Continued Strong Policy Action to Combat Uncertainty
IMF Blog, November 19, 2020
Source details
- Canonical URL
- Continued Strong Policy Action to Combat Uncertainty
Other formats
Bibliographic details
- Authors: Kristalina Georgieva
- Published: November 19, 2020
Global outlook and immediate context
- Global GDP contraction of 4.4 percent in 2020 (IMF projection).
- Partial and uneven recovery expected in 2021 with growth at 5.2 percent.
- Data since the latest projections show the global recovery has continued; third-quarter activity in the United States, Japan, and the Euro Area was stronger than expected.
- Contact-intensive service industries show slowing momentum where the pandemic is resurging.
- Vaccine progress raises hopes but carries many caveats; a medical solution is “in sight” while the economic path remains difficult and prone to setbacks.
- Upside scenario: faster-than-expected containment or better treatments would limit scarring and boost growth.
- Downside scenario: renewed stringent mobility restrictions or delays in vaccine development/production/distribution would prolong social distancing, lower growth, raise public debt, and deepen long-term scarring (e.g., harm to human capital from extended job losses).
Three key policy priorities
- The author’s three key priorities: (i) end the health crisis, (ii) reinforce the economic bridge to recovery, and (iii) build the foundations of a better 21st-century economy.
Priority 1 — End the health crisis (policy actions and impact)
- Public spending on treatment, testing, and contact tracing is more important than ever.
- Cross-border cooperation needed to lower the risk of inadequate supply of vaccines, treatments, and tests: step up multilateral efforts on manufacturing, purchase, and distribution—especially in poorer nations.
- Remove recent trade restrictions on all medical goods and services, including those related to vaccines.
- Estimated benefit: faster progress on widely shared medical solutions could add almost $9 trillion to global income by 2025 and help narrow the income gap between poorer and richer nations.
Priority 2 — Reinforce the economic bridge to recovery (measures, risks, and recommendations)
- G20-led measures to date include $12 trillion in fiscal actions and massive liquidity support from central banks.
- Financing conditions have eased for all but the riskiest borrowers.
- Remaining risks: many developing nations face precarious situations due to limited response capacity; elevated asset valuations indicate a disconnect between financial markets and the real economy with risks to financial stability.
- Much fiscal support is gradually waning; many lifelines (cash transfers, job retention support, augmented unemployment benefits) have expired or are set to expire by the end of this year.
- Employment losses remain sizable; in global tourism alone, up to 120 million jobs are estimated at risk.
- Policy recommendations to reduce uncertainty and strengthen the recovery bridge:
1. Avoid premature withdrawal of policy support.
- In some economies there is room for further fiscal support next year beyond what is currently budgeted.
- For countries with limited fiscal space: prioritize and reallocate spending to protect the most vulnerable.
- Continue monetary accommodation and liquidity measures to ensure credit flow, especially to small and medium-sized firms, complemented by appropriate financial sector policies.
2. Prepare now for a synchronized infrastructure investment push once the pandemic is better controlled to invigorate growth, limit scarring, and address climate goals.
- Public sector investment where slack remains can help move economies toward full employment and strengthen private sector productivity.
- IMF staff research: if G20 countries with the largest fiscal space simultaneously increase infrastructure spending by ½ percent of GDP in 2021 and 1 percent of GDP in the following years—and if economies with more constrained fiscal space invested one third of that—this could lift global GDP by close to 2 percent by 2025.
- By contrast, an unsynchronized approach would lift global GDP by just below 1.2 percent by 2025.
- If countries acted alone, it would take about two-thirds more spending to achieve the same outcomes.
Priority 3 — Build the foundations of a better 21st-century economy
- Environmental sustainability must be a key building block for a resilient and inclusive economy: combine a green investment push with gradually rising carbon prices.
- Estimated impact of a green-plus package: could lift global GDP and create about 12 million new jobs over a decade, while putting the world on a path towards net zero emissions by mid-century.
- Support for workers in transition is essential: increase investment in training, re-skilling, and high-quality education, with emphasis on low- and medium-skilled workers (among whom women and young people are overrepresented).
- Fiscal sustainability is critical: record-high global public debt requires medium-term action, including retooling tax systems to mobilize revenues equitably.
- For many low-income countries with heavy debt burdens, urgent action is required now: access to more grants, concessional credit, and debt relief.
- G20 actions noted:
- Debt service suspension initiative provided temporary “breathing space” for many low-income countries.
- The new Common Framework, agreed with support of the Paris Club, can allow poorer nations to apply for permanent debt relief if fully implemented and ensures all creditors negotiate on the same level playing field.
- Broader multilateral priorities: strengthen rules-based trade, foster an international system of taxation where everyone pays their fair share, and bolster the global financial safety net to prevent exacerbation of inequality and greater future challenges.
IMF response and capacity
- IMF emergency response: over $100 billion in new financing to 82 countries and debt service relief for the poorest members.
- The IMF aims to do even more to help its 190 member countries overcome the crisis and build a better post-pandemic economy.
Source: Kristalina Georgieva, “Continued Strong Policy Action to Combat Uncertainty,” November 19, 2020.
Content in this bundle
- Chapter 3