New Challenges and Opportunities in a New Era

IMF News, November 5, 2020

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Published: November 5, 2020

Global growth prospects

Near-term outlook: the global economy is recovering but "a global recession for 2020 overall is a foregone conclusion."
IMF expects the global economy to shrink by 4.4 percent in 2020.
Upward revision since the June WEO is driven by strong Q2 GDP in major economies.
Country-specific Q3/quarterly outturns cited:
- China is expected to be the only major economy to maintain positive growth throughout 2020, at 1.9 percent.
- US grew by 7.4 percent quarter-on-quarter, or 33.1 percent at an annual rate (Q3).
- China grew by 4.9 percent (Q3).
Recovery characteristics and risks:
- Recovery described as a "long, uneven, and uncertain ascent."
- Pace and synchronization of recovery across regions remain uncertain.
- Divergence across sectors, particularly services (example: October PMI for services strengthened in the US and the UK while weakening in Japan and some countries in the European Union).
- Pandemic relapses in some countries cast a shadow over the next phase of recovery.
- Outcomes depend on progress in vaccines, medicines, and treatments; slower-than-expected progress could weaken recovery.

Global policy outlook

Policy responses to COVID-19:
- Total global fiscal support has now reached $11.7 trillion.
- Monetary authorities of major advanced economies have provided $7.5 trillion in liquidity support.
- These supports have supported disposable incomes, corporate cash flow, and banks' credit supply, helping avoid a repeat of the 2008–09 global financial crisis experience.
Monetary and macroprudential considerations:
- Broad consensus that low interest rates will exist for a longer period of time.
- Low interest rates help support recovery but may increase risk appetite and lead to excessive and lower-quality credit.
- Policy challenge: balance accommodative monetary policy with flexible macroprudential policies.
Fiscal considerations:
- Protecting livelihoods and preventing long-term structural scarring are priorities.
- Global public debt has reached a record high, accounting for around 100 percent of global GDP.
- Fiscal sustainability frameworks for the medium and long term are critical, especially for countries with weak economic fundamentals where debt sustainability challenges are more severe.
Implementation caveats:
- Success in realizing policy goals will vary by country due to differences in policy tools, market sophistication, implementation capacity, and communication ability.
- Policy selection and implementation must be flexible, precise, and adapted to local conditions.
Policy recommendation (high level):
- Avoid premature withdrawal of macroeconomic support before consolidation of the recovery.

Prospects for global recovery (longer term) — focus on green recovery

Pre-existing structural challenges that COVID-19 may exacerbate:
- Slowdown in global productivity growth.
- Population aging in advanced economies.
- High levels of corporate and household debt in some regions.
- Intensifying income inequality within many economies.
Opportunity: pandemic creates transformational momentum for a smarter, greener, and more inclusive recovery; international cooperation should be strengthened.
Three key points on the green recovery:

1. Necessity

IMF research suggests that if no further action is taken to reduce greenhouse gas emissions, "the earth will embark on a path of no return toward higher temperatures."
Natural disasters becoming more frequent; pressure from global warming increasingly obvious.
Analysis suggests the loss of global economic output will exceed 20 percent by 2100 if no further action is taken.
Urgent need to reduce greenhouse gas emissions.

2. Achievability

Early and comprehensive action can help achieve global carbon neutrality by the middle of this century.
Measures include raising carbon taxes or implementing carbon emissions trading, plus subsidies, guarantees, and investment to increase low-carbon energy supply, carbon capture, and carbon storage.
Raising the price of carbon emissions will provide incentives to improve energy efficiency and promote resource shifts from high-carbon to low-carbon industries.
Green investment can bolster transformation, quickly add aggregate demand, and provide buffers to absorb transition costs related to higher carbon prices.

3. Prioritization

Early-stage green investment can buoy growth and boost employment while supporting low-carbon industries, taking advantage of favorable fiscal and monetary policies.
Combined with a gradual phase-in of moderate carbon pricing, the net short-run effect on growth would be positive.
Carbon prices would need to be raised thereafter to achieve carbon neutrality by mid-century, but IMF research suggests the drag on growth during this transitional period would be negligible — no more than 0.1 percent annually compared with the base case.

Country example and encouragement:
- China has made a commitment to achieve carbon neutrality by 2060.
- IMF encourages other countries to scale up ambition in their submissions for COP26 next year.

Conclusion and policy priorities

Overall assessment:
- The global economic recession in 2020 seems less dire than earlier expectations, but the recovery will be long, uneven, and uncertain.
Policy priorities going forward:
- Maintain continuity of macroeconomic policy support and consolidate the recovery.
- Prioritize resilient and sustainable growth, with particular emphasis on a green recovery.
- Seize the opportunity for a more inclusive, smarter, and greener economic recovery path.

Source: New Challenges and Opportunities in a New Era — 2020 CICC Forum Speech, November 5, 2020, IMF Communications Department