Transcript of the World Economic Outlook Update Press Briefing

January 28, 2021

Gita Gopinath , Economic Counselor and Director, Research Department, IMF

Petya Koeva Brooks , Deputy Director, Research Department, IMF

Malhar Nabar , Division Chief, Research Department, IMF

Raphael Anspach , Senior Communications Officer, IMF


Raphael Anspach: Good morning, everyone. Welcome to this IMF press conference on the World Economic Outlook. Delighted that you could join us. With us today to discuss the findings of our latest report on the economic outlook are Gita Gopinath, she's the director of the IMF's Research Department and Economic Counselor, Petya Koeva Brooks, Deputy Director in the Research Department, and Malhar Nabar, the Division Chief of the WEO division in the IMF's Research Department. Before we take your questions, Gita will have an introduction and then we'll be happy to go to your questions. So, with that, I'm going to hand the floor over to Gita.

Gita Gopinath: Thank you, Raphael. And we are off to new beginnings, we welcome Petya Koeva Brooks, who is our new deputy director in the research department. Now, in just three months since our last forecast in October, covid-19 deaths have doubled to over two million, with new waves of the virus peaking in many countries of the world. In these same three months, multiple vaccines have seen unexpectedly strong success, and several countries have embarked on ambitious vaccination drives. Now, much depends on the outcome of this race between a mutating virus and vaccines and the ability of policies to provide effective support until the pandemic ends. Now, there remains tremendous uncertainty, and prospects vary greatly across countries.

In our latest World Economic Outlook, we are projecting global growth for 2021 to be 5.5 percent, which is 0.3 percentage points above our previous forecast. And then growth is expected to moderate to 4.2 percent in 2022. The upgrade is owing to positive effects that have come upon with the onset of vaccinations in many countries and also because of the additional fiscal policy support that has been provided in some economies like the US and Japan. Now the positive effects have been partially offset by the negative consequences of the raging virus in many countries and the containment measures that have had to be put in place to deal with it. Now, there is a great deal of uncertainty around this forecast. If you we could have greater success on vaccinations, especially vaccine rollouts, if there is additional policy support provided, outcomes could improve. But on the other hand, if there is going to be a slowdown in vaccine rollouts and if there's a premature withdrawal of policy support alongside a mutating virus, then that could certainly lead to worse outcomes. Now, if the downside risks were to realize we could see a tightening of financial conditions, which could have a real negative impact on the economy at a time when debt is at record highs in many countries. Now, the projected projected growth that we see for this year follows a severe contraction in 2020. Now, even though the estimated collapse for 2020 is somewhat less dire than we had projected in October, the crisis in 2020 still remains the worst peacetime global contraction since the Great Depression. And because of the partial nature of the rebound, over 150 economies are expected to have per capita incomes that are below their 2019 levels in 2021. And that's expected to decline only modestly to around 110 economies in 2022.

Now at 22 trillion dollars, the projected cumulative output loss over 2020 to 2025, relative to the pre pandemic, projected levels remains substantial. The strength of the projected recovery also varies significantly across countries with large differences in projected output losses in 2022. For instance, China returned to its pre-pandemic projected level in the fourth quarter of 2020 ahead of all major economies. The US is projected to surpass its 2019 levels this year, well ahead of the euro-area. With advanced economies generally expected to recover faster, the progress made towards convergence over the last decade is likely to reverse. Over 50 percent of emerging market and developing economies, that were converging towards advanced economies per capita income, are now diverging over the three years between 2020 and 2022. Oil exporters and tourism dependent economies are being particularly hard hit and their prospects look particularly severe, given that oil prices still have a subdued outlook and cross-border travel is not expected to return fully anytime soon. Even within countries, the burden of the crisis has been felt unequally across different groups. Workers with less education, youth and women and those informally employed have suffered disproportionate income losses. Now over 90 million individuals are expected to enter extreme poverty over 2021, reversing the trends of the past two decades.

If vaccines and therapies were to remain effective against the virus, we may be able to exit this crisis with less scarring than was feared and arrest the divergence and prospects that we now see across and within countries. However, that's not guaranteed unless we have more determined policy action. Firstly, all countries must accelerate the roll out of vaccinations. The international community must act quickly to make sure that vaccinations and the logistics of delivery of these vaccinations is available globally to address what is currently a deeply iniquitous distribution of access to vaccines across the world. Now, this will require ramping up production and bolstering funding for the COVAX facility and for financing the logistics of vaccine delivery. Now, the health and economic arguments for this are just simply overwhelming. The new virus Strain have made abundantly clear that the pandemic is not over until it's over everywhere. And we estimate there the benefit of more rapid progress towards ending the health crisis will add 9 trillion dollars cumulatively to the global economy between 2020 and 2025, with benefits for all countries, including advanced economies of around 4 trillion dollars. Secondly, a well targeted economic lifelines should be provided to households and firms where the virus is surging to help maintain livelihoods and prevent bankruptcies of otherwise viable firms. Now, in countries of fiscal space is limited. Spending should be prioritized for health and transfers to the poor. Now, once infections are durably declining and we have broadening immunity to the virus, we could think of gradually rolling back these lifelines so as to enable mobility of workers and to prevent the risk of having zombie firms that would then end up negatively impacting productivity.

If policy space permits, these freed up resources could then be used to strengthen the recoveries. And there are many areas of priorities, including education spending, to correct the negative hit to human capital accumulation that's happened over the past year; digitalization to boost productivity growth and green investments to create jobs and accelerate the transition to a new climate economy. A synchronized green public investment push by the largest economies with the fiscal space to do so can enhance the effectiveness of individual measures and boost cross-border spillovers through trade linkages. Thirdly, given the highly uncertain times we live in, financial stability needs to be ensured. Monetary policy should remain accommodative where inflation is not at risk, but at the same time keeping paying close attention to containing the risks that will emerge with historically low interest rates and easy financial conditions. When pandemic measures are withdrawn, we are likely to see an increase in bankruptcies, which could have an impact on fragile banking systems, and therefore it's very important to prepare now to have special out-of-court restructuring frameworks to deal with the problem of rising non-performing loans in many countries. Now, because of this crisis, fiscal spending was needed. That increase in fiscal spending alongside the output collapse has raised debt levels to record highs in many countries. The fact that we have low interest rates and because we have growth now coming back in 2021, that should help stabilize debt levels in many countries. But it is very important for all countries to have medium-term fiscal frameworks that ensure that debt remain sustainable.

Lastly, the international community needs to do more to help poorer nations. The dramatic easing of monetary policy by major central banks have certainly helped by easing financial conditions for several developing countries. But there are others that are more severely constrained, and they will need help from the international community in the form of grants, concessional aid, debt relief and in some cases, outright debt restructuring. They're confronted with an unprecedented global challenge, the international community must act now to ensure the pandemic is beaten back everywhere, the divergence and prospects across and within countries is reversed, and we build forward to a future that is more prosperous, sustainable and inclusive. Thank you.

Raphael Anspach: Thanks very much, Gita. Thanks for this introduction. So I'm going to call on our colleagues in the media to submit their questions. I understand and their sense that we are having some issues, some difficulties with the WebEx connection. So if you do have a question, please do submit them through the online media briefing center and I'll be happy to read them. I'm going to start with a [first] question: What is the principal reason the global pandemic recession is less severe than you predicted nine months ago?

Gita Gopinath: So, we had in our last projection, I don't know if that was nine months ago, In October, we had growth at - 4.4 percent. That would be the contraction what we set for 2020. And that number is now projected at -3.5 percent. The reason that we have this increase is because the outcomes in the third quarter for many countries came in stronger than we expected. Once countries reopened and you saw activity coming back, it came back at a stronger pace. Now, just to remember, when we first provided these projections in April of 2020, we had said the global growth of 2020 would be - 3.3 percent. And now we are at -3.5 percent.

Question: We're seeing rising prices in commodities like steel and energy sector with oil. So how much is inflation a risk for growth as central banks have highly accommodative rates and can put pressure on interest rates to rise both in emerging and advanced economies?

Gita Gopinath: So oil prices have come back about 20 percent from their depths in 2020. But, you know, given where we are right now, at around 50 dollars around that range a barrel of oil is still well below the pre-crisis levels. With metal prices, indeed, those prices have come back and are above the pre-pandemic levels. And that's a reflection of the increase in demand that's coming from China, but also some supply side bottlenecks. To a question of the implications of that for inflation, of course, that shows up in headline inflation and not as much in core inflation. And some of this should be transitory. So, as of now, given the slack we see in the global economy in terms of employment, in terms of the decline in labor force participation rates, in the terms of, you know, hours worked being well below the pre-pandemic level, we don't see this as translating into runaway inflation or unanchored inflation expectations on the upside.

Question: How do you explain the divergence between the U.S. and the Eurozone in 2021? Does it mean the U.S. decision to have less restrictions and no lockdown's proves better for the economy?

Gita Gopinath: There are multiple factors. Firstly, the particular kinds of public health responses in Europe led to more restrictions on activity. You had a much more severe pandemic that started a little early on in Europe relative to the U.S. Secondly, the structural composition of these economies matters a lot. So, if you're a country that depends a lot on tourism, with several economies in Europe do, then again the is much more severe and it's also more long lasting because it can take longer to come back up. And, you know, there are many more small and medium enterprises in Europe. And we know that in this crisis, they've been affected more than larger firms have been. So that's the third factor. So, all of these are going behind why we have this particular projected path of recoveries for Europe and the euro area versus the U.S.

Question: The UK is the only G7 nation to be downgraded for 2020 and it's downgraded again in 2021. Why does the U.K. fare worse in these forecasts than other leading economies? Is it related to Brexit?

Gita Gopinath: Well, in the case of the U.K., you had the second waves towards the end of last year, which had a negative effect on activity, and that offset what was otherwise a positive revision that we had for growth in the first three quarters of last year. And now there was a third wave with the new strain of the virus, which is leading to more prolonged restrictions and movement. And that's one of the reasons why we have the downgrade. For the impact of Brexit, we estimate would reduce the quarter on quarter in the first quarter of this year, it would have a negative hit of about 1 percent of GDP again this quarter on quarter for the first quarter of this year. And so these are some of the factors that have gone behind this. But again, we have a revision up going forward for 2022 when we should see growth coming back. It's kind of a lagged recovery that we have over here.

Question: The WEO suggested that Japan will be one of the key drivers for the economic growth in 2021, but Japan's growth rate would be 3.1 percent in 2021 and 2.4 percent in 2022. Those are lower than the US or the Euro-area. Do you have any other reason than Japan's low potential growth for that development?

Gita Gopinath: I think the low potential growth is a very important part of the story. Japan has put in a lot of stimulus, including the additional stimulus at the end of the year. But let me actually bring in my colleague, Petya, if you would like to add something on Japan.

Petya Koeva Brooks: I think the actions that we have seen by the authorities, including not only on the fiscal front but also on the monetary front, have been very important in contributing to those upward revisions in the forecast.

Question: The Chinese economy is estimated to have grown at 2.3 percent in 2020 and it's projected to continue to recover this year with an expected growth of 8.1 percent. What are the key factors for China's robust recovery? And looking ahead, how does China’s recovery path look like?

Gita Gopinath: So, China has been very successful in containing the pandemic and that has played a very important role to bring back activity much more quickly. There's been effective policy support provided both in terms of fiscal policy and monetary policy, and China's exports have also gone up in this environment. So, all of these factors are responsible for China doing as well. It is as it has. And indeed, like we said, it is one of these economies that's returning back to the pre-pandemic projected level in the fourth quarter of 2020, well ahead of other major economies. I'd like to see if my colleague Malhar would like to come in and add a few points.

Malhar Naber: Thanks Gita. Yeah, just to reinforce the point that you raised on policy support. That's been a big driver of the impressive rebound in China in 2020, the public infrastructure spending support and also the support that was extended to affected households and to firms reinforced by aggressive actions by the People's Bank of China to provide liquidity support and ensure that credit provision remains strong. Going forward, we see a gradual handoff to private sector activity starting out with a pickup in private investment activity. And that's, in fact, already been seen in the second half of last year. And we expect that to continue, but also increasingly shifting towards more private consumption-based growth. But in terms of securing that recovery path, it's vitally important to ensure that rebalancing towards private consumption continues and perhaps even is accelerated to an extent with efforts to strengthen the social safety net, which will help bring down precautionary savings among households in China, encourage them to spend more and to rotate the composition of growth more towards private consumption. Reinforcing that with structural reform efforts to deregulate certain key sectors, to bring in more private investment in those sectors, for example, in services, would also help secure the medium-term growth path. But overall, as you mentioned, Gita, very impressive recovery in 2020 after strong initial containment effort reinforced by aggressive policy support.

Question: On India, could you please explain your projection of 11.5 percent growth rate for India in 2021, 2022, which is higher than other institutions like the U.N. and the World Bank? What are the conditions for it to continue?

Gita Gopinath: So when we look at the India numbers, of course, you have to accumulate over the last two years, like 2020 and 2021, India is estimated to have had a contraction of around -8 percent for this 2021 fiscal year. And then we do have, as you said, a bounce back and growth to around 11 percent. But again, cumulatively, by the end of 2022, India is still 9 percent below its pre-pandemic projected level. So, we are seeing India come back to its 2019 levels in 2021, but it's still below. Why do we have these upgrades? We have the upgrade, one because activity and mobility particularly came back much faster than expected in India. We have not seen another wave [of the virus]. In fact, we are seeing a very strong decline in cases, which is, again, a bit different from other parts of the world. And so these factors, including what we're seeing in terms of high frequency indicators, point to a somewhat faster pace of recovery. But again, there is still some distance to go.

Question: Latin America was one of the regions most affected by the pandemic and the economic crisis. Which countries will be recovering first? And is there a risk for another lost decade? Can you please describe the risks for the recovery in Latin America? And specifically, how does the situation in Argentina impact the outlook for the region?

Gita Gopinath: So indeed, Latin America was particularly hard hit by the pandemic. If you look at the number of cases per million, deaths per million, it's been a pretty difficult time for Latin America and for the region as a whole, we saw a severe contraction, but again, that was less severe than we had expected in October because of stronger recoveries when you saw the activity started coming back up when countries were reopening from their lockdown. What we do have is a very differing speeds of recoveries and also different levels of contraction that countries have—there are big differences between Brazil and Mexico. Many factors play a role, including the amount of policy support that was deployed, a lot of fiscal policy support that was provided. These are challenging times for Latin America. Now, to the extent that we see a return in growth in the global economy and including its main trading partners, including the U.S., we should see that having positive spillovers to the Latin America region. But, until this pandemic is over, the risks remain very high. There are still a large number of cases in the area. There are new strains that are being found in different parts of the world. And we know vaccinations have rolled out, but I think in many parts of the world, the vaccinations are not just happening at a fast enough pace. So, you know, these are important factors that make the outlook remain uncertain. I don't know if Petya wants to add anything on Latin America.

Petya Koeva Brooks: Just to add that across the region, we've also seen some countries being ahead of others in terms of securing vaccines and starting that process of vaccination. So here countries such as Chile and Mexico and Costa Rica stand out. So, again, going back to our recommendation on how to make this recovery appear and strengthen as much as possible, going that route in terms of the health response is the first order of business.

Question: Did you evaluate the potential impact of the rescue plan of 1.9 trillion dollars unveiled by the new American president, Joe Biden, both on the U.S. growth and on global growth?

Gita Gopinath: These are still early days. We have what I would describe as a very preliminary estimate at this point of the impact on the U.S. economy and not for the world at this point. For the U.S. economy, we have that this can raise output in the U.S. by 5 percent over three years. That's what we have in terms of our estimate, including increasing growth this year by 1 and a quarter percent. But again, just to be very clear, this is all still preliminary. Many things are still being worked out at this point, but this is what we have as a first estimate.

Question: With the new variant of the virus now being found in some African countries where hope for access of vaccine is still weak, will the IMF be stepping up to help these countries?

Gita Gopinath We are flagging this. This is a very important concern. The one of the reasons we are having this diverging recoveries is because of the [unequal] access to vaccines that we are seeing around the world. Now, there are advanced economies and some emerging and developing economies that are expected to get to, you know, widespread vaccine coverage in the second half of this year. But then there are many countries that are waiting until 2022 for that to happen. And that's just costly and it's costly for everybody, it's costly not just for developing countries, but it's very costly for the countries that have the vaccines, too. Which is why we are calling on greater funding for making sure these vaccines are available to poorer nations, also, including the funding of logistics to make them delivered and to have actual vaccine uptake. This is a very important priority. Funding COVAX is very important. The fact that the U.S. has re-joined the WhO and is, you know, promising to provide money to COVAX, I think is a very big step in that direction. But much more will be needed because as we can see, given the mutating virus, that this is not a problem that's going away anytime soon.

Question: What are the IMF expectations for MENA's economic outlook in 2021 and 2022? And how does the IMF see the debt crisis in the region in 2021? And which policies does it propose to manage in the region?

Gita Gopinath: Again, in the case of MENA too, like many other regions of the world, there are different pieces of a recovery. What we've seen in in general is in terms of the impact on growth, it was more negative for oil exporting nations relative to the ones that are not. But again, we also found that the effect on oil exporters is not as negative as we might have projected last time around, because in these economies like Saudi Arabia, for instance, we've seen non-oil activity return back much more strongly. Now, again, there's great differences. There are fragile states. There is you know, we have Lebanon, which has very high financing needs. And cross -border tourism isn't returning anytime soon, which has implications for countries that rely on tourism. So there are many different diverse parts of recovery here. And again, let me bring in Petya to add anything.

Patya Koeva Brooks: Thank you, Gita. Just to add that, as in other regions, we do have that divergent path also because of access and actions taken on the vaccination front. And here is where countries such as those in the Gulf region have been ahead of others and securing somewhat diversified sources of vaccine. And so making sure that access to vaccine reaches everyone in the region is something very important going forward.

Raphael Anspach: On the update, the IMF has increased the GDP projections for Mexico in 2021. Can you please explain if that means that the economy is on a path for recovery? In case yes, what are the sectors that are going to be boosting that development?

Gita Gopinath: What we're seeing in Mexico is a two-speed recovery. So, what we're seeing is that the growth is coming from external demand with an increase in exports, while, on the other hand, domestic demand remains subdued. And so that's playing out in the numbers. And, of course, depending upon what happens in the U.S. this year in terms of additional support plans, that could be an upside risk for Mexico. But if you look at the cumulative effect between 2020 and 2021 on the recovery, you can see that this is still well below 2019 levels and it will take some more time, at least until 2022 or later, to get back to the pre-covid levels. So that's what we have for Mexico at this point.

Question: Do you think that the impact of the supply chain interruptions to goods production, combined with the ongoing monetary stimulus, could create inflationary pressures?

Gita Gopinath: Again, the answer depends upon the country we are talking about. But for many advanced economies as we see it, there is still a fair amount of slack. Employment rates, labor force participation rates are still below their pre pandemic level. We're still in the midst of the crisis and inflation expectations are still well anchored. Again, there's a difference here between the US and the Euro-area. In the Euro-area the concern is about inflation drifting too low. And in the U.S., we have in terms of our predictions for core inflation, it still is slightly below or around the two percent target. So, we don't expect to see, a runaway inflation in these countries and also in terms of global supply chains and the effect that might have. If you look at the facts, merchandise trade has returned back to pre-pandemic levels, and this is much faster than during the global financial crisis. And so, we don't really see dramatic breakdown of global supply chains around the world as of now. I mean, trade is still weak in services, but in goods trade, we are seeing we've seen a strong recovery.

Raphael Anspach: Thanks very much, Gita. I see that we don't have any additional questions here. And again, my apologies for the colleagues following us online for the hiccup with the WebEx. I'm going to ask Gita, Petya and Malhar, if they have any closing words about the outlook and the policy priorities before we close the press conference.

Gita Gopinath: Thank you, Raphael. I mean, just to reiterate what I said at the start, which is that we are living in a highly uncertain times. We are projecting the world would grow this year as opposed to a severe collapse last year, but there is uncertainty. A lot depends upon the outcome of this race between a mutating virus and vaccines, and how much policy support can hold up. And what we are seeing is divergence and prospects across countries. Emerging and developing nations are projected to have greater output losses relative to their pre pandemic projected levels as compared to advanced economies. And this doesn't have to be this way. It can be arrested. It can be reversed. That would require more broad spread, a broad access to vaccines, and not just that and vaccinations, which is getting the logistics done too, and therapies to end this health crisis everywhere. It's important for countries that don't have the financial access that some other countries do, that they receive support from the international community in terms of concessional financing, in terms of grants, aides, [and] in some cases, outright debt restructuring. So, there is still much, much to be done. But we're certainly at least in positive growth territory this year as opposed to last year.

Raphael Anspach: With that, if there are no other comments, I'm going to close this press conference again, thanking our speakers for today, Gita Gopinath, Petya Koeva Brooks, Malhar Nabar, and every one of you who has followed us online. And again, our apologies for the technical problems that we've experienced. Stay safe, stay well, and see you soon. Thank you.

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