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Four key themes from the IMF Spring Meetings 2021

  • Global growth revised upward, but with divergence between and within countries and more limited policy space in EM vs AE

  • Like January WEO, revisions driven by progress on vaccination and AE fiscal stimulus, but with an even greater jump

  • Sole new theme is that IMF believes risk of AE inflation and taper tantrum impact on EM is overstated

Four key themes from the IMF Spring Meetings 2021
Patrick Curran
Stuart Culverhouse
Stuart Culverhouse

Head of Sovereign & Fixed Income Research

Tellimer Research
19 April 2021
Published by

We attended the IMF/World Bank Spring Meetings (virtual edition) over the week of 5-9 April. In this note, we provide an overview of the global context, drawing on the latest IMF WEO, Fiscal Monitor, and our own country discussions. We will publish a summary of our specific country meetings separately.

We identify four key global themes from the meetings (the first three of which echo the January WEO update, the fourth of which is new):

  • Global growth revised upwards…

  • …but with divergence between and within countries…

  • …and more limited policy space in EM/FM versus advanced economies

  • Risk of inflation and taper tantrum in advanced economies overstated

Global growth revised upwards, but with divergence between and within countries

After contracting by an estimated 3.3% in real terms in 2020, the global economy is projected to rebound strongly by 6.0% this year and 4.4% in 2022. Relative to the October 2020 WEO, this represents an upward revision of 1.1% in 2020, 0.8% in 2021 and 0.2% in 2022, while compared to the January WEO update, growth in 2020 is 0.2% higher, growth in 2021 is 0.5% higher and growth in 2022 is unchanged.

2021 growth projection

*Note: the IMF divides countries into advanced economies (AE), emerging market and developing economies (EMDE), and low-income developing countries (LIDC). Herein, we use our own terminology by referring to EMDE as emerging markets (EM) and LIDC as frontier markets (FM).

The 2020 revisions were due to higher-than-expected growth outturns in H2 "after lockdowns were eased and economies adapted to new ways of working." Meanwhile, the 2021 and 2022 revisions reflect "additional fiscal support in a few large economies and the anticipated vaccine-powered recovery in the second half of the year." This mirrors the rationale for the upward revisions in the January WEO update, but this time around the revisions were two-thirds larger, potentially reflecting even more confidence about the growth outlook as economic data in the US continues to surprise to the upside and more details emerge about the vaccine rollout globally, and Biden's stimulus plan in the US.

Growth revisions

However, revisions vary widely by country, with growth in advanced economies revised by +0.8% in 2021 versus +0.4% for EM and -0.8% for FM compared to the January WEO (although the large downward revision for FM is due in part to the +0.8% revision in 2020 versus +0.2% in advanced economies and FM, giving it a stronger base). This brings total revisions since October to +1.2% for advanced economies, +0.7% for EM, and -0.6% for FM (with similar base effects, with 2020 growth over that period revised up by +1.1% in advanced economies and EM and +1.2% in FM).

Despite relatively strong revisions in advanced economies, growth is still higher for EM with a projection of 6.7% in 2021 and 5% in 2022 for EM versus 5.1% in 2021 and 3.6% in 2022 for advanced economies. This means that EM will continue to close the income gap over time, albeit at a slower rate than anticipated in October or January. However, with growth of just 4.3% in 2021 and 5.2% in 2022, low-income countries will actually see the income gap with advanced economies widen this year and narrow only marginally in 2022. Adjusting for relatively high population growth in FM, the per capita income gap will widen in both years.

Real per capita income growth

Cumulative per capita income losses from 2020–22 compared to pre-pandemic projections reach 20% across EM/FM (excluding China) versus just 11% across advanced economies, with an additional 95 million people entering extreme poverty in 2020. Medium-term scarring from the pandemic is also likely to be worse in EM/FM than advanced economies, contrary to the experience of the global financial crisis when advanced economies experienced relatively more severe scarring, with nominal GDP actually expected to be higher in the US in 2024 relative to the pre-Covid baseline.

Medium-term scarring

Within country inequality is also likely to worsen, with younger, lower-skilled, and female workers all experiencing greater job losses in 2020 than their relatively well-off older, higher-skilled, and male counterparts. The Covid shock has also hit sectors that are more vulnerable to automation particularly hard, accelerating pre-pandemic employment trends, and poses a risk to human capital accumulation in countries and regions with pre-existing deficiencies (such as limited access to electricity and internet). 

More limited policy space and vaccine access in EM/FM

Inequality will be exacerbated by a lack of vaccine access and policy space in EM/FM compared to advanced economies. On the vaccine front, the IMF says that 16% of the world’s population has pre-purchased 50% of the existing doses, while procurement data suggest that most people in EM countries will not be vaccinated before 2022, hampering their recovery (we have written extensively on unequal access to vaccines – see here and here).

On the fiscal policy front, the IMF estimate there has been US$16tn in global pandemic-related fiscal actions taken through 17 March 2021 (US$10tn of additional spending and forgone revenue and US$6tn of government loans, guarantees, and capital injections). The IMF says that last year’s economic collapse could have been around 3x larger without the policy response, but fiscal space has been extremely uneven across countries with above-the-line spending in 2020 reaching 16.4% of GDP in advanced economies versus 4.2% in EM and 1.7% in FM (as we wrote about last summer – see here).  

Fiscal support

Further, the rise in public debt and fiscal deficits has left most EM/FM countries with less fiscal space than advanced economies, meaning that all but 0.5% of GDP of measures in EM/FM have expired even as advanced economies implement an average of 6% of GDP of fiscal support this year and 2.2% next year (versus only 0.1% of GDP in EM and 0% in FM). The IMF urges policymakers to balance the risks from large and growing public and private debt with the risks from premature withdrawal of fiscal support, but this balance will prove much more difficult for EM/FM countries to manage without the ability to borrow money at low or sub-zero rates or simply print it ad infinitum in the vein of Modern Monetary Theory.

Budget balances

Government debt

Risk of inflation and taper tantrum in advanced economies overstated

The IMF also seemingly dismissed rising concerns over higher inflation and interest rates in advanced economies spilling over to tighter financial conditions in EM/FM. For one, trimmed-mean inflation rates (which eliminate extreme price changes to approximate underlying inflation) point to declining, not increasing, inflation pressure in advanced economies. And even if output gaps are less negative than previously estimated, they should only lead to runaway inflation if they turn large and positive for an extended period of time and monetary policy fails to react timely and forcefully enough to rising inflation expectations.

Trimmed mean inflation

The IMF suggests that "a gradual and well-telegraphed normalization of US interest rates driven by a recovering US economy would likely be manageable for most emerging market economies." On the one hand, an unexpected signal of higher future US policy rates that is not driven by changes in US economic conditions (eg a hawkish shift in the Fed’s reaction function) would lead to tighter financial conditions in EM. However, US rate increases based on upside surprises to economic or vaccine data or inflation expectations should have a relatively benign impact on EM financial conditions.

These findings mimic our previous analysis. The one caveat is that there appears to be a real and significant "risk channel" impact, whereby unexpected policy tightening in the US has a disproportionate impact on countries already seen as riskier investments by driving up the term premium (with limited impact on expected policy rates). This suggests that, if the current taper tantrum episode persists, it could cause a further divergence between riskier credits and currencies and their more stable peers.