Letter IEDI n. 1082—The global recovery in 2021
The IMF baseline scenario released on April 2021 projects global economic growth of 6% in 2021 and 4.4% in 2022, after an estimated 3.3% contraction in 2020. Both projections are more optimistic compared to those released last January (5.5% and 4.2%, respectively) due to, above all, the favorable impact of additional fiscal stimuli in some countries and the progress of vaccination.
A less favorable picture is drawn by both the OECD and UNCTAD, whose projections for world GDP in 2021 are less optimistic than the IMF's: expansion of 5.6% and 4.7%, respectively. For 2022, the OECD also forecasts a rate slightly lower than the IMF, 4%.
Despite the increased coverage of vaccination, the emergence of new COVID-19 variants and the asymmetry in economic recovery across countries and regions are reasons for concern. The actual performance of the global economy in 2021 and 2022 will depend on the following factors, according to multilateral organizations:
• the trajectory of the pandemic, that is, the battle between the virus and its variants versus the pace and effectiveness of vaccines;
• the effectiveness of economic policy initiatives adopted in this highly uncertain context to limit the economic damage caused by the unprecedented crisis;
• the evolution of financial conditions and commodity prices;
• economies’ ability to adjust to the impact of confinement and social distancing measures on the level of activity.
The main hypotheses underlying the latest IMF outlook include: unequal global access to vaccines; heterogeneous fiscal policies; rises in commodity prices and recovery in the volume of international trade; favorable monetary and financial conditions.
If the central IMF scenario is confirmed, the recovery in the 2021–2022 biennium will be more intense than in the two years that followed the global financial crisis of 2008. This performance was to be expected given the intensity of the COVID-19 crisis and, consequently, the very low bases of comparison.
According to IMF estimates, the 2020 global recession might have been three times more intense in the absence of the countercyclical monetary and fiscal policies adopted in Advanced Economies (AEs) and Emerging and Developing Market Economies (EDMEs).
Within each group of countries, the differences in the projected pace of recovery depend on several factors, according to the Fund, including: the intensity of the health crisis, the extent of interruptions in economic activity (associated with the degree of importance of activities intensive in physical contact), the degree of economic openness and the effectiveness of public policies in limiting the negative economic impacts of the crisis.
Advanced economies will register a 5.1% expansion in 2021, forecasts the IMF, under the leadership of the United States (+6.4%) thanks to President Biden's robust fiscal package. By the first half of 2021, the US is expected to return to the level of economic activity seen at the end of 2019.
The second highest growth rate among advanced countries will be in the United Kingdom (+5.3%), but in this case the pre-crisis level should be reached only in 2022. The Euro area, in turn, comes next, with a 4.4% rise, also returning to the pre-COVID level in 2022.
The Japanese economy will continue to come last in the 2021 GDP growth ranking according to the IMF. Its expansion is expected to be of 3.3% in 2021, but due to a milder recession than in the UK and the Euro area, it will reach the pre-crisis level in the second half of this year.
In the case of emerging and developing economies, the current projection points to a growth rate of 6.7% after a recession of -3.3% in 2020. The current scenario is more favorable compared to Jan/21's for all regions, although the upward revision was lower than in the AEs.
The Fund says that available data suggest that a large part of the population will not have access to vaccination in 2021 and measures of confinement and social distancing are likely to be more frequent this year and in 2022 than in advanced countries, increasing the likelihood of more lasting adverse effects on potential output.
Furthermore, among emerging countries the asymmetry in regional performance is greater than in the AEs. Emerging and developing Asia, the only region that did not go into recession in 2020 (due to China's performance), is expected to grow 8.6% under Chinese leadership.
On the other hand, Latin America and the Caribbean, the region hardest hit by the COVID-19 crisis with a 7% contraction in 2020, should register the second highest growth rate in 2021: +4.6%, anchored on the revival of the volume of world trade and rising commodity prices.
For Brazil, the IMF projects GDP growth of 3.7% in 2021, practically the same level as in the previous scenario. In other words, unlike other regions and countries, the Fund did not see an improvement in the Brazilian economic situation between the turn of the year and this latest projection (of Apr/21).
The balance of risks to the latest outlook has a neutral bias in the short term, that is, negative and positive risks neutralize each other. In the medium term, however, the bias is positive.
For the negative risks to not materialize and overshadow the positive ones, the IMF presents a set of policy recommendations, staggered in three phases, which correspond to the short, medium and long terms, respectively:
• immediate actions to overcome the crisis: priority to health care spending; maintenance of fiscal policy in line with the evolution of the pandemic; accommodative monetary policy; macroprudential policies to contain the risks of financial instability;
• initiatives to safeguard the recovery: limit the failure of viable companies; support the hardest hit sectors (such as culture and entertainment); policies to avoid long-term unemployment; investment in education, R&D, professional qualification and infrastructure;
• measures to build a more resilient, inclusive and environmentally sustainable economy: restructuring of the sovereign external debts of EDMEs facing solvency problems; measures to increase productivity and GDP, such as investments in artificial intelligence and automation, fighting inequality and unemployment; tax reforms to expand the fiscal policy space; support for low carbon economy, etc.
In all three phases, the Fund stresses that international cooperation will be essential to, for example, enable universal distribution of vaccines at affordable prices, support debt restructuring for emerging and developing economies facing external solvency problems, and expand climate change mitigation policies.