Drawing Further Apart: Widening Gaps in the Global Recovery

IMF Blog, July 27, 2021

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Drawing Further Apart: Widening Gaps in the Global Recovery

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• Authors: Gita Gopinath
• Published: July 27, 2021

Global growth outlook and composition

• Global growth forecast for 2021: 6 percent (unchanged from previous outlook).
• 2022 global growth projection: 4.9 percent (up from previous forecast of 4.4 percent).
• Composition shifts:
  • Growth prospects for advanced economies in 2021 improved by 0.5 percentage point.
  • The improvement for advanced economies was exactly offset by a downward revision for emerging market and developing economies driven by a significant downgrade for emerging Asia.
  • The 2022 upgrade largely reflects anticipated additional fiscal support in the United States and from the Next Generation European Union funds; the upgrade for emerging market and developing economies is more modest.

Per capita income losses and vaccination gaps

• Estimated pandemic impact on per capita incomes (relative to pre-pandemic trends over 2020-2022):
  • Advanced economies: reduced by 2.8 percent a year.
  • Emerging market and developing economies (excluding China): reduced by 6.3 percent a year.
• Vaccination differentials influencing outlook:
  • Close to 40 percent of the population in advanced economies has been fully vaccinated.
  • 11 percent in emerging market economies have been fully vaccinated.
  • A tiny fraction in low-income developing countries have been fully vaccinated.

Drivers of divergence between advanced and emerging market & developing economies

• Pandemic developments and access to vaccines:
  • Faster-than-expected vaccination rates and return to normalcy in some countries produced upgrades.
  • Lack of access to vaccines and renewed COVID-19 waves in some countries (notably India) produced downgrades.
• Divergences in policy support:
  • Advanced economies: continued sizable fiscal support with $4.6 trillion of announced pandemic related measures available in 2021 and beyond.
  • Emerging market and developing economies: most measures expired in 2020; many are rebuilding fiscal buffers.
  • Some emerging markets (Brazil, Hungary, Mexico, Russia, and Turkey) began raising monetary policy rates to head off upward price pressures.
  • Commodity exporters benefited from higher-than-anticipated commodity prices.

Inflation concerns and assessment

• Short-run inflation pressures:
  • Pent-up demand and supply chain bottlenecks are putting upward pressure on prices.
• Reasons inflation is expected to subside to pre-pandemic ranges in most advanced economies in 2022:

1. A significant fraction of abnormally high inflation readings is transitory, from pandemic-affected sectors (travel and hospitality) and low 2020 comparison bases (commodity prices). 2. Overall employment rates remain well below pre-pandemic levels in most countries; while some sectors saw rapid wage growth, overall wage growth remains within normal ranges. As health metrics improve and exceptional income support measures expire, hiring difficulties are expected to abate and ease wage pressures. 3. Long-term inflation expectations (survey and market-based measures) remain well-anchored; automation effects that lower price sensitivity to labor market slack likely intensified during the pandemic.

• Upside inflation risks:
  • More persistent supply disruptions.
  • Sharply rising housing prices.
  • Continued food price pressures and currency depreciations in some emerging market and developing economies could keep inflation elevated into 2022.

Downside and systemic risks to the recovery

• Pandemic variant risk:
  • The emergence of highly infectious virus variants could derail the recovery and wipe out $4.5 trillion cumulatively from global GDP by 2025.
• Financial and policy risks:
  • Financial conditions could tighten abruptly amid stretched asset valuations if there is a sudden reassessment of the monetary policy outlook, especially in the United States.
  • Stimulus spending in the United States could prove weaker than expected.
• Distributional impacts:
  • A worsening pandemic and tightening financial conditions would inflict a double hit on emerging market and developing economies and severely set back their recoveries.

Multilateral policy recommendations to arrest divergences

• Global vaccination, diagnostics, and therapeutics strategy:
  • IMF staff proposal (endorsed by WHO, World Bank, and WTO):
  • Goal: vaccinate at least 40 percent of the population in every country by the end of 2021 and at least 60 percent by mid-2022.
  • Ensure adequate diagnostics and therapeutics at a price of $50 billion.
  • Operational priorities:
  • At least 1 billion vaccine doses should be shared in 2021 by countries with surplus vaccines.
  • Vaccine manufacturers should prioritize deliveries to low- and lower-middle income countries.
  • Remove trade restrictions on vaccine inputs and finished vaccines.
  • Make additional investment in regional vaccine capacity.
  • Make available upfront grant financing of around $25 billion for diagnostics, therapeutics, and vaccine preparedness for low-income developing countries.
• International liquidity and debt relief:
  • Major central banks should clearly communicate their monetary policy outlook to avoid triggering rapid tightening of financial conditions.
  • Complete a general allocation of Special Drawing Rights (SDR) equivalent to $650 billion ($250 billion to emerging market and developing economies) quickly to provide liquidity buffers and help address essential spending needs.
  • Rich nations voluntarily channeling their SDRs to emerging market and developing economies would magnify the impact.
  • Greater action is needed to ensure the G20 Common Framework successfully delivers on debt restructuring for countries where debt is already unsustainable.
• Climate policy:
  • A multipronged strategy with carbon pricing as its centerpiece is needed to reduce carbon emissions and slow the rise in global temperatures.
  • Revenue from carbon pricing mechanisms should fund compensatory transfers to those hurt by the energy transition.
  • Complementary measures: green infrastructure push and subsidies for research into green technologies.
  • Current recovery spending on low-carbon activities: 18 percent.

National-level policy guidance by pandemic stage

• Stage 1 — Escape the acute crisis:
  • Prioritize health spending, including for vaccinations.
  • Provide targeted support for affected households and firms.
• Stage 2 — Secure the recovery:
  • Emphasize broader fiscal and monetary support depending on available space.
  • Undertake remedial measures to reverse the loss in education.
  • Support reallocation of labor and capital to growing sectors via targeted hiring subsidies and efficient bankruptcy resolution mechanisms.
• Stage 3 — Invest in the future:
  • Boost productive capacity.
  • Accelerate transition to lower carbon dependence.
  • Harness benefits of digitalization.
  • Ensure gains are equitably shared.
• Fiscal and monetary policy design:
  • Fiscal actions should be nested within a credible medium-term fiscal framework to ensure debt remains sustainable.
  • Many countries need to improve tax capacity, increase tax progressivity, and eliminate wasteful expenditures.
  • Low-income developing countries will need strong international support.
  • Central banks should avoid prematurely tightening policy when inflation pressures are transitory but be prepared to move quickly if inflation expectations show signs of de-anchoring.
  • Emerging markets should prepare for possibly tighter external financial conditions by lengthening debt maturities where possible and limiting buildup of unhedged foreign currency debt.

Source: Gita Gopinath, July 27, 2021 — Drawing Further Apart: Widening Gaps in the Global Recovery

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