This week, the International Monetary Fund (IMF) released their latest forecast which predicts that world GDP will grow by 5.5% in 2021 against a net decline of -3.5% seen in 2020. IMF foresees that first half of 2021 will see softer growth and the growth momentum will increase in the second half. The rebound in 2021 will be driven by the twin-punch of a ‘vaccine-powered’ recovery coupled with policy support in large economies.
However three unknowns cloud these forecasts – (1) pace of easing of pandemic restrictions which depends on (2) speed of rollout of vaccine and timing and amount of the govt stimulus and (3) improvements in financial conditions and growth in commodity prices. For these three factors, the IMF is making these key assumptions which drive it’s growth outlook;
- restrictions to contain pandemic will gradually ease by summer 2021
- broad vaccine availability in most countries by second half of 2022 and as a result transmission of virus being brought to very low levels everywhere by end of 2021
- major fiscal support announced in advanced economies of US, EU and Japan will lift economic activity and spillover into emerging markets
- major central banks in advanced economies will maintain their accommodative stance till end of 2022
- commodity prices will recover and risk with oil predicted to rise 20% from low of 2020
A separate IMF report released this week also, highlighted risks to global financial stability and the key ones which resonate and which loom over the 5.5% predicted world GDP growth are;
- delayed access to vaccines in emerging market countries which since they account for 40% of world GDP (65% if including China)
- financing needs of emerging market countries who have large and persistent fiscal deficits caused by pandemic
- risks to corporate sector where the fallen angels (firms with a BBB- rating) have tripled since before the pandemic. Notably, corporate sector was not a concern in 2020 which actually saw bankruptcies fall compared to previous recessions as a result of the extraordinary fiscal support and policy actions like preventing foreclosures and moratorium on bankruptcies announced in most advanced economies
- risks of inflation and market correction due to stretched asset valuation; in US there is more than 50% probability of inflation being higher than 2%
- risks to financial conditions for poorer and marginalized households and rise in global inequality. As a result of the pandemic almost 90 million people are expected to fall below the extreme poverty threshold in 2020-2021 (this reverses progress against poverty made in last two decades). Coincidentally, the World Economic Forum (WEF) has also released it’s global annual risk report and this risk is prominently mentioned there and will be a topic for further analysis.