The International Monetary Fund (IMF) has projected that the global economy will grow 5.5% in 2021, a figure 0.3 percentage points higher than its forecast from October 2020.
The global growth rate will moderate to 4.2% in 2022, reflecting the same figure as the international financial organisation’s forecast of last October.
According to its World Economic Outlook (WEO) update report, released by the IMF on Tuesday, the upgrade for 2021 reflects the positive effects of the rollout of vaccines for the novel coronavirus (COVID-19) in some countries. It has also received a boost from additional policy support in some large economies.
“However, surging infections in late 2020 including from new variants of the virus, renewed lockdowns, logistical problems with vaccine distribution, and uncertainty about take-up are important counterpoints to the favourable news,” the report noted, “Much remains to be done on the health and economic policy fronts, to limit persistent damage from the severe contraction of 2020 and ensure a sustained recovery.”
The report anticipates that close to 90 million people are likely to fall below the extreme poverty threshold during fiscal year (FY) 2020/21, with the pandemic wiping out progress made in reducing poverty over the past two decades. Large numbers of people remained unemployed and underemployed in many countries, including the US.
“In just three months since we released our last forecast in October, recorded COVID-19 deaths have doubled to over 2 million, as new waves have lifted infections past previous peaks in many countries,” the IMF report said, “In these same three months, multiple vaccines have seen unexpectedly strong success and some countries have started ambitious vaccination drives.”
It also said that much now depends on the outcome of this race between a mutating virus and vaccines to end the pandemic, and on the ability of policies to provide effective support until that happens.
There remains tremendous uncertainty and prospects vary greatly across countries, according to Gita Gopinath, Economic Counselor and Director of the Research IMF’s Department.
During an online press conference to launch the WEO report, Gopinath added that the 2021 upgrade reflects the positive effects of the COVID-19 vaccine rollout in some countries.
It was also driven by additional policy support at the end of 2020 in economies, such as the US and Japan, and an expected increase in contact-intensive activities as the health crisis wanes.
However, the positive effects are partially offset by a somewhat worse outlook for the very near term, as measures to contain the spread of the virus dampen activity.
In terms of the Middle East and Central Asia, the IMF maintained its forecast for growth in 2021 at 3%. The figure is the same as its forecast for October 2021, although the organisation upgraded its forecast for the region in 2022 at 4.2%, 0.2 percentage points higher than its October forecast.
“The MENA region is like many other regions in the world, and reflects different paces of recovery,” the IMF report said, “What we’ve seen in, in general, is in terms of the impact on growth, with it being more negative for oil exporting nations relative to the ones that are not.”
The report said that the effect on oil exporters is not as negative as might have previously been projected. In economies such as Saudi Arabia, for instance, there has been a return of non-oil activity, much more strongly.
There are also great differences in fragile states, such as Lebanon which has very high financing needs.
The report added, “Cross border tourism is not returning anytime soon, which has implications for countries that rely on tourism. So there are many different diverse parts of recovery.”
Consistent with the recovery in global activity, global trade volumes are forecast to grow about 8% in 2021, before moderating to 6% in 2022. Services trade is expected to recover more slowly than merchandise volumes, however, which is consistent with subdued cross-border tourism and business travel until transmission declines everywhere.
Concerning inflation, the IMF said that even with the anticipated recovery in fiscal year (FY) 2021/22, output gaps are not expected to close until after 2022.
“Consistent with persistent negative output gaps, inflation is expected to remain subdued during FY 2021/22,” the IMF report said, “In advanced economies it is projected to remain generally below central bank targets at 1.5%.”
It added that, among emerging market and developing economies, inflation is projected at just over 4%, which is lower than the historical average of the Middle East and Central Asia group.
The IMF said that the projected growth recovery in 2021 follows a severe collapse in 2020. The global growth contraction for that year is estimated at -3.5%, 0.9 percentage point higher than projected in the previous forecast and reflecting stronger-than-expected momentum in the second half (H2) of 2020.
It further said that the strength of the recovery is projected to vary significantly across countries. It is dependent on access to medical interventions, effectiveness of policy support, exposure to cross-country spill-overs, and structural characteristics entering the crisis.
“Policy actions should ensure effective support until the recovery is firmly underway, with an emphasis on advancing key imperatives of raising potential output, ensuring participatory growth that benefits all, and accelerating the transition to lower carbon dependence,” the IMF report said, “As noted in the October 2020 World Economic Outlook (WEO), a green investment push, coupled with initially moderate but steadily rising carbon prices, would yield needed emissions reductions while supporting the recovery from the pandemic recession.”
It also said that strong multilateral cooperation is required to bring the pandemic under control everywhere.
It noted that such efforts include bolstering funding for the COVAX facility to accelerate access to vaccines against the novel coronavirus (COVID-19) for all countries. It will also ensure universal distribution of vaccines, and facilitating access to therapeutics at affordable prices for all.
Many countries, particularly low-income developing economies, entered the crisis with high debt that is set to rise further during the pandemic. The global community will need to continue working closely to ensure adequate access to international liquidity for these countries. Where sovereign debt is unsustainable, eligible countries should work with creditors to restructure their debt under the Common Framework agreed by the G20.
Gopinath concluded that the IMF is projecting the world would grow this year as opposed to the severe collapse seen last year, but there is still uncertainty. A lot depends upon the outcome of the race between a mutating virus and vaccines against it, and how much policy support can hold it up.
“What we are seeing is divergence and prospects across countries, emerging and developing nations are projected to have greater output losses relative to their pre-pandemic projected levels, as compared to advanced economies,” Gopinath said, “This doesn’t have to be this way, it can be arrested, it can be reversed, but that would require more broad spread abroad access to vaccines.”
She noted that it is important for countries that do not have the financial access that some other countries do, to receive support from the international community. This would come in terms of concessional financing such as grants aid, or in some cases outright debt restructuring.
There is still much to be done, Gopinath noted, but the world is at least in positive growth territory this year as opposed to 2020.