Covid-19 Vaccine Rollout Key for Economic Recovery
COVID-19 caused a global recession whose depth was surpassed only by the two World Wars and the Great Depression over the past century and a half. Although global economic activity is growing again, it is not likely to return to business as usual for the foreseeable future. The pandemic has caused a severe loss of life, is tipping millions into extreme poverty, and is expected to inflict lasting scars that push activity and income well below their pre-pandemic trend for a prolonged period.
The incipient recovery was initially supported by a partial easing of stringent lockdowns. Various restrictive measures have been reintroduced, however, as COVID-19 has continued to spread around the world. Some areas have experienced a sharp resurgence of infections, and daily new cases remain high. That said, there has been substantial progress in the development of effective vaccines, and inoculation has begun in some countries.
A more general rollout in advanced economies and major emerging market and developing economies (EMDEs) is expected to proceed early this year. Most other EMDEs, however, face greater constraints in vaccine procurement and distribution. Until vaccines are widely distributed, effective containment strategies to limit the spread of COVID-19 remain critical.
Following the initial rebound in mid-2020, the global economic recovery has slowed. Whereas activity and trade in the goods sector have improved, the services sector remains anemic, with international tourism, in particular, still depressed. The fall in global investment has been pronounced, particularly for EMDEs excluding China.
Even though financial conditions remain very loose, reflecting exceptional monetary policy accommodation, underlying financial fragilities are mounting. Most commodity prices rebounded from their mid 2020 lows as strict lockdowns were gradually lifted and demand firmed, especially from China; however, the recovery in oil prices was more modest amid concerns over the pandemic’s lasting impact on oil demand.
In all, the global economy is estimated to have contracted 4.3 per cent in 2020 – a 0.9 percentage point smaller collapse than was expected in June forecasts. In advanced economies, the initial contraction was less severe than anticipated, but the ensuing recovery has been dampened by a substantial resurgence of COVID-19 cases.
Meanwhile, output in China is estimated to have rebounded last year at a faster-than expected clip, with particular support from infrastructure spending. China’s strength was an exception, however, and disruptions from the pandemic in the majority of other EMDEs were more severe than previously envisioned, resulting in deeper recessions and slower recoveries, especially in countries with recent large COVID-19 outbreaks.
Prospects for the global economy are uncertain, and several growth outcomes are possible. In the baseline forecast, global GDP is expected to expand four per cent in 2021, predicated on proper pandemic management and effective vaccination limiting the community spread of COVID-19 in many countries, as well as continued monetary policy accommodation accompanied by diminishing fiscal support. Nonetheless, the level of global GDP in 2021 is forecast to be 5.3 per cent below pre-pandemic projections – or about $4.7 trillion. After this year’s pickup, global growth is envisioned to moderate in 2022 to 3.8 per cent – still above its potential pace, but weighed down by lasting damage from COVID-19. By 2022, global GDP is still expected to be 4.4 percent below pre-pandemic projections – with the gap in EMDEs nearly twice as large as in advanced economies – as output remains dampened by lingering risk aversion on the demand side and the effects of diminished physical and human capital accumulation on labour productivity.
Advanced economies are projected to recover, with growth reaching 3.3 percent and 3.5 percent in 2021 and 2022, respectively, on the back of pandemic containment aided by widespread vaccination and sustained monetary policy accommodation, which is expected to more than offset the partial unwinding of fiscal support.
Although aggregate EMDE growth is envisioned to firm to five per cent in 2021 and to moderate to 4.2 per cent in 2022, the improvement largely reflects China’s expected rebound. Absent China, the recovery across EMDEs is anticipated to be far more muted, averaging 3.5 per cent in 2021-22, as the pandemic’s lingering effects continue to weigh on consumption and investment.
Despite the recovery, aggregate EMDE output in 2022 is expected to remain six per cent below its pre-pandemic projection. The pandemic has caused per capita incomes to fall in more than 90 per cent of EMDEs, tipping millions back into poverty. For more than a quarter of EMDEs, the pandemic is expected to erase at least 10 years of per capita income gains – and, in about two-thirds of EMDEs, per capita incomes are projected to be lower in 2022 than they were in 2019.
After more than two decades of steady global poverty reduction, the crisis is projected to push poverty rates back up to levels last seen in 2017. The pandemic has also impeded future prospects for poverty reduction by adversely affecting longer-term productivity growth – the deterioration in confidence has dampened investment, and the loss in learning-adjusted school years and prolonged spells of unemployment have eroded earlier gains in human capital.
In low-income countries (LICs), activity in 2020 shrank 0.9 per cent–the first aggregate contraction in a generation. Growth is forecast to resume at a moderate pace in 2021-22, averaging 4.3 per cent. Nonetheless, output in LICs is expected to remain 5.2 per cent below its pre-pandemic projections by 2022. The pandemic has hit fragile and conflict-affected LICs particularly hard, and their recovery is set to be even more sluggish, in part because the large-scale rollout of vaccines among these economies is expected to lag that of advanced economies and major EMDEs.
The materialisation of a number of downside risks could derail the projected global economic recovery, however. The pandemic could accelerate, and delays in vaccine procurement and distribution could limit the scope for achieving durable containment. Even if the pandemic is brought under control, its effect on potential growth could be longer lasting than expected.
Debt has surged above already-high levels and, although banking systems are generally well capitalised, a wave of bankruptcies could erode bank buffers, putting some countries at increased risk of financial crisis. In contrast, stronger-than-expected growth outcomes could result from improved pandemic management, aided by the rapid rollout of highly effective vaccines, which could trigger a sharp rise in consumer confidence and unleash pent-up demand.
In light of these risks, there are various possible scenarios for the ultimate path for global growth. In particular, in a downside scenario, new cases of COVID-19 would remain persistently higher than in the baseline in many parts of the world, and the vaccine rollout process would be slowed by logistical impediments and general reluctance to be immunised. Activity and financial conditions would deteriorate as a result. In these circumstances, global growth would be much more subdued, only recovering to 1.6 per cent in 2021 and 2.5 per cent in 2022. In a more severe downside scenario including widespread financial stress, global growth could even be negative in 2021.
This exceptional level of uncertainty around the near-term outlook also highlights the role of policy makers in raising the likelihood of better outcomes while warding off worse ones. Effective containment measures are key to avoid disruptive flare-ups of new cases. As such, the top near-term policy priority will continue to be pandemic control, such as sustaining compliance with social distancing and masking guidelines; increasing testing capacity; and, eventually, overcoming challenges in procuring and distributing vaccines, particularly in LICs. Timely and equitable access to vaccines across the world will necessitate global cooperation. Only once the pandemic is contained in all countries will each country be safe from a resurgence.
Even once the pandemic has subsided, the global economic landscape is unlikely to return to its previous state. The pandemic will leave lasting scars on productivity, including through its effect on the accumulation of physical and human capital, which will exacerbate the downward trend in potential growth. Accordingly, beyond the necessary steps to nurture the recovery and protect vulnerable populations in the near term, decisive policy action will be essential to address the far-reaching damage from COVID-19 and ultimately mitigate its compounding effects on the ongoing structural decline in long-term growth.
The prospect of a protracted period of low inflation and interest rates has important implications for both monetary and fiscal policy. In advanced economies, where the room for additional monetary policy support is limited, central bank frameworks are being reassessed, while fiscal policy is playing a more prominent role in macroeconomic stabilisation. Over the longer run, the pandemic has highlighted the urgent need for reforms in advanced economies that harness the productivity benefits of sectoral reallocation and bolster the adoption of automation and digital technologies, along with the strengthening of social safety nets to facilitate this process.
In EMDEs, monetary policy is likely to remain generally accommodative in the near term, helped by subdued inflationary pressures and expectations of prolonged expansionary monetary policy stances in advanced economies. Several EMDE central banks have continued to employ asset purchase programmes. These purchases appear to have been effective at stabilising financial markets during the height of financial stress last March April. Nevertheless, asset purchase programmes need to be accompanied by clearly articulated policy mandates and objectives to avoid the risk that they would erode institutional independence and de-anchor inflation expectations. In addition, EMDEs increasingly face the challenge of preserving financial stability while maintaining accommodative macro-prudential policy stances – such as lowered capital and liquidity requirements – to help facilitate credit availability and support the recovery.
Despite high debt levels, many EMDEs have implemented unprecedented fiscal support in response to COVID-19 to protect lives and livelihoods, confront the collapse in activity, and bolster the eventual recovery. Nevertheless, relative to advanced economies, the amount of support in EMDEs has been far more limited – particularly in countries facing narrower fiscal space, such as LICs. In most advanced economies and EMDEs, much of the fiscal support provided last year is expected to be withdrawn, weighing on growth. Whereas deficits are generally expected to shrink over the forecast, they will nonetheless contribute to rising debt, potentially planting the seeds for future problems –particularly if borrowing is not used efficiently.
Against this backdrop, EMDE policy makers will need to tackle the challenge of avoiding premature fiscal tightening in the short-term, but unwinding fiscal support measures and ensuring fiscal sustainability over the medium term. This will be especially difficult for some countries, given the substantial deterioration of fiscal positions that has occurred in the past year. Accordingly, there is a pressing need for EMDEs to improve domestic revenue mobilisation and prioritise expenditures that yield large growth dividends. Additionally, the erosion of public balance sheets may call for the global community to provide assistance – in some cases including immediate debt relief – for hard-hit fiscally constrained EMDEs to support their most vulnerable populations through the crisis.
EMDE policy makers will also need to make sustained efforts to attenuate the pandemic’s long-term damage to underlying growth and incomes. Addressing the recent increase in food insecurity and safeguarding access to education are essential to promoting the development of human capital. Simultaneously, far-reaching investment in digital and green infrastructure can facilitate sectoral reallocation while enhancing environmental resilience. Improved governance and reduced corruption can lay the foundations for higher longrun growth. Increased debt transparency will be key to mitigate the risk of sovereign debt and financial crises, one of the most pressing threats to growth prospects.
Global cooperation will be essential for supporting vulnerable populations and achieving a sustainable and inclusive global recovery. In light of substantial fiscal constraints and high debt levels, globally coordinated debt relief, predicated on debt transparency, could help many economies – particularly LICs – and provide much-needed fiscal resources to support social protection programmes. More broadly, deeper global collaboration will be needed to develop equitable and sustainable solutions to the world’s most pressing long-term challenges, including tackling climate change and eliminating extreme poverty.