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The global economy is finally emerging from the worst phases of the COVID-19 pandemic, although with prospects diverging starkly across regions and countries, the IMF says in its Global Financial Stability Report unveiled Tuesday (April 6) in Washington, DC.
IMF says the global economy is projected to grow at 6 percent in 2021, moderating to 4.4 percent in 2022. That is a big turnaround from an estimated contraction of –3.3 percent in 2020 when the world was hit by pandemic.
“So relative to our January forecast, we are upgrading growth to 6% for 2021 and 4.4% for 2022. This reflects the additional fiscal support provided in the United States, vaccination efforts that are going to lead to a strengthening of recovery in the second half of this year, and also the continued resilience of economic activity to the pandemic in many parts of the world,” said IMF chief economist Gita Gopinath.
Tobias Adrian, Director of the Monetary and Capital Markets Department at the International Monetary Fund, however said: “Extraordinary policy measures have eased financial conditions and supported the economy, helping to contain financial stability risks. But those rescue efforts may have unintended consequences and sow the seeds of future financial market instability.”
He added: “Continuing policy support remains necessary — but targeted macroprudential measures should pre-empt a legacy of vulnerabilities. Global financial conditions are still easy. But there is a risk that an asynchronous and divergent recovery — between Advanced and Emerging Markets — may result in tighter financial conditions and portfolio outflows in Emerging Market economies.”
“For many Frontier Markets, access to funding remains a major challenge, given their limited access to bond markets. The corporate sector is emerging from the pandemic overindebted, facing high solvency risk. Meanwhile, in the banking sector, concerns about the credit quality of hard-hit borrowers and about the profitability outlook are likely to weigh on banks’ risk appetite,” Adrian warned.
The United States received a big upgrade in its growth prospects earlier Tuesday in the IMF’s World Economic Outlook. That has global markets concerned over a rise of US long-term interest rates, worried that a rapid and persistent increase may result in tighter financial conditions.
“The recent rapid increase in long-term U.S. interest rates has clearly caused concern among investors. While this move was driven by higher growth and inflation expectations, boosted by progress on vaccination prospects and the ensuing economic recovery, it also likely reflects uncertainty about the future path of monetary policy and concerns about the increased supply of Treasury debt to finance the fiscal expansion, Adrian said the report showed.
“A rapid and persistent increase in rates may result in a repricing of risk and a tightening in financial conditions at a time when valuations are stretched — and when the recovery may still be fragile. Such a tightening of financial conditions could interact with elevated financial vulnerabilities, creating knock-on effects on confidence and endangering macro-financial stability,” said Adrian
The economic trauma would have been much worse if the global economy had not been supported by the unprecedented policy action taken by central banks and by the fiscal measures implemented by governments.
“Looking ahead, continuing policy support remains necessary. But policy measures should also address financial vulnerabilities to avoid a legacy of structural problems. There is a pressing need to act,” Adrian urged.
“Addressing corporate-sector weaknesses and repairing balance sheets is a priority. Advanced Economies should tighten selected macroprudential tools to safeguard financial stability while avoiding a broad tightening of financial conditions, Emerging Markets should rebuild buffers, to prepare for a potential repricing of risk and a reversal of capital flows,” he recommended.
The IMF, along with other international institutions, is ready to support troubled economies in the uncertain times ahead,” said Adrian.
Meanwhile, IMF chief economist, Gita Gopinath, has stressed that a high degree of uncertainty surrounds the IMF’s projections as the pandemic is yet to be defeated and virus cases are accelerating in many countries.
That’s leading to diverging recoveries both across and within countries, as economies with slower vaccine rollout, more limited policy support, and more reliant on tourism do less well.
“The biggest risk right now is still the pandemic, if there are new virus variants that evade the vaccine, then that could lead to a sharp downgrade. But if, on the other hand, there’s faster roll out of vaccinations, then that could uplift the outlook,” said Gopinath.
She also added that multi-speed recoveries could pose financial risks if interest rates in the United States rise further in unexpected ways. This could cause inflated asset valuations to unwind in a disorderly manner, financial conditions to tighten sharply, and recovery prospects to deteriorate, especially for some highly leveraged emerging markets and developing economies.
“The second big risk is to financial conditions. We see multispeed recoveries and we have seen interest rates go up. If interest rates go up even further in a more disorderly fashion than that could have negative implications for several countries, especially for some highly vulnerable emerging and developing economies,” said Gopinath
Policy makers will need to continue supporting their economies while dealing with more limited policy space and higher debt levels than prior to the pandemic, Gopinath added. This requires better targeted measures to leave space for prolonged support if needed.
“Given that we are not out of the woods, it is very important for policy support to be continued in this crisis. Of course, countries are dealing with high debt levels, so they’ll have to make sure this support is better targeted and well-tailored to countries specific economic conditions, the stage of the recovery they are in and the structural characteristics of the economy,” she added.
She also urged central banks to keep access to money easy in the current environment.
“Monetary policy should also remain accommodative while proactively addressing financial risks that we do see using macro prudential tools,” said Gopinath.
Read the full report here
