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IMF global forecast paints relatively upbeat picture amid pandemic uncertainty

  • Vaccines and policy support are expected to lift activity from Q2 after a softening in momentum in early 2021

  • Global growth projected at 5.5% in 2021, up 30bp compared to the previous forecast, largely led by Advanced Economies

  • But the recovery is uneven, with differentiation within EM, while poor countries have less policy space

IMF global forecast paints relatively upbeat picture amid pandemic uncertainty
Stuart Culverhouse
Stuart Culverhouse

Head of Sovereign & Fixed Income Research

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Tellimer Research
27 January 2021
Published byTellimer Research

The IMF published its annual January update to the World Economic Outlook (WEO) yesterday. It presents a relatively upbeat picture for global macroeconomic prospects this year, despite the recent rise in infections and emergence of new more transmissible variants, as vaccine approvals offer the prospect of a turnaround in the pandemic later this year and the global economy is buoyed by ongoing policy support.

However, it also reveals contrasting fortunes within EM, with considerable differentiation expected between China and other economies. Oil exporters and tourism-based economies face particular challenges.

Global forecast

Global growth is projected at 5.5% in 2021, an increase of 30bp compared to the previous forecast in the October WEO, and 4.2% in 2022. The IMF note that this is a stronger starting point for the 2021-22 forecast. As well as positive vaccine news, economic momentum was stronger than expected in H2 2020. Additional policy measures at the end of the year – in the US and Japan - provide further support to the outlook.

The upgrade in global growth is particularly large for Advanced Economies (AE). Their growth is projected at 4.3% this year (+40bp compared to the October forecast), following -4.9% in 2020. This is led by big upwards growth revisions in the US (+2ppts, from 3.1% to 5.1%) and Japan (+80bp), reflecting additional fiscal support. Most other AE are expected to see weaker growth than expected this year. Growth in the Eurozone is revised down by 1ppt.

Emerging Markets (EM) see growth of 6.3% this year (+30bp compared to the October forecast), following -2.4% last year. India sees the biggest upward revision (+2.7ppts). The growth forecast for China is relatively unchanged at 8.1% (-10bp), following 2.3% last year. Turkey, Brazil and Mexico also see healthy upward revisions. At the other end of the scale, meaningful downward revisions are seen in Indonesia, Saudi Arabia and Argentina.

Size of IMF growth revisions for 2021 in selected countries

However, the renewed surge in infections and new lockdown restrictions will soften activity in early 2021, although this is expected to give way to rising momentum in the second quarter due to the vaccine rollout. The IMF baseline assumes broad vaccine availability in AE and some EM in summer 2021 and across most countries by the second half of 2022. But there is uncertainty about the vaccine rollout, logistical challenges, and take-up, which will impact the resumption of contact intensive activity. The virus is expected to be brought to "low levels everywhere" by the end of 2022.

An uneven recovery

Despite the expected recovery, the IMF note that the deep contraction last year (-3.5%, albeit a better outcome than previously expected, by 90bp) has had an adverse distributional impact, especially on women, youth, the poor, the informally employed, and those who work in contact-intensive sectors.

Moreover, global activity will remain well below pre-Covid levels in the years to come (ie lasting GDP losses). Projected GDP losses in EM amount to 4.6%, rising to 6.2% in SSA, 6.9% in Latin America and 8.0% in emerging Asia ex China, compared to 2.5% in Advanced Economies. The US and China seem to fair the best, with GDP in 2022 expected to be only about 1.3% and 1.5% below pre-Covid levels respectively in each country; surprisingly similar figures given the contrasts in how they were impacted by the pandemic and their response to it.

Policy recommendations

Global financial conditions are expected to remain supportive. Major central banks are assumed to keep policy rates unchanged to the end of 2022. Additional fiscal policy support will also boost activity in some countries, although lower deficits are expected in most countries in 2021.

As for emerging markets, the IMF notes that where debt sustainability is not at risk and where inflation expectations are well anchored, authorities should maintain fiscal and monetary support. Exchange rate flexibility can also help to absorb the impact of shocks. However, the IMF acknowledge that temporary capital flow management (CFM) measures – capital controls – may be useful for some countries in certain circumstances. But Low-Income Countries (LICs) have less policy space. Support through concessional lending and/or debt relief will be needed. The IMF caution that "debt restructuring may be unavoidable for some countries".