IMF improves growth prospects for all economies, including Latin America
The institution warns that the world economy still faces extreme socio-economic tensions and ensures that much remains to be done to reverse the pandemic and avoid divergences and inequalities
The world economy will grow 6% in 2021, moderating that increase to 4.4% in 2022, according to the latest report from the International Monetary Fund on World Economic Outlook.
"One year after the COVID-19 pandemic, the world community still faces extreme socio-economic tensions while human losses grow and millions remain unemployed," says the document, which despite this highlights that "the way out of this crisis health and economic is getting closer and closer ”.
The stimulation of the economy throughout this year is attributed by the Fund "to the ingenuity of the scientific community", which has achieved that millions of people are being administered vaccines.
In addition, economies also continue to adapt to new forms of work despite restricted mobility, and this has allowed a more vigorous recovery than anticipated in all regions. Additional fiscal support provided in large economies, especially the United States, contributed to further improving prospects.
However, one of the great problems observed by the institution is that "the recovery will be uneven and will require multilateral efforts to safeguard the progress made before the pandemic in reducing inequality and alleviating poverty."
The United States may grow even more than without a pandemic
The Fund's forecasts indicate higher global growth in 2021 and 2022 mainly due to upward revisions for advanced economies, especially a significant revision in the case of the United States (1.3 percentage points) , where growth is expected to be 6.4% this year. This means that the United States would be the only major economy where GDP is projected to exceed the forecast level for 2022 had the pandemic not occurred.
Other advanced economies, including the euro area, will also rebound this year, but at a slower pace.
Within the group of emerging market and developing economies, China is projected to grow 8.4% this year. Although the Asian country's economy had already returned to its pre-COVID GDP level in 2020, it is expected that many other countries will not do so until 2023.
Outlook for Latin America
The economy of Latin America and the Caribbean will grow 4.6% in 2021, according to the Fund, which revises the growth forecasts it made in January for the region up by one percentage point.
"After a sharp decline in 2020, only a mild and multi-speed recovery is expected in Latin America and the Caribbean in 2021," after the regional economy sank 7% in 2020.
The three major economies of Latin America, Brazil, Mexico and Argentina will grow this year 3.7%, 5%, and 5.8%, respectively. Colombia, for its part, will rise 5.1%; Chile, 6.2%; and Peru 8.5%. On the contrary, Venezuela will suffer an economic contraction of 10%.
The IMF warns that long-term prospects continue to depend on the trajectory of the pandemic. "With some exceptions - for example, Chile, Costa Rica or Mexico - most countries have not obtained enough vaccines to cover their population," they highlight.
The projection for the Caribbean economies, which depend on tourism, has been revised downward by 1.5 points to 2.4%.
Huge challenges ahead
However, the future poses huge challenges. The pandemic has not yet been defeated and cases of infection are accelerating in many countries. There is also a dangerous divergence in the recovery between the different countries and within each country, given that the situation is less favorable in economies where vaccine distribution is slower, economic policy support is more limited and dependence of tourism is higher.
This divergence in recovery trajectories is likely to deepen disparities in living standards across countries compared to pre-pandemic expectations.
Compared to pre-pandemic forecasts, annual per capita GDP loss in 2020–24 is projected to average 5.7% in low-income countries and 4.7% in emerging markets , while for the advanced economies smaller losses are expected, of 2.3%.
These losses have erased progress in poverty reduction: 95 million more people are expected to fall into extreme poverty in 2020 compared to pre-pandemic projections.
Inequality within countries
The recovery is also uneven within each country, as young workers and the less skilled continue to be much more affected. As the crisis has accelerated the transformative forces of digitization and automation, many of the lost jobs are unlikely to reappear; that will require a reallocation of workers across sectors, which often punishes earnings severely.
Policies around the world were swiftly adopted that prevented the outcome from being much worse, including a $ 16 trillion fiscal support. Our estimates indicate that last year's severe collapse could have been three times worse without such supportive policies.
As a financial crisis was averted, medium-term losses of around 3% are expected to be lower than after the 2008 international financial crisis. However, unlike in the aftermath of that crisis, Low-income and emerging market countries are expected to have the greatest scars given their limited policy space.
Recovery at different speeds
The global outlook is surrounded by a high degree of uncertainty. A more rapid advance in vaccination could improve the prognoses, while a further prolongation of the pandemic with variants of the virus that cannot be prevented by vaccines could lead to a drastic downward correction of the prognoses.
Recoveries at different speeds could pose financial risks if interest rates continue to rise in the United States in unforeseen ways, which could lead to a disorderly correction of overvalued assets, an abrupt tightening of financial conditions and a deterioration in the prospects for recovery. especially for some highly leveraged emerging market and developing economies.
Policymakers will have to continue to provide support to economies while coping with more limited room for maneuver and higher debt levels than before the pandemic.
This will require better targeted measures that allow room for prolonged support if necessary. In a context in which the recovery proceeds at different speeds, an approach adapted to each situation will be necessary, with well-calibrated policies depending on the stage of the pandemic, the strength of the economic recovery and the structural characteristics of each country.
Prioritizing health spending
At this time, the emphasis should be on getting out of the health crisis by prioritizing spending on health care: vaccinations, treatment and health infrastructure. Fiscal policy must be properly targeted to support affected businesses and households.
Monetary policy must continue to support faster growth (as long as inflation is contained), while managing risks to financial stability proactively using macroprudential measures.
As the pandemic is defeated and labor market conditions normalize, support measures, such as job retention, should be gradually withdrawn. At that time, more emphasis should be placed on the reassignment of workers, including through targeted hiring subsidies and retraining programs and training for the acquisition of new job skills.
As some exceptional measures such as the moratorium on debt payments are withdrawn, the cases of company insolvency could increase, with which in many countries one in ten jobs would be at risk.
To limit long-term damage, countries should consider converting prior liquidity support (loans) to capital-featured support for viable businesses, while developing out-of-court restructuring frameworks to accelerate eventual bankruptcies.
Resources will also need to be dedicated to helping children make up for the instructional time they lost during the pandemic.
Once the pandemic is over, progressive taxes are needed
Once the health crisis is over, policies can focus more on building resilient, inclusive and greener economies, both to strengthen recovery and increase potential output.
As priorities, investments should be made in green infrastructure to help mitigate climate change and in digital infrastructure to stimulate productive capacity, and strengthen social assistance to prevent further increasing inequality.
Financing these initiatives will be more difficult for economies with limited fiscal space. In such cases it will be essential to improve tax capacity, increase the escalation of taxes (on income, real estate and inheritance), establish a carbon pricing system and eliminate unnecessary expenses.
All countries must anchor their policies in credible medium-term frameworks and adhere to the highest standards of debt transparency that help contain borrowing costs and eventually reduce debt to build reserves for the future.
At the international level, countries must primarily collaborate to achieve universal vaccination. While some countries will achieve widespread vaccination by the third quarter of this year, most, and especially low-income countries, will have to wait until the end of 2022 to do so.
Accelerating vaccinations requires increasing vaccine production and distribution, avoiding export controls, fully funding the COVAX initiative, which many low-income countries depend on for doses, and ensuring equitable global transfers of surplus doses.
The authorities should also continue to guarantee adequate access to international liquidity. Large central banks should provide clear guidance on future action, well in advance to avoid turmoil such as those caused by the withdrawal of monetary stimulus in 2013.
Low-income countries would benefit from a longer pause in repayment of debt. debt under the Debt Service Suspension Initiative and the implementation of the G-20 Common Framework for an orderly debt restructuring. A new allocation of special drawing rights from the IMF will provide the liquidity needed to hedge in times of great uncertainty.
Although all eyes are on the pandemic, progress in resolving trade and technology tensions is essential. Countries should also cooperate on climate change mitigation, modernization of international corporate taxation, and measures to limit cross-border transfer of profits and tax avoidance and evasion.
Over the past year, there have been significant policy innovations and a gigantic expansion of support at the national level, especially in advanced economies that have been able to afford it.
Now an equally ambitious effort is needed at the multilateral level to secure the recovery and build a stronger foundation for the future. Without additional efforts to give everyone a fair chance, the disparity between countries' living standards could widen significantly, and gains in global poverty reduction that took decades to achieve could be reversed.