World Economic Outlook 2020

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Context: Recently, IMF published the 2nd edition of the World Economic Outlook in October 2020 after the 1st edition in April 2020. Both the reports focussed on the impact of the coronavirus-led global economic slowdown. According to the report, the global economy is climbing out from the depths to which it had plummeted during the Great Lockdown in April. But with the COVID-19 pandemic continuing to spread, many countries have slowed reopening and some are reinstating partial lockdowns to protect susceptible populations. While the recovery in China has been faster than expected, the global economy’s long ascent back to pre-pandemic levels of activity remains prone to setbacks.

Relevance:
Prelims: Current events of national and international importance. 
Mains: GS III- Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment; Inclusive Growth and issues arising from it.

Theme 

A Long and Difficult Ascent

Key findings

Global Growth Outlook

Near-term outlook:

  • Global growth is projected at -4.4% in 2020, a less severe contraction than forecast in the June 2020 World Economic Outlook Update.
  • The revision reflects better-than-anticipated second-quarter GDP outturns, mostly in advanced economies, where activity began to improve sooner than expected after lockdowns were scaled back in May and June, as well as indicators of a stronger recovery in the third quarter.
  • Global growth is projected at 5.2% in 2021.
  • Following the contraction in 2020 and recovery in 2021, the level of global GDP in 2021 is expected to be a modest 0.6% above that of 2019.
  • The growth projections imply wide negative output gaps and elevated unemployment rates this year and in 2021 across both advanced and emerging market economies.
  • The report also predicted that the output in advanced and emerging economies will remain below 2019 levels, with an exception of China.
  • Manufacturing-led economies recover better than the economies that rely on contact-intensive services and oil export.
  • Uneven recoveries between advanced economies and developing economies are projected in 2020.
  • The report also mentions the severe setback to the improvements in standards of living. It states, “The cumulative loss in output relative to the pre-pandemic projected path is projected to grow from 11 trillion over 2020-21 to 28 trillion over 2020-25.”
  • The pandemic is having particularly adverse effects on economically more vulnerable people, including younger workers and women. The burden of the crisis has fallen unevenly across sectors. In general, low-wage earners are at an appreciably higher risk of losing their jobs than those in the upper quintiles of the wage distribution.


Medium-term outlook:

  • After the rebound in 2021, global growth is expected to gradually slow to about 3.5% into the medium term.
  • This implies only limited progress toward catching up to the path of economic activity for 2020–25 projected before the pandemic for both advanced and emerging market and developing economies. 
  • It is also a severe setback to the projected improvement in average living standards across all country groups.
  • The pandemic will reverse the progress made since the 1990s in reducing global poverty and will increase inequality.
  • People who rely on daily wage labour and are outside the formal safety net faced sudden income losses when mobility restrictions were imposed.
  • Close to 90 million people could fall below the $1.90 a day income threshold of extreme deprivation this year.
  • School closures during the pandemic pose a significant new challenge that could set back human capital accumulation severely.
  • The subdued outlook for medium-term growth comes with a significant projected increase in the stock of sovereign debt.
  • Social distancing will continue into 2021 but will subsequently fade over time as vaccine coverage expands and therapies improve.
  • Local transmission is assumed to be brought to low levels everywhere by the end of 2022.
  • The medium-term projections also assume that economies will experience scarring from the depth of the recession and the need for structural change, entailing persistent effects on potential output.
  • These effects include adjustment costs and productivity impacts for surviving firms as they upgrade workplace safety, the amplification of the shock via firm bankruptcies, costly resource reallocation across sectors, and discouraged workers’ exit from the workforce.
  • Without further action to reduce greenhouse gas emissions, the planet is on course to reach temperatures not seen in millions of years, with potentially catastrophic implications.
  • An initial green investment push combined with steadily rising carbon prices would deliver the needed emission reductions at reasonable transitional global output effects, putting the global economy on a stronger and more sustainable footing over the medium term.

Significant Risks of More Severe Growth Outcomes

Fundamental uncertainty regarding the evolution of the pandemic makes it difficult to provide a quantitative assessment of the balance of risks.

On the upside:

The recession could turn out to be less severe than projected if economic normalization proceeds faster than currently expected in areas that have reopened, without rekindling infections.

  1. Extensions of fiscal countermeasures- The current forecast factors in only the measures implemented and announced so far. As such, the overall fiscal policy stance in advanced and emerging market economies is expected to turn significantly less accommodative in 2021, in line with the projected handoff to private-activity-led growth.
  2. Extensions of fiscal countermeasures would lift global growth above the projected baseline in 2021.
  3. Faster productivity growth could be engendered by changes in production, distribution, and payment systems- from new techniques in medicine to new data‑enabled services and remote working across broader sectors of the economy.
  4. Advances in therapies may allow health care systems to better manage infection loads, while changes in the workplace and by consumers to reduce transmission may allow an activity to return more quickly to pre-pandemic levels without triggering repeated waves of infection.
  5. Production of a safe, effective vaccine would prevail over all other upside risk factors. If produced at the needed scale and distributed worldwide at affordable prices, such a vaccine would lift sentiment and yield better growth outcomes than in the baseline, including by allowing for a fuller recovery in contact-intensive sectors and travel.

Downside risks, however, remain significant. They include the following:

  1. Outbreaks could recur in places- If the virus resurges, and progress on treatments and vaccines is slower than anticipated or countries’ access to them remains unequal, economic activity could be lower than expected, with renewed social distancing and tighter lockdowns.
    • Cross-border spillovers from weaker external demand could further magnify the impact of the country- or region-specific shocks on global growth.
  2. Premature withdrawal of policy support, or poor targeting of measures because of design and implementation challenges, could lead to the dissolution of otherwise viable and productive economic relationships, exacerbating misallocation.
    • Financial conditions may again tighten, as in March, exposing vulnerabilities. A sudden stop in new lending (or failure to roll over existing debt) would tip some economies into debt crises and slow activity further.
  3. Liquidity shortfalls and insolvencies-
    • Deep recessions invariably entail widespread liquidity shortfalls as firms suffer immediate revenue losses but still have to meet payroll expenses, cover fixed costs, and fulfil debt service obligations.
    • Prolonged liquidity shortfalls can readily translate into bankruptcies and firm closures. This time around, there have been a few prominent bankruptcies, for example in retail and rental car sectors, and the rate of corporate bond defaults more broadly is at its highest since the global financial crisis.
    • However, the aggressive and swift policy countermeasures have so far likely prevented even more widespread bankruptcies.
    • But considering the severity of the recession and the possible withdrawal of some of the emergency support in some countries, the risk of a wider cross-section of firms experiencing deep liquidity shortfalls and bankruptcies is tangible.
    • Such events would lead to large job and income losses, further weakening demand.
    • At the same time, they would deplete bank capital buffers and constrain credit supply, compounding the downturn.
  4. Intensifying social unrest- 
    • Instances of social unrest increased globally in 2019 before declining during the early part of the pandemic.
    • While ultimate causes vary across countries, in many cases, these include declining trust in established institutions and lack of representation in governance structures, as well as a perceived disconnect between leaders’ priorities and the problems faced by the public.
    • In June, social unrest increased in the United States and quickly spread worldwide in protests against institutional racism and racial inequality.
    • More widespread or longer-lived protests could hurt sentiment and further weigh on activity. Intensifying social unrest may also complicate the political economy of reform efforts, to the detriment of medium-term growth or the sustainability of public finances.
  5. Geopolitical tensions- 
    • While seeming to de-escalate during the pandemic, geopolitical tensions could again flare-up.
    • Moreover, frayed ties among the OPEC+ coalition of oil producers (Organization of the Petroleum Exporting Countries, including Russia and other non-OPEC oil exporters) pose risks for global oil supply.
    • A renewed plunge in prices as seen in March would severely hurt activity in oil exporters and lead to weaker growth than projected.

  6. Trade policy uncertainty and technology frictions-
    • Despite the recent reaffirmation of the Phase One trade deal between the United States and China signed at the start of the year, tensions between the world’s two largest economies remain elevated on numerous fronts.
    • Moreover, the United Kingdom’s transitional arrangement with the European Union expires on December 31, 2020.
    • If the two sides fail to agree and ratify a trade deal before then, trade barriers between them are set to rise significantly, which would increase business costs and could disrupt long-standing cross-border production arrangements.
    • In addition, the bulk of the distortionary tariff and nontariff barriers instituted over the past two years remain in place.
    • The World Trade Organization Appellate Body has ceased functioning because of the impasse over appointments, casting doubt over the enforceability of World Trade Organization legal commitments.
    • Moreover, with the spread of trade disputes to the technology domain, global supply chains face additional threats from a bifurcation of technology standards and platforms.
    • On the positive side, the trade agreement between Canada, Mexico, and the United States came into force on July 1, helping to lower near-term trade policy uncertainty.
    • But lingering frictions (for example, on aluminium, rules of origin in the auto sector, and dairy trade) could hamper implementation.
    • Trade policy uncertainty could increase again in these contexts or in discussions involving other trading partners, weighing on global growth.
  7. Weather-related natural disasters- 
    • The increased frequency and intensity of weather-related natural disasters, such as tropical storms, floods, heatwaves, droughts, and wildfires have inflicted a devastating humanitarian toll and widespread livelihood loss on many regions in recent years (for example, Australia, the Caribbean, eastern and southern Africa, South Asia).
    • Climate change, a principal driver of more frequent and intense weather-related disasters, already has had visible impacts- and not just in regions where the disasters strike.
    • The disasters could also contribute to cross-border migration and financial stress (for example, in the insurance sector) or add to disease burdens.
    • Moreover, they can have persistent effects long after the event itself (as seen, for example, in parts of eastern Africa, where heavy rainfall in late 2019 and earlier this year have contributed to an extreme locust infestation– the worst in decades- that has imperilled food supplies in the region).
Findings Related to India
  • Industrial production in India has been severely hit amid economic slowdown followed by the COVID-19 crisis.
  • The IMF’s World Economic Report of October 2020 mentions that India will be worst affected in both the short and long term.
  • IMF’s WEO proposed that Bangladesh’s per capita income is expected to be higher than India’s in 2020.
  • It projected the growth rate of 8.8% in 2021.
  • The IMF stated, “The economy is projected to contract by 10.3% in 2020.”

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Policy Priorities- What needs to be done?

The IMF observed that the pandemic is set to widen inequality between economies and within nations. So, the IMF has urged greater international cooperation.

Besides combating the deep near-term recession, policymakers have to address complex challenges to place economies on a path of higher productivity growth while ensuring that gains are shared evenly and debt remains sustainable.

  1. Tax and spending measures: 
    • These should privilege initiatives that can help lift potential output, ensure participatory growth that benefits all, and protect the vulnerable.
    • The additional debt incurred to finance such endeavours is more likely to pay for itself down the road by increasing the size of the economy and future tax base than if the borrowing were done to finance ill-targeted subsidies or wasteful current spending.
  2. Social spending and infrastructure development:
    • Investments in health, education, and high-return infrastructure projects that also help move the economy to lower carbon dependence can further those objectives.
    • Safeguarding critical social spending can ensure that the most vulnerable are protected while also supporting a near-term activity, given that the outlays will go to groups with a higher propensity to spend their disposable income than more affluent individuals.
  3. R&D:
    • Research spending can facilitate innovation and technology adoption– the principal drivers of long-term productivity growth.
  4. Access to vaccines for all:
    • A key priority is funding advance purchase commitments at the global level for vaccines currently under trial to incentivize rapid scaling up of production and worldwide distribution of affordable doses.
    • For example, by bolstering multilateral initiatives for vaccine development and manufacture, including the Coalition for Epidemic Preparedness Innovations and Gavi, the Vaccine Alliance.
    • This is particularly important given the uncertainty and risk of failure in the search for effective and safe vaccines.
    • It is imperative for all countries to work closely to ensure that new treatments and vaccines are made available to all.
    • This is because wider and faster availability of medical solutions could boost global income by almost $9 trillion by end-2025.
  5. Financial support to low-income countries:
    • Several emerging markets and developing economies- in particular low-income countries- require support from the international community through debt relief, grants, and concessional financing.
    • The global financial safety net can further help countries deal with external funding shortfalls. Since the onset of the crisis, the IMF has expeditiously provided funding from its various lending facilities to about 80 countries at unprecedented speed.
  6. Digital economy:
    • Countries should also cooperate on the design of international corporate taxation to respond to the challenges of the digital economy.
  7. Defusing trade and technology tensions: Multilateral cooperation is needed to defuse trade and technology tensions between countries and address gaps for instance in services trade- in the rules-based multilateral trading system.
  8. Climate change mitigation:
    • Countries must also act collectively to implement their climate change mitigation commitments.
    • Joint action- particularly by the largest emitters-  that combines steadily rising carbon prices with a green investment push is needed to reduce emissions consistent with limiting increases in global temperature to the targets of the 2015 Paris Agreement.
    • A broadly adopted, growth-friendly mitigation package could raise global activity through investment in green infrastructure over the near term, with modest output costs over the medium-term as economies transition away from fossil fuels toward cleaner technologies.
    • Relative to unchanged policies, such a package would significantly boost incomes in the second half of the century by avoiding damages and catastrophic risks from climate change.
    • Moreover, health outcomes would begin to improve immediately in many countries thanks to reduced local air pollution.
  9. Focus on health:
    • The global community should also take urgent steps to strengthen its defences against calamitous health crises.
    • For example- by augmenting stockpiles of protective equipment and essential medical supplies, financing research, and ensuring adequate ongoing assistance to countries with limited health care capacity, including through support of international organizations.

Additional Information

About International Monetary Fund:

  • IMF (Bretton Woods Institution) is an organization working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
  • Created in 1945, the IMF is governed by and accountable to the 189 countries that make up its near-global membership. India Joined on December 27, 1945.
  • The IMF's primary purpose is to ensure the stability of the international monetary system- the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other.
  • The Fund's mandate was updated in 2012 to include all macroeconomic and financial sector issues that bear on global stability.

About the World Economic Outlook:

  • WEO is a survey by the IMF that is usually published twice a year in the months of April and October.
  • It analyzes and predicts global economic developments during the near and medium-term.
  • In response to the growing demand for more frequent forecast updates, the WEO Update is published in January and July between the two main WEO publications released usually in April and October.



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