Letter IEDI n. 1115—Advances and obstacles to overcoming the COVID-19 crisis
According to the October 2021 IMF baseline projection, after contracting 3.1% in 2020, the global economy will grow 5.9% in 2021, i.e. slightly less than the 6% expected in the previous outlook (July). The estimate for 2022 (4.9%) was maintained. The scenarios of other international organizations for 2021 and 2022 are less optimistic: the OECD projects 5.7% and 4.5%, while UNCTAD predicts 5.3% and 3.6%, respectively.
For Brazil, the Fund also revised downwards its economic growth forecast for 2021, from 5.3% to 5.2%, that is, the same magnitude as the global GDP revision. In 2022, however, unlike the world economy for which growth expectations were maintained, the IMF expects Brazil to grow 1.5% and not 1.9%, as previously estimated.
If the current scenarios of the IMF and the OECD are confirmed, the world economy's recovery in 2021–2022 will be more intense than in the biennium that followed the 2008 global financial crisis (GFC), a result that was to be expected given the greater severity of the COVID-19 crisis and the magnitude of the emergency measures adopted. Growth in 2021 will also be higher than in 2007, the peak of the global growth boom that preceded the GFC.
The IMF highlights that the main threat to global recovery is still the “large disparities in vaccine access” between advanced economies (AEs) and emerging and developing market economies (EDMEs)—as well as between emerging economies (EMEs) and low-income developing economies, where only 5% of the population is fully immunized.
As long as this situation persists, the divergence in the economic performance of the two groups of countries will continue to increase, according to the IMF. Differences in the degree of support provided by fiscal policy are another factor in this divergence. While several emerging economies have already started to withdraw fiscal stimulus, in advanced economies fiscal policy remains expansionary.
On the other hand, monetary and financial conditions will, in general, remain favorable in the Fund's view, although the context is still one of high uncertainty, very vulnerable to new outbreaks of volatility. In the main AEs, base interest rates are not assumed to change until the end of 2022, but asset purchase policies (quantitative easing) are expected to be scaled back sooner.
In some emerging economies, such as Brazil, Chile, Mexico and Russia, the IMF highlights that monetary policy has already become less accommodative in the face of inflationary pressures, which, although to a lesser degree, are also happening in some advanced economies, particularly in the United States.
These pressures stem from a set of factors, among which two stand out: the mismatch between supply and demand in various manufacturing sectors (due to the pandemic) and the rise in commodity prices (led by metals) in a context of growth revival. While these factors point to an uncertain inflation scenario, the IMF projects inflation to decelerate to pre-pandemic levels by 2022 in most countries.
Recent performance and assumptions about access to vaccines, the stance of fiscal and monetary policies, global financial conditions and inflation underlie the Fund's projections for both groups of economies. The expected growth in 2021 for AEs and EDMEs was revised in opposite directions compared to the July scenario: from 5.6% to 5.2% in the first case and from 6.3% to 6.4% in the second.
In addition to the short-term outlook (for 2021–2022), the report also details the prospects for the medium term (2023 to 2025). The divergence in the speed of recovery between the two groups of economies is highly likely to leave lasting marks, referred to as "scarring" by the IMF, with medium-term performance below pre-COVID-19 projections.
Such scarring will be deeper in emerging and developing economies than in advanced nations, and there are also important asymmetries within each of these groups of countries, says the Fund.
According to current estimates, AEs' GDP is expected to return to the pre-pandemic trend by the end of 2022 and grow slightly above this trend from 2023 onwards. This is mainly due to the performance of the United States, whose estimated GDP will be above this trend in 2024 thanks to the positive impact of the new infrastructure package of the Biden government.
In the EDMEs, in turn, GDP should remain below the pre-shock path until 2025, that is, a two-year lag in relation to advanced economies. In addition, negative output gaps are predicted for a number of economies over the next three years. In other words, the scarring will be pervasive outside the AEs.
The largest negative gap through 2024 is predicted for emerging and developing Asia, followed by Latin America and the Caribbean, sub-Saharan Africa and the Middle East and Central Asia; within the EDMEs, only emerging and developing Europe should have a positive gap.
A similar picture of major lasting effects in emerging and developing economies (EDMEs) is predicted for the labor market, suggesting that employment is a key channel through which so-called scarring manifests.
According to the IMF, the current scenario remains permeated by uncertainties regarding the evolution of the pandemic itself, but also the performance of inflation and global financial conditions, with outcomes tilted to the negative side both in the short and in the medium term. In other words, there is greater probability of global growth being lower than what is estimated in this Oct'21 scenario. It is worth remembering that in Apr'21 the bias was neutral in the short term and positive in the medium term, as discussed in Letter IEDI n. 1082.
To prevent downside risks from materializing, smooth the divergence between EDMEs and AEs, and ensure a sustainable recovery, the IMF presents a wide range of policy recommendations. At the multilateral level, the Fund highlights the reinforcement of the actions of the international community to guarantee an adequate availability of vaccines in all countries; bolder climate change mitigation and adaptation policies; and advances in the restructuring and/or rescheduling of debts of developing countries with external solvency problems.