Thailand’s COVID-19 response cited as an example of resilience and solidarity. Credit: UNDP

By Gita Gopinath
WASHINGTON DC, Oct 20 2020 (IPS)

The COVID-19 pandemic continues to spread with over 1 million lives tragically lost so far. Living with the novel coronavirus has been a challenge like no other, but the world is adapting.

As a result of eased lockdowns and the rapid deployment of policy support at an unprecedented scale by central banks and governments around the world, the global economy is coming back from the depths of its collapse in the first half of this year. Employment has partially rebounded after having plummeted during the peak of the crisis.

This crisis is however far from over. Employment remains well below pre-pandemic levels and the labor market has become more polarized with low-income workers, youth, and women being harder hit.

The poor are getting poorer with close to 90 million people expected to fall into extreme deprivation this year. The ascent out of this calamity is likely to be long, uneven, and highly uncertain. It is essential that fiscal and monetary policy support are not prematurely withdrawn, as best possible.

In our latest World Economic Outlook, we continue to project a deep recession in 2020. Global growth is projected to be -4.4 percent, an upward revision of 0.8 percentage points compared to our June update.

This upgrade owes to somewhat less dire outcomes in the second quarter, as well as signs of a stronger recovery in the third quarter, offset partly by downgrades in some emerging and developing economies. In 2021 growth is projected to rebound to 5.2 percent, -0.2 percentage points below our June projection.

Except for China, where output is expected to exceed 2019 levels this year, output in both advanced economies and emerging market and developing economies is projected to remain below 2019 levels even next year. Countries that rely more on contact-intensive services and oil exporters face weaker recoveries compared to manufacturing-led economies.

The divergence in income prospects between advanced economies and emerging and developing economies (excluding China) triggered by this pandemic is projected to worsen.

We are upgrading our forecast for advanced economies for 2020 to -5.8 percent, followed by a rebound in growth to 3.9 percent in 2021. For emerging market and developing countries (excluding China) we have a downgrade with growth projected to be – 5.7 percent in 2020 and then a recovery to 5 percent in 2021.

With this, the cumulative growth in per capita income for emerging-market and developing economies (excluding China) over 2020-21 is projected to be lower than that for advanced economies.

This crisis will likely leave scars well into the medium term as labor markets take time to heal, investment is held back by uncertainty and balance sheet problems, and lost schooling impairs human capital.

After the rebound in 2021, global growth is expected to gradually slow to about 3.5 percent into the medium term. The cumulative loss in output relative to the pre-pandemic projected path is projected to grow from 11 trillion over 2020-21 to 28 trillion over 2020-25.

This represents a severe setback to the improvement in average living standards across all country groups.

There remains tremendous uncertainty around the outlook with both downside and upside risks. The virus is resurging with localized lockdowns being re-instituted. If this worsens and prospects for treatments and vaccines deteriorate, the toll on economic activity would be severe, and likely amplified by severe financial market turmoil.

Growing restrictions on trade and investment and rising geopolitical uncertainty could harm the recovery. On the upside, faster and more widespread availability of tests, treatments, vaccines, and additional policy stimulus can significantly improve outcomes.

More Action is Needed

The considerable global fiscal support of close to $12 trillion and the extensive rate cuts, liquidity injections, and asset purchases by central banks helped saved lives and livelihoods and prevented a financial catastrophe.

There is still much that needs to be done to ensure a sustained recovery. First, greater international collaboration is needed to end this health crisis. Tremendous progress is being made in developing tests, treatments and vaccines, but only if countries work closely together will there be enough production and widespread distribution to all parts of the world.

We estimate that if medical solutions can be made available faster and more widely relative to our baseline, it could lead to a cumulative increase in global income of almost $9 trillion by end 2025, raising incomes in all countries and reducing income divergence.

Second, to the extent possible, policies must aggressively focus on limiting persistent economic damage from this crisis. Governments should continue to provide income support through well targeted cash transfers, wage subsidies, and unemployment insurance.

To prevent large scale bankruptcies and ensure workers can return to productive jobs, vulnerable but viable firms should continue to receive support—wherever possible—through tax deferrals, moratoria on debt service, and equity-like injections.

Over time, as the recovery strengthens, policies should shift to facilitating reallocation of workers from sectors likely to shrink on a long-term basis (travel) to growing sectors (e-commerce). Workers should be supported through this adjustment with income transfers, retraining, and reskilling.

Supporting reallocation will also require steps to speed up bankruptcy procedures and resolution mechanisms to efficiently tackle firm insolvencies. A public green infrastructure investment push in times of low interest rates and high uncertainty can significantly increase jobs and accelerate the recovery, while also serving as an initial big step towards reducing carbon emissions.

Emerging market and developing economies are having to manage this crisis with fewer resources, as many are constrained by elevated debt and higher borrowing costs. These economies will need to prioritize critical spending for health and transfers to the poor and ensure maximum efficiency.

They will also need continued support in the form of international grants and concessional financing, and debt relief in some cases. Where debt is unsustainable it should be restructured sooner than later to free up finances to deal with this crisis.

Lastly, policies should be designed with an eye toward placing economies on paths of stronger, equitable, and sustainable growth. The global easing of monetary policy while essential for the recovery should be complemented with measures to prevent build-up of financial risks over the medium term, and central bank independence should be safeguarded at all costs.

Needed fiscal spending and the output collapse have driven global sovereign debt levels to a record 100 percent of global GDP. While low interest rates alongside the projected rebound in growth in 2021 will stabilize debt levels in many countries, all will benefit from a medium-term fiscal framework to give confidence that debt remains sustainable.

In the future, governments will likely need to raise the progressivity of their taxes while ensuring that corporations pay their fair share of taxes, alongside eliminating wasteful spending.

Investments in health, digital infrastructure, green infrastructure and education can help achieve productive, inclusive, and sustainable growth. And expanding the safety net where gaps exist can ensure the most vulnerable are protected while supporting near-term activity.

This is the worst crisis since the Great Depression, and it will take significant innovation on the policy front, at both the national and international levels to recover from this calamity. The challenges are daunting. But there are reasons to be hopeful.

The exceptional policy response, including the establishment of the European Union pandemic recovery package fund and the use of digital technologies to deliver social assistance is a powerful reminder that well-designed policies protect people and collective economic wellbeing.

At the IMF we have provided funding at record speed to 81 members since the start of the pandemic, granted debt relief, and called for extended debt service suspension for low-income countries and for reform of the international debt architecture. Building on these actions, policies for the next stage of the crisis must seek lasting improvements in the global economy that create prosperous futures for all.

Source: IMF Blog

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By Gita Gopinath
WASHINGTON DC, Jun 24 2020 (IPS)

The COVID-19 pandemic pushed economies into a Great Lockdown, which helped contain the virus and save lives, but also triggered the worst recession since the Great Depression. Over 75 percent of countries are now reopening at the same time as the pandemic is intensifying in many emerging market and developing economies. Several countries have started to recover. However, in the absence of a medical solution, the strength of the recovery is highly uncertain and the impact on sectors and countries uneven.

Compared to our April World Economic Outlook forecast, we are now projecting a deeper recession in 2020 and a slower recovery in 2021. Global output is projected to decline by -4.9 percent in 2020, 1.9 percentage points below our April forecast, followed by a partial recovery, with growth at 5.4 percent in 2021.

These projections imply a cumulative loss to the global economy over two years (2020–21) of over $12 trillion from this crisis.

The downgrade from April reflects worse than anticipated outcomes in the first half of this year, an expectation of more persistent social distancing into the second half of this year, and damage to supply potential.

High uncertainty

A high degree of uncertainty surrounds this forecast, with both upside and downside risks to the outlook. On the upside, better news on vaccines and treatments, and additional policy support can lead to a quicker resumption of economic activity. On the downside, further waves of infections can reverse increased mobility and spending, and rapidly tighten financial conditions, triggering debt distress. Geopolitical and trade tensions could damage fragile global relationships at a time when trade is projected to collapse by around 12 percent.

A recovery like no other

This crisis like no other will have a recovery like no other.

First, the unprecedented global sweep of this crisis hampers recovery prospects for export-dependent economies and jeopardizes the prospects for income convergence between developing and advanced economies. We are projecting a synchronized deep downturn in 2020 for both advanced economies (-8 percent) and emerging market and developing economies (-3 percent; -5 percent if excluding China), and over 95 percent of countries are projected to have negative per capita income growth in 2020. The cumulative hit to GDP growth over 2020–21 for emerging market and developing economies, excluding China, is expected to exceed that in advanced economies.

Second, as countries reopen, the pick-up in activity is uneven. On the one hand, pent-up demand is leading to a surge in spending in some sectors like retail, while, on the other hand, contact-intensive services sectors like hospitality, travel, and tourism remain depressed. Countries heavily reliant on such sectors will likely be deeply impacted for a prolonged period.

Third, the labor market has been severely hit and at record speed, and particularly so for lower-income and semi-skilled workers who do not have the option of teleworking. With activity in labor-intensive sectors like tourism and hospitality expected to remain subdued, a full recovery in the labor market may take a while, worsening income inequality and increasing poverty.

Exceptional policy support has helped

On the positive side, the recovery is benefitting from exceptional policy support, particularly in advanced economies, and to a lesser extent in emerging market and developing economies that are more constrained by fiscal space. Global fiscal support now stands at over $10 trillion and monetary policy has eased dramatically through interest rate cuts, liquidity injections, and asset purchases. In many countries, these measures have succeeded in supporting livelihoods and prevented large-scale bankruptcies, thus helping to reduce lasting scars and aiding a recovery.

This exceptional support, particularly by major central banks, has also driven a strong recovery in financial conditions despite grim real outcomes. Equity prices have rebounded, credit spreads have narrowed, portfolio flows to emerging market and developing economies have stabilized, and currencies that sharply depreciated have strengthened. By preventing a financial crisis, policy support has helped avert worse real outcomes. At the same time, the disconnect between real and financial markets raises concerns of excessive risk taking and is a significant vulnerability.

We are not out of the woods

Given the tremendous uncertainty, policymakers should remain vigilant and policies will need to adapt as the situation evolves. Substantial joint support from fiscal and monetary policy must continue for now, especially in countries where inflation is projected to remain subdued. At the same time, countries should ensure proper fiscal accounting and transparency, and that monetary policy independence is not compromised.

A priority is to manage health risks even as countries reopen. This requires continuing to build health capacity, widespread testing, tracing, isolation, and practicing safe distancing (and wearing masks). These measures help contain the spread of the virus, reassure the public that new outbreaks can be dealt with in an orderly fashion, and minimize economic disruptions. The international community must further expand financial assistance and expertise to countries with limited health care capacity. More needs to be done to ensure adequate and affordable production and distribution of vaccines and treatments when they become available.

In countries where activities are being severely constrained by the health crisis, people directly impacted should receive income support through unemployment insurance, wage subsidies, and cash transfers, and impacted firms should be supported via tax deferrals, loans, credit guarantees, and grants. To more effectively reach the unemployed in countries with large informal sectors, digital payments will need to be scaled up and complemented with in-kind support for food, medicine, and other household staples channeled through local governments and community organizations.

In countries that have begun reopening and the recovery is underway, policy support will need to gradually shift toward encouraging people to return to work, and to facilitating a reallocation of workers to sectors with growing demand and away from shrinking sectors. This could take the form of spending on worker training and hiring subsidies targeted at workers that face greater risk of long-term unemployment. Supporting a recovery will also involve actions to repair balance sheets and address debt overhangs. This will require strong insolvency frameworks and mechanisms for restructuring and disposing of distressed debt.

Policy support should also gradually shift from being targeted to being more broad-based. Where fiscal space permits, countries should undertake green public investment to accelerate the recovery and support longer-term climate goals. To protect the most vulnerable, expanded social safety net spending will be needed for some time.

The international community must ensure that developing economies can finance critical spending through provision of concessional financing, debt relief and grants; and that emerging market and developing economies have access to international liquidity, via ensuring financial market stability, central bank swap lines, and deployment of a global financial safety net.

This crisis will also generate medium-term challenges. Public debt is projected to reach this year the highest level in recorded history in relation to GDP, in both advanced and emerging market and developing economies. Countries will need sound fiscal frameworks for medium-term consolidation, through cutting back on wasteful spending, widening the tax base, minimizing tax avoidance, and greater progressivity in taxation in some countries.

At the same time, this crisis also presents an opportunity to accelerate the shift to a more productive, sustainable, and equitable growth through investment in new green and digital technologies and wider social safety nets.

Global cooperation is ever so important to deal with a truly global crisis. All efforts should be made to resolve trade and technology tensions, while improving the multilateral rules-based trading system. The IMF will continue to do all it can to ensure adequate international liquidity, provide emergency financing, support the G20 debt service suspension initiative, and provide advice and support to countries during this unprecedented crisis.

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The empty corridors of a locked down UN Secretariat in New York. Credit: United Nations

By Gita Gopinath
WASHINGTON DC, Jun 17 2020 (IPS)

The Great Lockdown is expected to play out in three phases, first as countries enter the lockdown, then as they exit, and finally as they escape the lockdown when there is a medical solution to the pandemic.

Many countries are now in the second phase, as they reopen, with early signs of recovery, but risks of second waves of infections and re-imposition of lockdowns. Surveying the economic landscape, the sheer scale and severity of the Global Lockdown are striking.

Most tragically, this pandemic has already claimed hundreds of thousands of lives worldwide. The resulting economic crisis is unlike anything the world has seen before.

This is a truly global crisis. Past crises, as deep and severe as they were, remained confined to smaller segments of the world, from Latin America during the 1980s to Asia in the 1990s. Even the global financial crisis 10 years ago had more modest effects on global output.

For the first time since the Great Depression, both advanced and emerging market economies will be in recession in 2020. The forthcoming June World Economic Outlook Update is likely to show negative growth rates even worse than previously estimated. This crisis will have devastating consequences for the world’s poor.

Aside from its unprecedented scale, the Global Lockdown is playing out in ways that are very different from past crises. These unusual characteristics are emerging all over the world, irrespective of the size, geographic region, or production structure of economies.

First, this crisis has dealt a uniquely large blow to the services sector. In typical crises, the brunt is borne by manufacturing, reflecting a decline in investment, while the effect on services is generally muted as consumption demand is less affected.

This time is different. In the peak months of the lockdown the contraction in services has been even larger than in manufacturing, and it is seen in advanced and emerging market economies alike.

There are exceptions—like Sweden and Taiwan Province of China, which adopted a different approach to the health crisis, with limited government containment measures and a consequently proportionately smaller hit to services vis-à-vis manufacturing.

It is possible that with pent-up consumer demand there will be a quicker rebound, unlike after previous crises. However, this is not guaranteed in a health crisis as consumers may change spending behavior to minimize social interaction, and uncertainty can lead households to save more. In the case of China, one of the early exiters from lockdown, the recovery of the services sector lags manufacturing as such services as hospitality and travel struggle to regain demand.

Of particular concern is the long-term impact on economies that rely significantly on such services—for example, tourism-dependent economies.

Second, despite the large supply shocks unique to this crisis, except for food inflation, we have thus far seen, if anything, a decline in inflation and inflation expectations pretty much across the board in both advanced and emerging market economies.

Scene in New York City Subway during COVID-19 Outbreak. Credit: United Nations

Despite the considerable conventional and unconventional monetary and fiscal support across the globe, aggregate demand remains subdued and is weighing on inflation, alongside lower commodity prices. With high unemployment projected to stay for a while, countries with monetary policy credibility will likely see small risks of spiraling inflation.

Third, we see striking divergence of financial markets from the real economy, with financial indicators pointing to stronger prospects of a recovery than real activity suggests. Despite the recent correction, the S&P 500 has recouped most of its losses since the start of the crisis; the FTSE emerging market index and Africa index are substantially improved; the Bovespa rose significantly despite the recent surge in infection rates in Brazil; portfolio flows to emerging and developing economies have stabilized.

With few exceptions, the rise in sovereign spreads and the depreciation of emerging market currencies are smaller than what we saw during the global financial crisis. This is notable considering the larger scale of the shock to emerging markets during the Great Lockdown.

This divergence may portend greater volatility in financial markets. Worse health and economic news can lead to sharp corrections. We will have more to say about this divergence in our forthcoming Global Financial Stability Report.

One likely factor behind this divergence is the stronger policy response during this crisis. Monetary policy has become accommodative across the board, with unprecedented support from major central banks, and monetary easing in emerging markets including through first time use of unconventional policies.

Discretionary fiscal policy has been sizable in advanced economies. Emerging markets have deployed smaller fiscal support, constrained to some extent by limited fiscal space. Furthermore, a unique challenge confronting emerging markets this time around is that the informal sector, typically a shock absorber, has not been able to play that role under containment policies and has instead required support.

We are now in the early stages of the second phase as many countries begin to ease containment policies and gradually permit the resumption of economic activity. But there remains profound uncertainty about the path of the recovery.

A key challenge in escaping the Great Lockdown will be to ensure adequate production and distribution of vaccines and treatments when they become available—and this will require a global effort. For individual countries, minimizing the health uncertainty by using the least economically disruptive approaches such as testing, tracing, and isolation, tailored to country-specific circumstances with clear communication about the path of policies, should remain a priority to strengthen confidence in the recovery.

As the recovery progresses, policies should support the reallocation of workers from shrinking sectors to sectors with stronger prospects.

The IMF, in coordination with other international organizations, will continue to do all it can to ensure adequate international liquidity, provide emergency financing, support the G20 debt service suspension initiative, and help countries maintain a manageable debt burden.

The IMF will also provide advice and support through surveillance and capacity development, to help disseminate best practices, as countries learn from each other during this unprecedented crisis.

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