Managing Divergent Recoveries
IMF Blog, April 6, 2021
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- Authors: Gita Gopinath
- Published: April 6, 2021
Global outlook and growth projections
- Global growth is projected to be 6 percent in 2021 (0.5 percentage point upgrade) and 4.4 percent in 2022 (0.2 percentage point upgrade), after an estimated historic contraction of -3.3 percent in 2020.
- The upgrades for 2021 and 2022 are mainly due to upgrades for advanced economies, particularly a sizeable upgrade for the United States (1.3 percentage points), with the United States expected to grow at 6.4 percent in 2021.
- China is projected to grow in 2021 at 8.4 percent.
- Many other countries are not expected to return to pre-pandemic GDP until 2023.
- Additional fiscal support in large economies, particularly the United States, has further improved the outlook.
Divergent and unequal recoveries; economic scarring
- Recoveries are diverging across and within countries, with economies that have slower vaccine rollout, more limited policy support, and greater reliance on tourism doing less well.
- The average annual loss in per capita GDP over 2020–24, relative to pre-pandemic forecasts, is projected to be:
- 5.7 percent in low-income countries
- 4.7 percent in emerging markets
- 2.3 percent in advanced economies
- An additional 95 million people are expected to have entered the ranks of the extreme poor in 2020 compared with pre-pandemic projections.
- Uneven impacts within countries: young and lower-skilled workers remain more heavily affected; women have suffered more, especially in emerging market and developing economies.
- The crisis has accelerated digitalization and automation; many of the jobs lost are unlikely to return, requiring worker reallocation across sectors with often severe earnings penalties.
- Swift policy action worldwide, including $16 trillion in fiscal support, prevented far worse outcomes; estimates suggest last year’s severe collapse could have been three times worse without such support.
- Because a financial crisis was averted, medium-term losses are expected to be smaller than after the 2008 global financial crisis, at around 3 percent; however, emerging markets and low-income countries are expected to suffer greater scarring given their more limited policy space.
- One in ten jobs may be at risk in many countries as exceptional measures such as moratoria on loan payments are withdrawn.
Risks and uncertainty scenarios
- Faster progress with vaccinations can uplift the forecast.
- A more prolonged pandemic with virus variants that evade vaccines can lead to a sharp downgrade.
- Multispeed recoveries could pose financial risks if interest rates in the United States rise further in unexpected ways, potentially causing inflated asset valuations to unwind in a disorderly manner, tightening financial conditions sharply, and deteriorating recovery prospects—especially for some highly leveraged emerging markets and developing economies.
Policy priorities and recommendations (domestic)
- Prioritize escaping the health crisis by prioritizing healthcare spending—on vaccinations, treatments, and healthcare infrastructure.
- Fiscal support should be well targeted to affected households and firms.
- Monetary policy should remain accommodative (where inflation is well behaved), while proactively addressing financial stability risks using macroprudential tools.
- Continue supporting economies with better-targeted measures to leave space for prolonged support if needed; tailor policies to the stage of the pandemic, the strength of the economic recovery, and structural characteristics of individual countries.
- As the pandemic recedes and labor markets normalize:
- Gradually scale back worker retention measures.
- Place more emphasis on reallocating workers through targeted hiring subsidies and reskilling.
- As moratoria and exceptional supports are withdrawn, consider converting previous liquidity support (loans) into equity-like support for viable firms and develop out-of-court restructuring frameworks to expedite eventual bankruptcies.
- Devote resources to helping children catch-up on lost instructional time during the pandemic.
- Once the health crisis is over, focus on building resilient, inclusive, and greener economies:
- Green infrastructure investment to mitigate climate change.
- Digital infrastructure investment to boost productive capacity.
- Strengthening social assistance to arrest rising inequality.
- For economies with limited fiscal space, priorities include improving tax capacity, increasing tax progressivity (on incomes, property, and inheritance taxation), deploying carbon pricing, and eliminating wasteful expenditures.
- Anchor policies in credible medium-term frameworks and adhere to the highest standards of debt transparency to contain borrowing costs and eventually reduce debt and rebuild buffers.
Policy priorities and recommendations (international)
- Work together to ensure universal vaccination:
- While some countries will get to widespread vaccinations by this summer, most, especially low-income countries, will likely have to wait until end-2022.
- Speeding up vaccinations requires ramping up vaccine production and distribution, avoiding export controls, fully funding the COVAX facility, and ensuring equitable global transfers of excess doses.
- Ensure adequate access to international liquidity:
- Major central banks should provide clear guidance on future actions with ample time to prepare to avoid "taper-tantrum" kinds of episodes.
- Low-income countries will benefit from further extending the pause on debt repayments under the Debt Service Suspension Initiative and operationalizing the G20 Common Framework for orderly debt restructuring.
- A new allocation of the IMF’s Special Drawing Rights will provide needed liquidity protection in highly uncertain times.
- Continue progress on resolving trade and technology tensions; cooperate on climate change mitigation, modernizing international corporate taxation, and measures to limit cross-border profit shifting, tax avoidance, and evasion.
- A similarly ambitious effort at the multilateral level is needed to secure the recovery and build forward better.
Source: Managing Divergent Recoveries — Gita Gopinath, April 6, 2021