Global Economy 2021: Prospects and Challenges
IMF News, March 20, 2021
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- Published: March 20, 2021
Global Outlook
- IMF projection in January: 2021 global growth at 5.5 percent.
- Prospects of a stronger recovery emerging because of additional fiscal stimulus, especially in the U.S., and the prospects of broader vaccination.
- The IMF will update global forecasts in the new World Economic Outlook coming out in early April.
- The global recovery is described as incomplete and unequal:
- Incomplete because, despite a stronger than expected recovery in the second half of 2020, GDP remains well below pre-pandemic trends in most countries.
- Recovery paths differ across countries and sectors.
- China is noted to have "in many ways, already completed its recovery," returning to pre-pandemic growth levels ahead of all large economies.
- Growth in China still "lacks balance, with private consumption lagging investment."
- Expectation: "consumption will catch up, as investment growth normalizes."
Growing Gap
- Outside of China, signs that the gap between advanced economies and emerging markets is growing.
- Exact IMF estimates:
- "Cumulative income per capita in emerging and developing countries, excluding China, between 2020 and 2022 will be 22 percent lower than what it would have been without the pandemic."
- "That will translate into close to 90 million people falling below the extreme poverty threshold since the pandemic started."
- China noted as "a bright spot in its continued fight against poverty," but the pandemic has hurt vulnerable people the most even there.
Exceptional Uncertainty
- Uncertainty about the recovery described as "exceptionally large."
- Key sources of uncertainty:
- Unknown duration of the health crisis; unequal access to vaccines across advanced and emerging economies.
- "Low-income countries might not see significant vaccination well into 2022."
- Risk of "the spread of resistant mutations that threatens to reduce the efficacy of current vaccines and could undermine or delay the recovery."
- Uncertainties about the effectiveness of policy actions and differences in what countries can do; many countries face limited fiscal space and higher debts.
- "Tighter financial conditions could exacerbate vulnerabilities in countries with high public and private debt."
- Recent increases in bond yields as growth outlook for some advanced economies improves, leading markets to expect an earlier withdrawal of monetary stimulus.
- Medium- and long-term risks:
- In the medium-term, the crisis could leave deep scars: "advanced economies have seen their output reduced almost 5 percent below pre-recession trends five years after the beginning of a recession."
- Worse outcomes possible in countries that cannot afford a strong macroeconomic response and/or have large services sectors more affected by the pandemic.
- The crisis has had a disproportionate impact on the young, the low-skilled, and women.
- "In the long-term, rising carbon emission levels remind us that climate change is also a significant challenge, and Asia has a major role in addressing it."
The Way Forward (Three Priorities)
- First priority: end the pandemic swiftly.
- International community must "swiftly ramp up vaccine production."
- Ensure low-income countries have financing to procure and distribute vaccines.
- Requires bolstering funding for the COVAX initiative and the logistics for delivery.
- The IMF asks that leading economies support vaccine production and provide finance to developing countries.
- Second priority: maintain economic support and calibrate it to the stage of recovery and the pandemic.
- Where the pandemic continues: priority to protect lives and livelihoods.
- As it wanes: support should become more targeted, focusing on mitigating scarring, supporting the reallocation of resources, and ensuring the post-pandemic economy is inclusive and sustainable.
- Best policies: those that support the recovery, help strengthen resilience, and tackle long-standing challenges (examples: foster the transition to green energy and digitalization).
- China-specific policy guidance:
- Policies announced during the "Two Sessions" to strengthen high-quality growth, rein in carbon emissions, and improve energy efficiency should support rebalancing toward greener and more consumption-oriented growth.
- Achieving faster and higher-quality growth requires mutually enhancing reforms: strengthening social safety nets and green investment; opening up of domestic markets; continuing to reform state companies; and ensuring private and government-owned firms can compete on an equal basis.
- A strong effort in this direction "will raise productivity and income, and lead to more balanced and consumption-driven growth."
- Third priority: mitigate divergence across countries.
- Includes providing access to liquidity for developing economies and preventing climate change from hampering their economic growth and convergence.
IMF Support
- IMF actions highlighted:
- Expanded concessional financing and provided debt relief to many of its poorest members.
- "A new SDR allocation is under consideration to help address the global long-term need for reserves."
- Worked with the G20 on bilateral debt service relief through the Debt Service Suspension Initiative and on a Common Framework to address unsustainable sovereign debt.
- Incorporating climate change into country and financial risk assessments, while scaling up capacity development.
- The IMF "appreciate[s] China’s continuing support to all these endeavors."
Conclusion
- Call for international cooperation: "the international community must come together and help each other to end this pandemic and lay the foundation for a more balanced, inclusive, and sustained global recovery for all."
Geoffrey Okamoto, First Deputy Managing Director, IMF — China Development Forum (session V venue I), March 20, 2021.