Global prospects remain highly uncertain one year into the pandemic. New virus mutations and the accumulating human toll raise concerns, even as growing vaccine coverage lifts sentiment. Economic recoveries are diverging across countries and sectors, reflecting variation in pandemic-induced disruptions and the extent of policy support.
In its annual World Economic Outlook, the International Monetary Fund (IMF) said unprecedented public spending to fight the COVID-19 pandemic would push global growth to 6 per cent this year.
The IMF raised its 2021 growth forecast from 5.5 per cent less than three months ago.
The upward revision reflects additional fiscal support in a few large economies, the anticipated vaccine-powered recovery in the second half of 2021, and continued adaptation of economic activity to subdued mobility.
However, high uncertainty surrounds this outlook, related to the path of the pandemic, the effectiveness of policy support to provide a bridge to vaccine-powered normalisation, and the evolution of financial conditions.
• After an estimated contraction of -3.3 per cent in 2020, the global economy is projected to grow at 6 per cent in 2021, moderating to 4.4 per cent in 2022.
• The strength of the projected recovery varies across countries, depending on the severity of the health crisis, the extent of domestic disruptions to activity (related to countries’ reliance on contact-intensive sectors), the exposure to cross-border spillovers, and importantly, the effectiveness of policy support to limit persistent damage.
• Beyond 2022 global growth is projected to moderate to 3.3 percent into the medium term.
• Persistent damage to supply potential across both advanced and emerging market economies and slower labour force growth because of population ageing (largely in advanced economies, but also in a few emerging market economies), and necessary rebalancing to a sustainable growth path in China, are all expected to weigh on the growth outlook for the global economy in the medium term.
• GDP levels are projected to remain well below the pre-pandemic trend path through 2024 for most countries.
• The IMF expects the US economy will grow 6.4 per cent this year, its strongest growth in decades.
• It has increased China’s GDP projection to 8.4 per cent for this year, a 10-year high. China’s economy, which was the first to be hit by the coronavirus pandemic and early to recover from its impact, grew 2.3 per cent in 2020, registering the lowest annual growth rate in 45 years.
• It also expects most Gulf economies to recover this year at a faster pace than previously estimated.
IMF scales up India’s GDP growth forecast for FY22
The IMF projected an impressive 12.5 per cent growth rate for India in 2021-22, stronger than that of China, the only major economy to have a positive growth rate last year during the COVID-19 pandemic. It also said that the Indian economy is expected to grow by 6.9 per cent in 2022. In 2020, India’s economy contracted by a record 8 per cent.
Divergent impacts of pandemic and the way ahead
Output losses have been particularly large for countries that rely on tourism and commodity exports and for those with limited policy space to respond. Many of these countries entered the crisis in a precarious fiscal situation and with less capacity to mount major health care policy responses or support livelihoods.
The projected recovery follows a severe contraction that has had particularly adverse employment and earnings impacts on certain groups. Youth, women, workers with relatively lower educational attainment, and the informally employed have generally been hit hardest.
Income inequality is likely to increase significantly because of the pandemic. Close to 95 million more people are estimated to have fallen below the threshold of extreme poverty in 2020 compared with pre-pandemic projections.
Moreover, learning losses have been more severe in low-income and developing countries, which have found it harder to cope with school closures, and especially for girls and students from low-income households. Unequal setbacks to schooling could further amplify income inequality.
Future developments will depend on:
• Whether the new COVID-19 strains prove susceptible to vaccines or they prolong the pandemic.
• The effectiveness of policy actions to limit persistent economic damage (scarring).
• The evolution of financial conditions and commodity prices.
• The adjustment capacity of the economy.
The ebb and flow of these drivers and their interaction with country-specific characteristics will determine the pace of the recovery and the extent of medium-term scarring across countries.
The factors shaping the appropriate stance of policy vary by country, especially progress toward normalisation. Hence, countries will need to tailor their policy responses to the stage of the pandemic, strength of the recovery, and structural characteristics of the economy.
As the recovery progresses, policymakers will need to limit long-term economic scarring with an eye toward boosting productive capacity (for example, public investment) and increasing incentives for an efficient allocation of productive resources.
More emphasis should at that point be placed on retraining and reskilling workers, together with income support as needed to help them through the transition, while in parallel expanding hiring subsidies to incentivise job creation. Expedited and streamlined bankruptcy procedures can further facilitate reallocation.
Resources will need to be devoted to reverse learning losses among children who lost instructional time during the pandemic, for instance, through increased spending on education.
The international community needs to work together to ensure that financially constrained economies have adequate access to international liquidity so that they can continue needed health care, other social, and infrastructure spending required for development and convergence to higher levels of income per capita. Strong cooperation is needed to resolve economic issues underlying trade and technology tensions (as well as gaps in the rules-based multilateral trading system).
Once the health crisis is over, policy efforts can focus more on building resilient, inclusive, and greener economies, both to bolster the recovery and to raise potential output. The priorities should include investing in green infrastructure to help mitigate climate change, strengthening social assistance and social insurance to arrest rising inequality, introducing initiatives to boost productive capacity and adapt to a more digitalised economy, and resolving debt overhangs.