IMF forecasts higher and faster but uneven growth in 2021

The International Monetary Fund (IMF) will next week upgrade its growth forecasts for the global economy for this year and next, currently at 5.5% and 4.2%, respectively, reflecting the positive impact of newly approved stimulus and the expected effect of progress on vaccination on the recovery in activity in the second half of 2021, IMF managing director Kristalina Georgieva has unveiled in a speech ahead of the Fund's spring meeting next week.

"Global growth is accelerating, driven by the United States and China," but she also pointed to risks of an out-of-sync recovery across countries. "In January, we were projecting global growth of 5.5 per cent in 2021. Now we expect a further acceleration" of the expansion, Kristalina Georgieva said in a speech ahead of the IMF and World Bank spring meetings.

The IMF managing director did not cite precise figures pending the Washington-based institution's traditional report on the new outlook for the global economy due this year on April 6. But she said the upward revision in growth was due "partly to additional policy support", including US President Joe Biden's mammoth $1.9 trillion plan, and "partly" to expected effects such as vaccination campaigns in advanced economies.

This improvement is the result of an "extraordinary effort" by nurses, doctors, essential workers and researchers around the world, he said, while governments have taken "exceptional" budgetary measures to the tune of a cumulative $16 trillion. Without this synchronised effort, the contraction in global GDP in 2020 (-3.5 per cent) would have been "three times larger", the IMF chief also stressed. But the Fund also sees "a multi-speed recovery increasingly driven by two engines: the United States and China" which are part of "a small group of countries" that will surpass their pre-crisis levels by the end of this year.

However, the Bulgarian economist warned that, "one of the biggest dangers remains extremely high uncertainty". "It all depends on the trajectory of the pandemic," she said, as progress on immunisation is uneven and new strains of the virus hamper growth prospects, "particularly in Europe and Latin America".

In the case of Europe, the IMF managing director urged that efforts be concentrated on accelerating the vaccination process, which is lagging behind the United States."We are focusing on accelerating the vaccination process and I think that policy makers and health authorities in Europe recognise that this is the number one priority," said Georgieva, who is confident that the Old Continent will end up doing exactly the same as other countries with stronger growth expectations after accelerating vaccination. "We expect European countries to experience the same but a quarter later," she said. 

In addition, there could be "more pressure" on vulnerable emerging markets with limited fiscal capacity. "Many are highly exposed to hard-hit sectors, such as tourism," she continued. These countries are also those with restricted access to vaccines while being exposed to a "high" risk of debt overhang.

The Washington institution is therefore concerned about the repercussions of an accelerated recovery in these countries. "Sustained growth in the United States can benefit many countries through increased trade," Georgieva said. But, with economic recovery out of sync around the world, if advanced countries were to dramatically increase their interest rates, this would increase the debt refinancing costs of several emerging countries that are already lagging behind in this recovery.

In these conditions, Georgieva recommends that countries focus on ending the crisis by accelerating the production and distribution of vaccines. She also recommends continuing to support the most vulnerable households to invest in the future, particularly in infrastructure, education and health, emphasising the issue: "that all benefit from a historic transformation towards greener and smarter economies". It also calls for increased international aid to vulnerable countries. He cites a new IMF study showing that low-income countries would need to allocate some $200 billion over five years to fight the pandemic. They would also need an additional $250 billion to "get back on track and catch up with higher income levels". The IMF finally wants to increase its reserves and lending capacity by $650 billion through a new issuance of special drawing rights.