The guardians of the global economy this week confronted a sobering view of the pandemic’s long-term impact six months after it shut down much of the world, though with some reason to be more upbeat.
“The story is less dire than we thought three months ago, but dire nonetheless,” International Monetary Fund Managing Director Kristalina Georgieva said during annual meetings with the World Bank that were held virtually. She and her colleagues warned that policy makers must not prematurely end support in order to avoid setbacks.
Unprecedented central bank action and $12 trillion of fiscal support helped stave off a deeper collapse, leaving the global economy poised to rebound to pre-pandemic output next year on strong growth forecast for China.
Here are some of key takeaways from the proceedings:
Economic Pain and Progress
The IMF forecast a 4.4% global contraction for this year, the deepest since the Great Depression but less than its prior estimate of 5.2% in June. Policy responses around the world have propelled debt to record levels that most governments haven’t yet begun to fully confront.
In the US and other advanced economies, that means a couple years of acute pain even with fiscal stimulus and monetary policy easing the blow. Suffering may last longer in Latin America, where the fund sees average per capita income remaining below 2015 levels through 2025.
Fiscal and monetary steps have helped cushion the world from an even uglier outcome, but the endgame can’t come until there’s a medical fix.
“Until we have a durable exit from the health crisis, we will be faced with difficulties, uncertainty, and uneven recovery,” Georgieva said Wednesday after a meeting with Group of 20 finance ministers and central bankers.
China Leads the Way
China’s taming the virus has safeguarded its economy and made the nation just about the only bright spot.
Overall, the fund sees global output by the end of 2021 being 0.6% higher than at the end of 2019, before the pandemic, but that’s driven almost entirely by China. Most other nations, including the US, will need to wait until at least 2022 to see full recovery to pre-virus levels.
The world’s second-largest economy will boost its share of global growth to 27.7% in 2025, almost triple that of the US, according to Bloomberg calculations using IMF data.
Meanwhile, the Asian nation is also owed almost 60% of the bilateral debt that the world’s poorest countries are due to repay this year, making Beijing’s participation in debt relief a key factor in the recovery prospects for crisis-stricken nations.
Help for the Poorest
While extending temporary debt relief for the world’s poorest nations until mid-2021 is a good step, the Bretton Woods institutions and some countries see the move as just delaying inevitable write-offs.
The debt of the 73 poorest nations eligible for the G-20’s Debt Service Suspension Initiative climbed to a record $744 billion last year, according to the World Bank. So far, they’ve had just $5 billion in relief from the program. The European Network on Debt and Development likened the relief to “draining out the Titanic with a bucket” and argued it only pushed debt risk further down the road.
World Bank President David Malpass called on banks and investment firms to provide more relief, adding that “private creditors and non-participating bilateral creditors should not be allowed to free-ride on the debt relief of others,” an implicit criticism of China. Georgieva also lamented the lack of progress, while the G-20 planned another meeting to push ahead on the issue and said that it could issue another six-month extension of debt relief next year.
Spending to the Rescue
The IMF underscored that countries shouldn’t prematurely remove fiscal stimulus and signaled that additional US measures would be welcome. While the IMF forecast 3.1% growth in the world’s largest economy next year, it said another round of stimulus like the package passed in March could add about 2 percentage points to the expansion pace.
Still, the IMF warns that soaring debt eventually will challenge policy makers as the global ratio of borrowing to gross domestic product reaches a record 100% this year and is poised to keep climbing. While low interest rates and faster growth will help, the fund says countries must think about how to boost revenues through digital taxes and from high-income earners.
Brace for Climate Change
The climate crisis also was a key topic of discussion, with Georgieva warning that the virus is just a preview of the looming global challenge.
“If you don’t like the pandemic, you’re not going to like the climate crisis one iota,” she said in a panel with Larry Fink. The BlackRock chief executive officer said that the pandemic is accelerating the need to confront climate change, and that the private sector is doing more than governments to tackle the problem.
Regulators and corporations are facing greater pressure to set universal standards for the growing sustainable finance industry. Climate solutions are fast becoming a key business for banks and fund managers given the need for trillions of dollars in investment in everything from renewable energy to electric vehicles.
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