A K-shaped recovery, this time on a global scale

WASHINGTON – The world economy is recovering from the coronavirus pandemic faster than expected, thanks in large part to the strength of the United States. But the International Monetary Fund warned Tuesday that an uneven launch of vaccines poses a threat to the recovery as the fortunes of rich and poor countries diverge.

The global dynamics echoes the “K-shaped” recoveries that are unfolding around the world. While many wealthy nations are poised for a major economic expansion this year, the struggles of other nations could reverse decades of progress in fighting poverty. Senior international economic officials warned this week that this divergence, which is amplified by the slow rollout of vaccines in developing countries, is a threat to long-term stability and growth.

“Economic fortunes within countries and between countries are dangerously diverging,” Kristalina Georgieva, the IMF’s managing director, said in a panel discussion Tuesday during the annual spring meetings of the fund and the World Bank.

This week, Treasury Secretary Janet L. Yellen emphasized that point, saying in a speech that the inability of low- and middle-income countries to invest in robust vaccination programs could result in “a deeper and more lasting crisis, with growing debt problems, deeper poverty and growing inequality. “

Fears about rising inequality were underscored Tuesday when the IMF said it was improving its global growth forecast for the year thanks to vaccinating hundreds of millions of people, efforts expected to help fuel a strong economic rebound. It now expects the world economy to expand 6 percent this year, up from its previous 5.5 percent projection, after a 3.3 percent contraction in 2020.

The richest countries are leading the way out of the crisis, particularly the United States, whose economy is forecast to expand 6.4% in 2021. The euro area is expected to expand 4.4% and Japan will expand 3.3%. according to the IMF

Among emerging market and developing economies, China and India are expected to drive growth. China’s economy is projected to expand by 8.4 percent, offering its own significant boost to overall global growth, and India’s is expected to expand by 12.5 percent.

But within advanced economies, low-skilled workers have been hit the hardest, and those who lost their jobs may have a hard time replacing them. And low-income countries face greater losses in economic output than advanced economies, reversing gains in poverty reduction and risking lasting scars from the pandemic era.

In many cases, emerging market economies have fewer resources for fiscal stimulus, vaccine investments, and workforce recycling – factors that put them at risk of being left behind and stagnating as the world begins to recover.

If their growth lags long, the fact that big economies like the United States are accelerating could compound the pain. A stronger US growth outlook is already driving market-based interest rates on US government debt higher. As that happens, it attracts capital from abroad, making borrowing more expensive in already weak economies and putting currency volatility at risk.

IMF researchers noted in a recent blog post that it was important that US debt rates are rising due to a stronger economic outlook, which will benefit many economies by fueling demand for their exports. Even so, “the countries that export less to the United States but that depend more on external debt could suffer tensions in the financial markets.”

Most American officials have focused on how stronger domestic growth could help the rest of the world as American consumers buy foreign goods and services. “This year, the United States looks like it’s going to be a locomotive for the global economy,” said Richard H. Clarida, vice chairman of the Fed, during a recent speech.

Ms Yellen made a similar argument Tuesday during a panel discussion at the IMF, urging countries not to back down on fiscal support.

“Stronger growth in the United States will have a positive impact on the entire global landscape and we will be careful to learn the lessons of the financial crisis, which is ‘don’t withdraw support too quickly,'” he said.

There are risks that side effects work the other way around: Slower vaccination progress abroad could weigh on US and global improvement. While about 500 doses of the vaccine have been administered per 1,000 people in the United States, according to vaccination data from the New York Times, that number is about 1 in 1,000 in Mali and Afghanistan.

Monica de Bolle, a senior fellow at the Peterson Institute for International Economics who studies emerging markets, noted that large swaths of the world, including South America and parts of Africa, could take as long as 2023 or later to reach widespread vaccination, according to forecasts. from The Economist Intelligence Unit.

“There is a race right now between these variants of concern and vaccines,” he said during a webcast event Tuesday. He urged “global cooperation and attention” on how disparities in vaccine distribution affect inequality and economic recovery.

The IMF agrees. Vitor Gaspar, the fund’s director of fiscal affairs, said advanced economies would remain at risk even if the virus spread to developing countries that are not great economic powers, noting that the virus cannot be eradicated anywhere until it is eradicate everywhere. For that reason, he said, investing in vaccines is critical.

“Global vaccination is probably the world’s highest-yielding public investment ever,” Gaspar said in an interview. “Vaccination policy is economic policy.”

While global policy bodies warn of divergent growth and public health outcomes, some Wall Street economists have taken a more optimistic tone.

“We believe that market participants underestimate the likely rate of improvement in both the public health situation and economic activity in the remainder of 2021,” wrote Jan Hatzius of Goldman Sachs in an April 5 research note.

Vaccinations are high or progressing in Canada, Australia, Great Britain and the euro area. In emerging markets, Hatzius wrote, Goldman economists expect 60 to 70 percent of the population to have “at least some immunity” by the end of the year when counting previous coronavirus infection and vaccine proliferation.

“The laggards are China and other Asian countries, although this is mainly because Asia has been so successful in controlling the virus,” he wrote.

The rapidity with which global recoveries are proceeding could be critical to the policy outlook, both in government support spending and in monetary aid from the central bank.

From the Fed to the European Central Bank to the Bank of Japan, monetary authorities have used a combination of rock-bottom interest rates, large bond purchases and other emergencies to try to cushion the consequences of the pandemic.

Organizing bodies have echoed Ms Yellen’s comment: they argue that it is important to carry out recovery, rather than withdrawing financial aid early.

Global policymakers “generally view the risks to financial stability associated with early withdrawal of support measures as currently greater than those associated with a late withdrawal,” Randal K. Quarles, vice president of supervision at the Federal Reserve and director of the Global Financial Stability Board, it said in a letter published Tuesday.

The IMF said on Tuesday it was closely monitoring interest rates in the United States, which could pose financial risks if the Fed unexpectedly raises them. He also urged countries to maintain targeted fiscal support and to be prepared to provide more if future waves of the virus emerge.

“For all countries, we are not out of the woods and the pandemic is not over,” said Gita Gopinath, IMF chief economist.

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