The uncertainty continues. Prospects for the development of the world economy. April 2021 IMF Report
Despite improving economic sentiment due to the expansion of vaccination, new virus mutations and growing humanitarian consequences are alarming. Economic recovery trajectories diverge dangerously across countries and sectors, reflecting differences in the disruptions caused by the pandemic and the scale of support measures. One year after the start of the pandemic, the global outlook is still highly uncertain.
Such conclusions were formulated in the new report of the International Monetary Fund “Prospects for the development of the world economy” published in April.
Prospects are not only determined by the outcome of the battle between the virus and vaccines, it also depends on how effective economic policy measures are, taken in an environment of high uncertainty, will limit the long-term damage from this unprecedented crisis.
In many countries, due to the second and third waves of infections, restrictive measures had to be reintroduced. This erratic pace means that the economic recovery is uneven and far from being complete.
Despite the fact that GDP growth was stronger than expected in the second half of 2020, in most countries it lags far behind pre-pandemic trends.
In addition, high-frequency indicators indicate a decrease in its pace in some sectors in early 2021.
Differences between countries
Economic recovery in different countries was determined by the dynamics of the pandemic, movement restrictions put in place to contain its spread, and policy responses.
The decline in output has been particularly strong in countries that depend on tourism and commodity exports, and in countries with limited policy space to respond.
By the beginning of the crisis, the fiscal situation in many of these countries was fragile and they were less able to make a serious public health response, forcing them to implement stricter self-isolation measures to contain the spread of the virus.
Factors such as the share of jobs that can be telecommuted, the share of employment in small and medium-sized enterprises, the depth of capital markets, the size of the informal sector, and the quality of the digital infrastructure also played a role in both the economic downturn and the speed of economic recovery.
Such differences can lead to long-term divergence between countries.
Differences between sectors
Strong demand for goods needed to work from home and the realization of pent-up demand for durable goods in general (especially for cars) are the main drivers of the global economic recovery from the second half of 2020.
After a brief and synchronized decline, industrial production returned to its pre-pandemic levels. However, consumption in high-contact service industries remains subdued as the resumption of economic activity in many countries in May-June, which led to a sudden recovery in the third quarter of 2020, also triggered a second wave of infections and further restrictions on movements in the last months of 2020.
Since the start of the pandemic, tourism, culture and entertainment, sports, hospitality and traditional retail have only used a small share of their capacity, and a significant recovery in them is not expected until the pandemic is fully contained.
A similar situation is observed in the sphere of international trade in goods. Merchandise trade volumes have returned to pre-pandemic levels.
The volume of cross-border trade in services remains reduced.
Vulnerabilities in the labor market
The recovery of the labor market is also not yet complete - unemployment and underemployment are still at elevated levels. Despite emergency support measures (including job retention programs and subsidies on wages), the unemployment rate rose by about 1½ percentage points compared to the pre-pandemic averages in both advanced and emerging market and developing economies.
The proportion of the economically active population has also declined. The true extent of the decline in activity may be even greater than the indicators show, as many countries have introduced or expanded job retention programs (such as the Kurzarbeit program in Germany.
Divergence between asset markets and the rest of the economy
Unlike labor and commodity markets, asset markets are rising despite recent volatility, driven by stimulus measures and anticipation of a normalization due to vaccines.
This discrepancy is double-edged: favorable financial conditions are vital to the recovery of the economy, but wide divergences in estimates and the economic outlook in general raise risks to financial stability.
A year ago, when the global economy seemed to be on the brink of collapse, central banks were quick to provide liquidity and support expanding lending to a wide range of borrowers.
At the same time, the fiscal authorities supported households and companies through transfers, wage subsidies, and liquidity support measures. These measures complemented other components of the social safety net, such as unemployment insurance and food assistance.
Financial regulators in many countries have facilitated the continued provision of credit through a number of measures. Financial conditions were generally favorable.
These changes in risk appetite were reflected in the dynamics of exchange rates; most emerging market and commodity exporter currencies have appreciated, and the US dollar has weakened since last April.
All of these developments helped to limit the increase in shock.
Prospects
Prospects for the development of the world economy are characterized by high uncertainty. In addition to the standard set of specific shocks that are commonly factored into all forecasts, further developments will depend on 1) the dynamics of the pandemic, 2) policy responses, 3) changes in financial conditions and commodity prices, and 4) the ability of the economy to adjust to the sanitary hurdles to economic activity.
Strengthening and weakening of these factors and their combination with country characteristics will determine the pace of economic recovery and the scale of the medium-term damage.