IMF raises global economic forecast but warns of uneven recovery and daunting challenges

The growth outlook depends on the outcome of the battle between the virus and vaccines

The IMF and the World Bank hold their Spring Meetings online this week. AP

The International Monetary Fund raised its global economic forecast for a second time this year as a result of quicker Covid-19 vaccination campaigns and fiscal and monetary support provided by governments and central banks, But it warned policymakers about wider income gaps and an uneven recovery as richer countries rebound faster from the pandemic.

The global economy is now set to grow by 6 per cent this year, compared with a previous forecast of 5.5 per cent, the Washington lender said in its latest update to its World Economic Outlook on Tuesday.

The revision comes after a 3.3 per cent contraction last year as Covid-19 disrupted trade, hindered travel and caused lockdowns worldwide as unemployment and poverty rose.

Next year's growth is projected at 4.4 per cent, compared with an earlier estimate of 4.2 per cent.

The fund issues its growth forecasts every three months and is holding its spring meetings this week alongside the World Bank. The growth outlook depends on success of vaccination programmes and how effectively economic policies can limit lasting damage from the world's deepest recession since the Great Depression, the fund said.

While medium-term losses for the global economy were expected to be smaller than during the aftermath of the 2008 crisis, "the cross-country pattern of damages is, however, likely to be different this time," the IMF's chief economist Gita Gopinath said.

Poor countries and emerging markets were set to endure more hardship, compared to a decade earlier when advanced economies were hit hard hit by the global financial crisis, Ms Gopinath said.

“These divergences, however, are not just occurring between countries but also within them," she said.

Income inequality within countries is set to increase due to young workers and those with relatively lower skills being more heavily affected in not only advanced but also emerging markets and developing economies, according to the fund.

The fund said 150 economies are unlikely to return to pre-pandemic levels this year, with the figure dropping to 110 countries next year.

Female employment rates remain below those of men and continues to exacerbate disparities, Ms Gopinath said.

Employment declined in sectors with larger concentrations of younger or lower-skilled workers and in sectors that are more vulnerable to automation. Many of the jobs lost amid the pandemic are unlikely to return due to hastened digitisation and automation, she said.

The divergent recovery paths of countries are poised to create wider gaps in living standards, compared with pre-pandemic expectations.

The average annual loss in per capita gross domestic product from 2020 to 2024 is projected to be 5.7 per cent in poor countries and 4.7 per cent in emerging markets, while losses in advanced economies are expected to be smaller at 2.3 per cent.

The losses are reversing gains recorded in efforts to reduce poverty, Ms Gopinath said. An additional 95 million people were considered extremely poor last year, compared with pre-pandemic projections.

On Monday, the fund extended $238m in debt service relief to 28 poor countries through to October 15.

The revision in global growth is largely underpinned by advanced economies expanding about 5.1 per cent this year, compared with a previous forecast of 4.3 per cent, after they contracted 4.7 per cent last year.

The US, the world’s largest economy, is set to benefit from the Biden administration’s $1.9 trillion recovery package that has been compared to former president Franklin D. Roosevelt’s New Deal economic programme, which helped the country out of the Great Depression.

Growth in the US is now projected at 6.4 per cent this year after it contracted shrank 3.5 per cent last year.

European growth will be more muted as countries on the continent face challenges with the distribution of vaccines.

Several European countries have had to lock down amid looming second and third waves of Covid-19 infections.

Germany, Europe’s largest and the world’s fourth-biggest economy, is now expected to grow 3.6 per cent this year.

France’s economy is expected to rebound by 5.8 per cent while Italy, which was hard hit by the pandemic and had the second-highest number of coronavirus deaths last April, will rebound by a modest 4.2 per cent.

China will grow 8.4 per cent this year. The world's second-biggest economy introduced strict movement restrictions to contain the pandemic and was able to reopen its economy and grow 2.3 per cent last year. Japan, the world’s third-largest economy, is projected to grow 3.3 per cent after it contracted by a similar degree last year.

India, which has the third-highest rate of infections in the world after the US and Brazil, is set to grow by 12.5 per cent after contracting 8 per cent last year.

The UK, the world’s sixth-largest economy, is projected to grow 5.3 per cent after a 9.9 per cent contraction last year.

Mena economies are expected to grow an average 4 per cent this year after shrinking 3.4 per cent.

Saudi Arabia, the Arab world’s largest economy, is set to grow 2.9 per cent after shrinking about 4.1 per cent. The UAE's economy is set to expand by 3.1 per cent. Egypt, the Arab world’s third-largest economy, is set to grow 2.5 per cent.

Global trade is set to improve after a rebound in the second half of last year due to pent-up demand for consumer durables from advanced economies such as cars and the resumption of supply chains in emerging markets, the fund said.

Trade is now set to expand 8.4 per cent this year and 6.5 per cent next year after shrinking 8.5 per cent in 2020, according to the fund’s estimates.

Inflation in advanced economies is this year set to remain below central bank targets of 1.6 per cent and average 4.9 per cent in emerging market and developing economies.

The fund raised its projections on oil prices. It now expects the price of oil to be about $58.52 a barrel this year and $54.83 a barrel next year. The average price of oil was $41.29 a barrel last year.

Ms Gopinath repeated her cautionary remarks in January regarding persistent uncertainty about growth and the pace of recovery around the world.

“Much still depends on the race between the virus and vaccines. Greater progress with vaccinations can uplift the forecast, while new virus variants that evade vaccines can lead to a sharp downgrade," she said.

"Large divergences in recovery speeds also raise the prospect of divergent policy stances.”

The IMF said last year’s “severe collapse could have been about at least three times as large had it not been for the swift policy support worldwide”.

Globally, governments provided $16tn in fiscal support last year, backed by $9tn in monetary accommodation from central banks.

Last year’s downturn saddled emerging market and developing countries with more debt and limited their capacity to address rising poverty and inequality levels.

Looking ahead, Ms Gopinath said “averting divergent outcomes will require, above all, resolving the health crisis everywhere”.

“Economic policies will need to limit persistent damage, secure the recovery and prepare for the post-Covid world, while being mindful of available policy space,” she said.

Given the limitations of countries and higher debt levels, policies need to be “better targeted to maintain the ability to support economic activity through this uncertain period as the race between the virus and vaccines unfolds”, Ms Gopinath said.

“A tailored approach will be necessary, with policies well-calibrated to the stage of the pandemic, strength of the economic recovery and social and economic circumstances of individual countries," she said.

“Once the health crisis is over, policy efforts can focus more on building resilient, inclusive and greener economies, both to bolster the recovery and to raise potential output.”