Letter IEDI n. 1040–COVID-19 and the World Economy
Today's letter IEDI analyzes the scenarios for the world economic growth in 2020 and 2021 put together by the main multilateral organizations. After a period of strong uncertainty, including doubts on the real effectiveness of government emergency measures, the new projections are more convergent and point to less pronounced declines.
According to the IMF October 2020 base scenario, the global economy will shrink -4.4% in 2020, a figure slightly better than was estimated in June (-4.9%). This revision stems from a less unfavorable economic activity performance in the second quarter of 2020 than predicted in the previous scenario. UNCTAD and OECD projections point to similar rates: -4.3% and -4.5%, respectively.
For 2021, the IMF (+5.2% versus +5.4% in June) and the OECD (+5.0%) scenarios practically converge, while UNCTAD estimates a more timid recovery (+4.0%). Considering the Fund's projections, at the end of 2021 global GDP will be 0.6 percentage point above the level of 2019.
Even with the outlook revision, the crisis caused by the COVID-19 pandemic, which the IMF called the “great lockdown”, remains the biggest global economic crisis since the 1930s. The 2008 global financial crisis (GFC) caused just a “major recession”, resulting in a decline of only -0.1% of world GDP in 2009.
The updating of projections in October, pointing to a slightly less severe global recession in 2020 than the July scenario indicated, was entirely due to the smaller contraction forecasted for advanced economies (AEs), -5.8% against -8 % in the previous publication.
Much of this was due to the better GDP performance of the United States and the Euro area in Q2/20. The recovery estimated for these economies in 2021, on the other hand, decreased from 4.8% to 3.9%, which will result in a GDP about 2% below the 2019 level.
In the case of Emerging and Developing Market Economies (EDME), the current scenario projects a -3.3% contraction in 2020, slightly worse than in June (-3.0%). As for the 2021 recovery, it remained practically at the same level (+6% versus +5.9%). Economic activity is expected to fall in all regions, with greater heterogeneity than in advanced economies.
Emerging and developing Asia is expected to experience the mildest recession (-1.7%) in 2020, although more intense than forecasted in June (-0.8%). In 2021, the growth rate is expected to be +8%. The outlook revision for this year stems from the change in projections for the two largest economies in the region.
On the one hand, the growth projection for the Chinese economy in 2020 practically doubled (+1.0% in June to +1.9% in October), a result of the faster than expected normalization of economic activity, countercyclical policies and recovery of exports.
On the other hand, the scenario for India worsened, going against the general trend of improvement in emerging economies (-4.5% in Jun/20 to -10.3% in Oct/20) due to the greater intensity of the pandemic and consequent larger-than-anticipated GDP fall in the second quarter.
In other regions, the scenario points to a more intense recession and a less robust recovery than in emerging and developing Asia. Latin America and the Caribbean, where several countries were seriously affected by the pandemic, will record the biggest drop (-8.1%) in 2020, followed by a timid recovery in 2021 (+3.6%).
The IMF's outlook for the Brazilian economy improved significantly for 2020, from -9.4% in the Jun/20 scenario to -5.8% in October. On the other hand, the 2021 figure worsened, pointing to a more limited GDP recovery: +2.8% against +3.6% in the June scenario.
With the exception of China, the prospects for EDMEs remain precarious due to a combination of factors, including: the pandemic continues to spread and health systems remain overburdened; the importance of sectors particularly affected, such as tourism; the dependence on external financing and remittances from emigrants. This group's GDP, excluding China, is expected to contract -5.7% in 2020 and the 2021 growth (+5.0%) will not be enough for a return to the level of 2019.
The IMF points out that, although less uncertain than in June, its base scenario remains based on assumptions that may not be confirmed due to the unpredictability of several factors, such as the path of the pandemic, the adjustment costs it imposes on the economy, the effectiveness of the economic policy response and the evolution of global investors' risk aversion.
The second wave of COVID-19 underway in Europe and the new restrictions that are being adopted illustrate the inherent difficulty to the elaboration of economic scenarios in the face of unprecedented phenomena.
In order to minimize the likelihood of negative risks materializing, which continue to predominate, the IMF recommends ensuring sufficient resources for health systems and limiting economic losses as an immediate policy priority. To this end, initiatives at the multilateral and national levels are necessary.
International cooperation is necessary to support these systems, as well as to financially assist emerging and developing economies, especially low-income ones, through debt reduction and concessional financing.
Although the G20 launched the Debt Service Suspension Initiative (DSSI) in April, giving 73 low-income countries the possibility to suspend official debt service with bilateral creditors (initially until December 2020, extended to mid-2021 in October), the IMF highlights that the private sector also needs to grant similar treatment to countries.
At the national level, the IMF recognizes that advanced economies, as issuers of reserve currency, have greater scope for the adoption of expansionary fiscal policies than emerging ones, and recommends maintaining these policies as long as the crisis persists.
In addition, fiscal rules that impose restrictions on countercyclical initiatives should be temporarily suspended, while commitment to gradual budgetary consolidation should persist, so as to meet the fiscal rules in the medium term.
On the revenue side, governments should consider a gradual rise in taxes on the wealthiest portion of the population and/or the least affected sectors. Prudent public debt management—with maturity lengthening and interest rates kept at low levels for as long as possible—can free up resources that would otherwise go to debt service payments to, instead, fund crisis-alleviation measures, like income transfer and unemployment insurance programs. As the crisis fades, part of these resources must be channeled to public investments.