A K-Shaped Recovery, This Time on a Global Scale

WASHINGTON – The global economy is recovering from the coronavirus pandemic faster than previously expected, largely thanks to the strength of the United States. However, the International Monetary Fund warned Tuesday that uneven vaccine adoption poses a threat to the recovery as the fortunes of rich and poor countries diverge.

The global dynamics reflect the “K-shaped” restorations that are taking place around the world. While many wealthy nations face major economic expansion this year, the struggles of other nations could undo decades of progress in fighting poverty. Senior international business figures warned this week that this divergence, exacerbated by sluggish vaccine use in developing countries, poses a threat to stability and long-term growth.

“Economic fortunes vary dangerously within and between countries,” said Kristalina Georgieva, managing director of the IMF, at a panel discussion on 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 immunization programs could lead to a “deeper and longer-lasting crisis of mounting debt, deeply ingrained problems Poverty and Growing Inequality. “

Fears of rising inequality were underscored Tuesday as the IMF improved its global growth forecast for the year thanks to immunization of hundreds of millions of people. These efforts should contribute to a strong economic recovery. The global economy is now expected to grow 6 percent this year, compared to its previous forecast of 5.5 percent after a 3.3 percent decline in 2020.

The richest countries are leading the crisis, especially the United States, whose economies are projected to grow 6.4 percent through 2021. The euro area is expected to grow 4.4 percent and Japan is expected to grow 3.3 percent. according to the IMF

Emerging and developing countries are expected to drive growth from China and India. China’s economy is expected to grow by 8.4 percent, significantly boosting global growth overall, and India is expected to grow by 12.5 percent.

In advanced economies, the low skilled are hardest hit and those who have lost their jobs may have difficulty replacing them. And low-income countries face greater losses in economic performance than developed countries, which reverse poverty reduction gains and risk long-lasting pandemic-era scars.

Emerging economies, in many cases, have fewer resources for fiscal stimulus, vaccine investments and labor retraining – factors that put them at risk of being left behind and stuck when the world begins to flourish.

If their growth slows down sharply, the fact that large economies like the United States are accelerating could make the pain worse. A stronger US growth outlook is already driving market-based US Treasury bond rates higher. In this case, it attracts capital from abroad, making borrowing more expensive in already weak economies and risking currency volatility.

IMF researchers recently pointed out in a blog post that it is important that interest rates on US debt rise due to the improving economic outlook, which will benefit many economies by boosting demand for their exports. Nonetheless, “countries that export less to the US and still rely more on external credit could suffer from the stress of the financial markets.”

Most US officials have focused on how stronger domestic growth could actually help the rest of the world as American consumers buy overseas goods and services. “This year, the US appears to be a locomotive for the global economy,” said Richard H. Clarida, vice chairman of the Fed, in a recent speech.

Ms. Yellen made a similar argument during a panel discussion at the IMF on Tuesday, calling on countries not to give up tax support.

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April 6, 2021, 1:43 p.m. ET

“Stronger growth in the US will have a positive impact on the overall global outlook and we will be careful to learn the lessons of the financial crisis, which is not to withdraw support too quickly,” she said.

There is a risk that spillover will work the other way – slower vaccination advances overseas could weigh on US and global improvement. While around 500 doses of the vaccine were given per 1,000 people in the U.S. based on vaccination data from the New York Times, that number is roughly 1 in 1,000 in Mali and Afghanistan.

Monica de Bolle, a senior fellow at the Peterson Institute for International Economics who studies emerging economies, noted that it may take large parts of the world – including South America and parts of Africa – to achieve comprehensive vaccination by 2023 or later, based on Forecasts from the Economist Intelligence Unit.

“There is currently a race between these varieties of concerns and vaccines,” she said during a webcast event Tuesday. She called for “global cooperation and attention” on how differences in vaccine distribution affect inequality and economic recovery.

The IMF agrees. Vitor Gaspar, the fund’s director of financial affairs, said advanced economies would continue to be at risk even if the virus raged in developing countries that are not major economic powers, noting that the virus has nowhere to be eradicated until it is eradicated everywhere is. For this reason, investing in vaccinations is crucial.

“Global vaccination is probably the highest return global public investment ever considered,” Gaspar said in an interview. “Vaccination policy is economic policy.”

While global political bodies warn of mixed growth and health outcomes, some Wall Street economists have chosen a more optimistic tone.

“We believe market participants are underestimating the likely pace of improvement in both public health and economic activity later in 2021,” wrote Jan Hatzius of Goldman Sachs in an April 5 research note.

Vaccinations are high or advancing in Canada, Australia, the UK and the euro area. In emerging markets, Hatzius said, Goldman economists expect 60 to 70 percent of the population to have “at least some immunity” by the end of the year, if they count previous coronavirus infection and vaccine proliferation.

“The laggards are China and other Asian countries, although this is largely because Asia has been so successful at virus control,” he wrote.

How fast global recoveries go could be critical to the policy outlook, both in government support spending and central bank monetary aid.

From the Fed to the European Central Bank to the Bank of Japan, monetary authorities have used a mix of rock bottom interest rates, huge bond purchases and other emergencies to cushion the effects of the pandemic.

The organizing bodies have reiterated Ms. Yellen’s comment: They argue that it is important to keep the recovery going rather than resorting to economic aid early on.

Global policymakers “generally view the risks to financial stability associated with early withdrawal of support measures as greater than those associated with late withdrawal,” said Randal K. Quarles, vice chairman of the Federal Reserve for oversight and Head of the Global Financial Stability Board. said in a letter posted on Tuesday.

The IMF said Tuesday that it was keeping a close eye on interest rates in the United States, which could pose financial risks if the Fed unexpectedly increases them. She also urged countries to maintain targeted tax support – and be ready to provide more if future virus waves hit.

“We are not out of the woods for all countries and the pandemic is not over yet,” said Gita Gopinath, chief economist at the IMF.

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