While vaccines are being rapidly rolled out worldwide, growing infections rates are threatening to drag out global economic recovery even further, and this is prompting a rethink of growth forecasts.
“While the global economy has started to climb back from the depths of the crisis, the recent resurgence in infections and spread of new variants is delaying our recovery,” said Antoinette M. Sayeh, Deputy Managing Director of the International Monetary Fund (IMF), at an economic summit this week.
Over the last year, countries have together pushed $14 trillion in fiscal support to households and firms worldwide and $9 trillion in monetary support through interest rate cuts and other measures by central banks, to help combat the health crisis that forced global economic growth to a crawl.
Long road to recovery
In its latest forecast released a week earlier, IMF projects global growth at 5.5 per cent in 2021, faster than the 5.2 per cent projected last October, which reflects the positive effects of vaccinations in some countries, adaptation to containment measures, and continued policy support.
“But just to be clear, we are still only in February,” said Sayeh. “And there is tremendous uncertainty around this forecast – especially considering that we ended 2020 with a contraction of 3.5 per cent, meaning the worst peacetime recession since the Great Depression.”
“How we fare over the next few months will be critical—much of it will depend on the outcome of the race between the mutating virus and vaccines, and on the ability of countries to provide continued support until herd immunity is achieved and the recovery is fully underway.”
Uncertainty levels still high
Global uncertainty reached unprecedented levels at the beginning of the COVID-19 outbreak and remains elevated. Aside from the coronavirus pandemic, UK-European Union Brexit negotiations have also added to significant uncertainties, as well as fluctuating US-Chinese relations.
The World Uncertainty Index shows that although uncertainty has come down by about 60 per cent from the peak observed at the onset of the COVID-19 pandemic in the first quarter of 2020, it remains about 50 percent above its historical average during the 1996-2010 period.
The World Uncertainty Index is a quarterly measure of global economic and policy uncertainty covering 143 countries. Economic growth in key systemic economies, like those of the US and the EU, is a key driver of economic activity in the rest of the world.
Some economies rebound faster
“Advanced economies with more fiscal space are, of course, expected to recover faster; but, around half of all emerging markets and developing economies – who were previously converging with advanced economies in per capita income – are now expected to diverge,” Sayeh further added.
A local projections analysis of past epidemics suggests that their initial impact on the level of potential output is relatively short-lived, tending to dissipate two years after the end of the epidemic.
However, it should be noted that the past epidemics considered in the analysis were – with the exception of the swine flu – mostly localised events which are not comparable to a major global pandemic.
In contrast, financial crises are associated with a significant and very persistent downward shift in potential output. The results for past financial crises suggest a loss of around 5 per cent even after eight years post-crisis.
Some forecasts deteriorate
The near term outlook for the global economy has deteriorated since December after most developed economies increased COVID-19 restrictions, European Central Bank governing council member and Ireland’s central bank chief Gabriel Makhlouf remarked earlier this week.
The world economy won’t be able to fully repair last year’s damage to employment in 2021 after the COVID-19 pandemic wiped out the equivalent of 255 million jobs, according to the International Labour Organisation.
However, coronavirus vaccines and broad government financial relief efforts are still seen providing a stronger tailwind for the global economy this year.
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