 2.8, 2020 = –4.4, 2021 = 5.2, 2025 = 3.5. - Advanced Economies: 2019 = 1.7, 2020 = –5.8, 2021 = 3.9, 2025 = 1.7. - Emerging Market and Developing Economies: 2019 = 4.5, 2020 = –3.3, 2021 = 6.0, 2025 = 4.7. - Selected table highlights preserved in the Statistical Appendix include detailed country and group-level series for: - Real GDP (Tables A2–A4), Inflation (Tables A5–A7), Fiscal balances and debt (Table A8), Trade volumes and prices (Table A9), Current account balances (Tables A10–A12), Financial account balances (Table A13), Net lending/borrowing and medium-term baseline scenario (Tables A14–A15). - Exact numeric projections and series are presented across the tables (examples preserved as in-source): - Output projections: World growth 2020 = –4.4, 2021 = 5.2. - Consumer prices: Advanced Economies (2020 = 0.8 percent, 2021 = 1.6 percent). - Major Advanced Economies: Net Lending/Borrowing (2019 = –4.2 percent of GDP; 2020 = –16.2 percent of GDP; 2021 = –7.6 percent of GDP). - Table A15 medium-term baseline: World Real GDP 2020 = –4.4, 2021 = 5.2, 2022–25 = 3.8. *Source: World Economic Outlook: A Long and Difficult Ascent, Statistical Appendix (October 2020), International Monetary Fund — text excerpts as provided.* ### Appendix 1.1 ### Appendix 1.1 ### Executive Board assessment of the outlook, risks, and policy priorities - Directors concurred that the path to prepandemic activity will be "long and precarious" with persistent scarring effects on output and employment. - Projections assume that social distancing will continue into 2021 and then fade over time as therapies improve and vaccines become more broadly available. - Directors noted concern that the pandemic is having dramatic effects on vulnerable people, leading to higher inequality, and a "sharp increase in the number of people living in extreme poverty." - Uncertainty surrounding the baseline projections remains "exceptionally large" and will be shaped primarily by: - the path of the pandemic, - the efficacy of containment measures, - pharmaceutical innovations. - Scenarios that could alter the recovery: - More rapid development of new therapeutics and wide distribution of effective vaccines could accelerate the economic recovery. - Medical setbacks and new waves of infections could require new lockdowns. - Other important sources of uncertainty: extent of global spillovers, damage to supply potential, efficacy and duration of policy support, and potential shifts in financial market sentiment. - Prepandemic risks noted: trade and technology tensions, geopolitical challenges, and climate change. ### Policy priorities and recommendations from Directors - Near-term priorities: - Support the economic recovery, - Protect vulnerable people, - Strengthen health care systems. - Emphasized objectives: - Reduce scarring effects on potential output and employment, - Reverse trends toward greater inequality and setbacks to human capital accumulation. - Structural and strategic opportunities: - Stimulate innovation, - Develop digital infrastructure, - Transition to lower carbon emissions using tools such as green investment and a gradual increase of the carbon price, with due consideration to offsetting negative social impact. - Fiscal policy guidance: - Welcome for unprecedented fiscal actions in response to the pandemic. - As economies reopen, ensure lifelines are not withdrawn prematurely. - Shift support gradually from protecting jobs to helping displaced workers find new jobs through retraining and reskilling. - When the pandemic is under control, address legacies of the crisis: record deficits and public debt levels, elevated unemployment, and increased poverty. - Public investment should play a crucial role in supporting the postpandemic recovery; noted its sizable job creation potential and the importance of good governance, budget execution, and communication to reap full benefits and maintain public trust. - Governments will need to "do more with less" and prepare credible and equitable measures to reduce fiscal deficits and debts over the medium term. - Countries with limited fiscal space should protect public investment and support lower-income households disproportionately hit by the pandemic. - Consider increasing progressive taxation and reforms to modernize business taxation, including multilateral cooperation on the design of international corporate taxation to respond to the challenges of the digital economy. - Support for low-income countries (LICs): - LICs face significant financing constraints; many will require external support, including debt relief, grants, and concessional financing. ### Financial stability, monetary policy, and international cooperation - Directors agreed that bold central bank actions to ease monetary policy, provide ample liquidity, and maintain credit flow have helped contain near-term risks to global financial stability. - Emerging vulnerabilities: - Rising vulnerabilities, most notably in the nonfinancial corporate sector, where liquidity pressures may morph into insolvencies, especially for small and medium-sized enterprises. - Rising defaults could lead to significant losses at banks and nonbank financial institutions. - While the global banking system is overall well capitalized, some banks and banking systems may experience aggregate capital shortfalls in the WEO adverse scenario. - Policy recommendations: - As economies reopen, accommodative policies and continued flow of credit to borrowers will be essential to sustain the recovery. - Once the pandemic is under control, policy support can be gradually withdrawn. - Postpandemic financial reform agenda should focus on: - Strengthening the regulatory framework to address vulnerabilities in the nonbank financial sector exposed by the crisis, - Stepping up prudential supervision to contain excessive risk taking in the lower-for-longer interest rate environment. - Improve access of emerging markets and frontier economies to capital markets. - International cooperation: - Scale up production capacity and develop distribution channels to ensure all countries have access to an effective, affordable, and safe vaccine. - Several emerging market and developing countries require international assistance through debt relief, grants, and concessional financing. - Opportunities for multilateral cooperation to alleviate trade and technology tensions and to collectively implement climate change mitigation policies. - IMF action noted: - The IMF has rapidly scaled up its lending facilities since the onset of the pandemic, providing swift financial assistance to "more than 80 countries." ### IMF Special Series on COVID-19 — selected notes - Options to Support the Income of Informal Workers during COVID-19 - This note reviews available options to support informal workers during COVID-19, as well as potential costs and selected financing options. - A transfer to cover the basic food and energy needs of all informal workers for two months could cost "over 2 and 5 percentage points of annual GDP in the median emerging market and low-income economies, respectively." - The Disconnect Between Financial Markets and the Real Economy - This note examines several prominent hypotheses to explain the disconnect between financial markets and the real economy. *IMF EXECUTIVE BOARD DISCUSSION OF THE OUTLOOK, OCTOBER 2020; Chair’s concluding remarks at the conclusion of the Executive Board’s discussion on September 30, 2020.* ### 2020. The note concludes that monetary ### 2020. The note concludes that monetary ### Monetary policy and asset valuations - "monetary policy actions—and the associated decline in discount rates—have lifted asset valuations." ### Emerging Market Capital Flows under COVID: What to Expect Given What We Know - Author: Sebnem Kalemli-Ozcan - Scope: Summarizes recent empirical research focusing on emerging market capital flows before and during the COVID-19 shock. - Focus: Examines the complex interaction between domestic fiscal and external financing needs in emerging market economies. ### COVID-19 and Government Debt Dynamics in Low-Income Developing Countries - Authors: Gabriela Cugat, Giovanni Melina, and Felipe Zanna - Scope: Assesses the potential medium-term impact of the COVID-19 pandemic on government debt in developing countries. - Methodology: Estimates are based on calibrations of a structural model. - Key conclusion: "Absent more multilateral support, restructurings, and/or fiscal consolidations, government debt may increase significantly in many developing economies." ### COVID-19 Policy Tracker - Description: "This periodically updated policy tracker summarizes the key economic responses 196 governments are taking to limit the human and economic impact of the pandemic." - Link text provided in source: IMF.org/COVID19policytracker ### Publication and framing - Institutional disclaimer: "The views expressed in these notes are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management." - Publication identifier: WORLD ECONOMIC OUTLOOK OCTOBER 2020 - IN THIS ISSUE: - CHAPTER 1 Global Prospects and Policies - CHAPTER 2 The Great Lockdown: Dissecting the Economic Effects - CHAPTER 3 Mitigating Climate Change—Growth-and Distribution-Friendly Strategies *Source: text - 2020. The note concludes that monetary; Canonical URL: https://www.imf.org/-/media/files/publications/weo/2020/october/english/text.pdf* --- _Source: https://www.imf.org/-/media/files/publications/weo/2020/october/english/text.pdf_