A Hobbled Recovery Along Entrenched Fault Lines

IMF Blog, October 12, 2021

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The global recovery continues but momentum has weakened, "hobbled by the pandemic."
Recorded global COVID-19 death toll has risen close to 5 million.
Global growth projections:
- 2021: revised down marginally to 5.9 percent (compared to July forecast).
- 2022: unchanged at 4.9 percent.
Distributional outcomes and divergences:
- Aggregate output for the advanced economy group is expected to regain its pre-pandemic trend path in 2022 and exceed it by 0.9 percent in 2024.
- Aggregate output for the emerging market and developing economy group (excluding China) is expected to remain 5.5 percent below the pre-pandemic forecast in 2024.
Labor market recovery significantly lags output recovery in most countries due to pandemic-related disruptions to contact-intensive sectors.
Supply disruptions from pandemic outbreaks and climate events have caused shortages of key inputs, lowered manufacturing activity, and contributed to rapid consumer price inflation in countries including the United States and Germany, and many emerging market and developing economies.
Food prices have increased the most in low-income countries, exacerbating food insecurity and raising the risk of social unrest.
The October 2021 Global Financial Stability Report highlights increased risk-taking in financial markets and rising fragilities in the nonbank financial institutions sector.

Principal global policy priority: vaccinate at least 40 percent of the population in every country by end-2021 and 70 percent by mid-2022.
Current disparities:
- Almost 60 percent of the population in advanced economies are fully vaccinated and some are now receiving booster shots.
- About 96 percent of the population in low-income countries remain unvaccinated.
Immediate actions recommended:
- High-income countries should fulfill existing vaccine dose donation pledges.
- Coordinate with manufacturers to prioritize deliveries to COVAX in the near-term.
- Remove trade restrictions on the flow of vaccines and their inputs.
- Close the $20 billion residual grant funding gap for testing, therapeutics and genomic surveillance.
- Support expansion of regional production of COVID-19 vaccines in developing countries through financing and technology transfers.
Address vaccine hesitancy where supply is adequate to improve uptake.

Urgent global priority: slow the rise in global temperatures and contain growing adverse effects of climate change.
Policy strategy elements recommended for COP26 and beyond:
- More ambitious commitments to reduce greenhouse gas emissions.
- An international carbon price floor adjusted to country circumstances.
- A green public investment and research subsidy push.
- Compensatory, targeted transfers to households to advance an equitable energy transition.
Financing imperative:
- Advanced countries should deliver on earlier promises of mobilizing $100 billion of annual climate financing for developing countries.

Multilateral measures needed to limit divergences:
- Ensure adequate international liquidity for constrained economies.
- Faster implementation of the G20 common framework to restructure unsustainable debt.
IMF-specific proposals:
- Build on the historic $650 billion Special Drawing Right (SDR) allocation.
- Call on countries with strong external positions to voluntarily channel their SDRs into the Poverty Reduction and Growth Trust.
- Explore establishment of a Resilience and Sustainability Trust to provide long-term funding for countries’ investment in sustainable growth.

Policy mix should be calibrated to local pandemic and economic conditions, aiming for maximum sustainable employment while protecting credibility of policy frameworks.
With fiscal space limited in many economies:
- Prioritize health care spending.
- Make lifelines and transfers increasingly targeted.
- Reinforce transfers with retraining and support for reallocation.
- As health outcomes improve, shift emphasis toward long-term structural goals.
Fiscal credibility:
- Public debt levels are at record highs; initiatives should be rooted in credible medium-term frameworks backed by feasible revenue and spending measures.
- The October 2021 Fiscal Monitor demonstrates that such credibility can lower financing costs for countries and increase fiscal space in the near-term.

Monetary policy must balance tackling inflation and financial risks while supporting the recovery.
Projection: headline inflation will likely return to pre-pandemic levels by mid-2022 for the group of advanced economies and emerging and developing economies, amid high uncertainty.
Heterogeneity and upside risks:
- Considerable cross-country heterogeneity with upside risks for some countries, like the United States, United Kingdom, and some emerging market and developing economies.
Recommended central bank actions:
- Generally look through transitory increases in inflation but be prepared to act quickly if risks of rising inflation expectations become more material.
- Chart contingent actions, announce clear triggers, and act in line with that communication.
Clarity and consistent actions are important to avoid policy accidents that could roil financial markets, including risks from a failure to lift the US debt ceiling, disorderly debt restructurings in China’s property sector, and escalating cross-border trade and technology tensions.

If COVID-19 were to have a prolonged impact into the medium-term, it could reduce global GDP by a cumulative $5.3 trillion over the next five years relative to the current projection.

Source: A Hobbled Recovery Along Entrenched Fault Lines — IMFBlog, Gita Gopinath, October 12, 2021.