The global economy has reached a fork in the road.
This is the advice the IMF provided to the recent G20 meeting of Finance Ministers and Central Bank Governors.
As the world continues to climb back from the worst peace time recession since the Great Depression, the prospects and pace of any recovery are, in the IMF’s view, “diverging dangerously across countries and regions”.
The question is will policy makers in the major economies take any action to prevent this great divergence.
Looking at global GDP figures masks the problem. The global economy is recovering and we will see economic growth of close to 6% this year and in excess of 4% next year – but it will be a very different journey and experience for the advanced economies compared to the lower income developing nations.
The numbers are stark.
The IMF estimate that the major economies will recover to be only 13% below their pre-crisis levels at the end of 2022, compared with 18% below for low income countries. However emerging and developing economies will be a full 22% shy of their pre-crisis GDP.
This could throw 90 million people into extreme poverty.
This is the first reversal in over 20 years and the worst setback to the first of the world’s Sustainable Development Goals. Developing economies would fall behind again and income inequality increase, undoing years of progress.
There is little surprise in why the forecast economic recovery will be so uneven. Vast differences in vaccination timelines and varying abilities and willingness to provide policy support are key.
Vaccines are likely to become widely available in G-20 advanced economies and some emerging market economies in 2021. But for the rest of the world, broad coverage for vaccinations is not expected until 2022 or later. Early inter-actions on Covax, the global initiative to ensure vaccine access, such as withdrawing stocks or insisting on domestic demands having priority, doesn’t give much heart.
Differences in how much governments were able to provide support is the other key factor. Decisive policy support, both fiscal and monetary, in G-20 economies has helped to prevent worse outcomes. G-20 governments have provided US$ 14 trillion in crisis related fiscal support. This has provided businesses and individuals with the necessary liquidity and credit to stay afloat, limiting the damage to economies’ productive potential.
The level of support has been such that in many G-20 economies, the number of corporate bankruptcies was lower in 2020 than in 2019!
There has also been a clear link between what level of support governments could provide and unemployment levels. Government support has been instrumental protecting the labour markets in European economies while elsewhere we have seen savage job losses in areas like Latin and South America.
It was not a level playing field. In 2020, advanced economies spent 24% of GDP in fiscal support; for low income countries this figure was less than 2%
Pandemics do nothing good for inequality. Both within and across countries, it is the young, the low skilled, women, informal workers, the already marginalised who have been particularly hard hit. Prolonged unemployment erodes skills, while reduced access to education can have a life-time impact. UNESCO estimate the 900 million learners are still affected by school closures today.
The IMF is highlighting how dangerous this economic divergence between advanced and developing economies is. But this divided world forecast is not yet our destiny -however it requires decisive concerted action from the G-20 countries.
The IMF identifies three priorities; accelerate vaccine roll out in poorer countries, step up support to vulnerable countries and continue the fight against the economic crisis at home.
Whether governments are prepared to raise their heads over national parapets is the question.
But as Kristalina Georgieva, Head of the IMF notes in her note to the G-20 – the crisis is not over anywhere until it is over everywhere.
Tradewinds 