Prospects for the development of the world economy, October 2020. IMF report
The global economy is recovering from a sharp decline that occurred during “Great Self-isolation”. However, as the pandemic continues to spread, many countries have slowed down the process of easing restrictions, and some are reintroducing partial self-isolation measures to protect vulnerable people. Although China is recovering faster than expected, the global economy's long climb back to pre-pandemic levels of economic activity is still fraught with setbacks.
This is the main conclusion of the follow-up report of the International Monetary Fund "Prospects for the development of the world economy", published in October.
Global growth prospects and risks
Short-term prospects
According to the forecasts of the authors of the report, in 2020 the growth of the global economy will be -4.4 percent. This is a more modest drop than projected in the June 2020 edition of the WEO. The change was influenced by more favorable GDP dynamics in the second quarter, mainly in advanced economies.
Following the end of lockdown measures in May and June, economic activity began to improve earlier than expected, with indicators showing more significant recovery in the third quarter.
In 2021, global growth is projected at 5.2 percent. This reflects a more moderate decline projected in 2020 and meets expectations of maintaining social distance. After the reduction in 2020 and recovering in 2021, global GDP in 2021 is expected to be slightly higher than in 2019 by 0.6 percent.
Growth projections take into account the large negative gap between actual and potential output and elevated unemployment as in advanced and emerging market economies this year and 2021.
Medium term prospects
In the October report, the IMF experts for the first time since the beginning of the crisis publish a medium-term forecast of economic growth.
While significant uncertainties remain, following a projected pickup in global economic activity in 2021, growth is expected to slow down significantly going forward.
Both advanced and emerging market economies are likely to face significant output contractions relative to pre-pandemic projections.
Small states are in particularly difficult situation, as well as countries dependent on tourism and countries in whose economy a key role is played by exchange commodities.
Most countries expect lasting damage to potential supply due to the footprint left by this year's deep recession and the need for structural changes. The persistent decline in output is associated with a serious decline in living standards relative to those expected before the pandemic.
For the first time in more than twenty years, not only will extreme poverty rise, but inequality will also increase, as women, informal workers and those with relatively low levels of education have been disproportionately affected by the crisis.
An additional problem is connected with the decline in human capital accumulation following widespread school closures.
In addition, government debt levels are expected to rise substantially, while lower potential output means a shrinking tax base, making debt service more difficult. On the positive side, the prospect of keeping interest rates low for a longer period, coupled with a projected recovery in economic growth in 2021, could help reduce debt service burden in many countries.
To ensure that the debt trajectory remains sustainable over the medium term, governments may need to increase tax progressivity and ensure that corporations pay their fair share of taxes while eliminating wasteful spending.
Risks
The uncertainty around the baseline forecast is unusually high. The forecast is based on public health and economic factors that are inherently difficult to predict.
The first level of factors relates to the evolution of the pandemic, the necessary public health response, and the attendant disruption to domestic economic activity, especially in sectors involving many face-to-face contacts.
Another source of uncertainty is the scale of global secondary effects from sluggish demand, reduced tourism and lower remittances.
The third set of factors includes the mood on the financial market and their influence on global capital flows.
Progress in the development of vaccines and treatments, as well as changes in workplaces and consumer behavior to reduce transmission of the virus, could ensure the return of economic activity to pre-pandemic levels faster than currently predicted, without triggering a resurgence of infections.
If the incidence rises sharply, development of treatments and vaccines will be slower than expected, or countries will not have equal access to them, economic activity could be lower than expected due to the resumption of social distancing and tighter self-isolation measures.
Taking into consideration the severity of the recession and the possible withdrawal of emergency support measures in some countries, an increase in bankruptcies could increase job and income losses. Deteriorating financial market sentiment could trigger a sudden halt in new lending to vulnerable countries (or a refusal to roll over existing debt). And cross-border spillovers from lower external demand could amplify the impact of country-specific shocks.