A Long, Uneven and Uncertain Ascent

IMF Blog, October 13, 2020

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A Long, Uneven and Uncertain Ascent

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Bibliographic details

• Authors: Gita Gopinath
• Published: October 13, 2020

Current situation and human toll

• The COVID-19 pandemic continues to spread with over 1 million lives tragically lost so far.
• Living with the novel coronavirus has been a challenge like no other, but the world is adapting.
• Employment has partially rebounded after having plummeted during the peak of the crisis.
• Employment remains well below pre-pandemic levels and the labor market has become more polarized with low-income workers, youth, and women being harder hit.
• The poor are getting poorer with close to 90 million people expected to fall into extreme deprivation this year.

Economic projections and outlook (World Economic Outlook base)

• Global growth is projected to be -4.4 percent in 2020, an upward revision of 0.8 percentage points compared to the June update.
• Growth in 2021 is projected to rebound to 5.2 percent, -0.2 percentage points below the June projection.
• Except for China, where output is expected to exceed 2019 levels this year, output in both advanced economies and emerging market and developing economies is projected to remain below 2019 levels even next year.
• Advanced economies: upgraded forecast for 2020 to -5.8 percent, followed by a rebound to 3.9 percent in 2021.
• Emerging market and developing countries (excluding China): downgraded with growth projected to be -5.7 percent in 2020 and then a recovery to 5 percent in 2021.
• The cumulative growth in per capita income for emerging-market and developing economies (excluding China) over 2020–21 is projected to be lower than that for advanced economies.
• After the rebound in 2021, global growth is expected to gradually slow to about 3.5 percent into the medium term.

Scarring and medium-term losses

• The crisis will likely leave scars as labor markets take time to heal, investment is held back by uncertainty and balance sheet problems, and lost schooling impairs human capital.
• The cumulative loss in output relative to the pre-pandemic projected path is projected to grow from 11 trillion over 2020–21 to 28 trillion over 2020–25.
• This represents a severe setback to the improvement in average living standards across all country groups.

Risks and scenarios

• Downside risks:
  • The virus is resurging with localized lockdowns being re-instituted.
  • Worsening health prospects for treatments and vaccines would severely toll economic activity, likely amplified by severe financial market turmoil.
  • Growing restrictions on trade and investment and rising geopolitical uncertainty could harm the recovery.
• Upside scenarios:
  • Faster and more widespread availability of tests, treatments, vaccines, and additional policy stimulus can significantly improve outcomes.
  • If medical solutions can be made available faster and more widely relative to the baseline, it could lead to a cumulative increase in global income of almost $9 trillion by end-2025, raising incomes in all countries and reducing income divergence.

Policy recommendations and priorities

• Do not prematurely withdraw fiscal and monetary policy support.
• Health and international collaboration:
  • Greater international collaboration is needed to end the health crisis and ensure production and widespread distribution of tests, treatments, and vaccines.
• Protect incomes and jobs:
  • Governments should continue to provide income support through well targeted cash transfers, wage subsidies, and unemployment insurance.
  • Vulnerable but viable firms should continue to receive support—wherever possible—through tax deferrals, moratoria on debt service, and equity-like injections to prevent large scale bankruptcies and ensure workers can return to productive jobs.
• Facilitate reallocation and adjustment:
  • Over time, policies should shift to facilitate reallocation of workers from sectors likely to shrink on a long-term basis (travel) to growing sectors (e-commerce).
  • Support workers with income transfers, retraining, and reskilling.
  • Speed up bankruptcy procedures and resolution mechanisms to efficiently tackle firm insolvencies.
• Public investment and green transition:
  • A public green infrastructure investment push in times of low interest rates and high uncertainty can significantly increase jobs and accelerate the recovery, while also serving as an initial big step towards reducing carbon emissions.
• Support for emerging market and developing economies:
  • Prioritize critical spending for health and transfers to the poor and ensure maximum efficiency.
  • Continue international grants and concessional financing, and provide debt relief in some cases.
  • Where debt is unsustainable it should be restructured sooner than later to free up finances to deal with the crisis.
• Fiscal and monetary frameworks:
  • Monetary easing should be complemented with measures to prevent build-up of financial risks over the medium term, and central bank independence should be safeguarded.
  • Record global sovereign debt levels have risen to 100 percent of global GDP; a medium-term fiscal framework is needed to give confidence that debt remains sustainable.
  • In the future, governments will likely need to raise the progressivity of their taxes while ensuring that corporations pay their fair share of taxes, alongside eliminating wasteful spending.
• Investment priorities:
  • Investments in health, digital infrastructure, green infrastructure, and education can help achieve productive, inclusive, and sustainable growth.
  • Expanding the safety net where gaps exist can ensure the most vulnerable are protected while supporting near-term activity.

IMF actions and concluding remarks

• The considerable global fiscal support of close to $12 trillion and the extensive rate cuts, liquidity injections, and asset purchases by central banks helped save lives and livelihoods and prevented a financial catastrophe.
• At the IMF:
  • Funding has been provided at record speed to 81 members since the start of the pandemic.
  • The IMF has granted debt relief and called for extended debt service suspension for low-income countries and for reform of the international debt architecture.
• The crisis is the worst since the Great Depression and will take significant innovation on the policy front, at both the national and international levels, to recover.
• There are reasons to be hopeful: the exceptional policy response, including the establishment of the European Union pandemic recovery package fund and the use of digital technologies to deliver social assistance, demonstrates that well-designed policies protect people and collective economic wellbeing.

Source: A Long, Uneven and Uncertain Ascent (IMF blog, Gita Gopinath, October 13, 2020).

References

• World Economic Outlook