A K-Shaped Recovery, This Time Globally

The global economy is rebounding from the coronavirus pandemic faster than expected, thanks in large part to the strength of the United States. But the International Monetary Fund warned on Tuesday that an uneven deployment of vaccines posed a threat to the recovery as the fortunes of rich and poor countries diverge.

The global dynamic echoes the “K-shaped” covers happening around the world. While many rich countries are poised for major economic expansion this year, the struggles of other nations could reverse decades of progress in the fight against poverty. Senior international economic officials warned this week that this divergence, which is amplified by the slow roll-out of vaccines in developing countries, is a threat to long-term stability and growth.

“Economic fortunes within countries and between countries diverge dangerously,” IMF Managing Director Kristalina Georgieva told a roundtable Tuesday at the annual spring meetings of the fund and the World Bank.

This week, Treasury Secretary Janet Yellen made the point, saying in a speech that the failure of low- and middle-income countries to invest in robust immunization programs could lead to “a deeper and more lasting crisis, with growing debt problems, more entrenched poverty and growing inequalities. ”

Fears of rising inequality were highlighted on Tuesday as the IMF announced it was improving its global growth forecast for the year by vaccinating hundreds of millions of people, efforts that should help fuel a strong economic recovery. He now expects the global economy to grow 6% this year, up from his previous projection of 5.5%, after contracting 3.3% in 2020.

The richest countries are leading the way out of the crisis, in particular the United States, whose economy is now expected to grow by 6.4% in 2021. The euro zone is expected to grow by 4.4% and Japan 3.3%, according to the IMF.

Among emerging and developing economies, China and India are expected to drive growth. China’s economy is expected to grow 8.4%, providing its own significant boost to overall world growth, and India’s is expected to grow 12.5%.

But in advanced economies, low-skilled workers have been hit hardest and those who have lost their jobs may find it difficult to replace them. And low-income countries face greater losses in economic output than advanced economies, reversing the gains in poverty reduction and risking the long-standing scarring of the pandemic.

In many cases, emerging market economies have fewer resources for fiscal stimulus, vaccine investments and workforce retraining – factors that put them at risk of falling behind and getting stuck. as the world begins to rebound.

If their growth is lagging far behind, the fact that large economies like the United States are accelerating could make the pain worse. The stronger US growth outlook is already pushing up market interest rates on US government debt. Over time, it attracts capital from abroad, making borrowing more expensive in already weak economies and potentially causing currency volatility.

IMF researchers stressed in a recent blog post that it is important for US debt rates to rise due to the strengthening economic outlook, a situation that will benefit many economies by boosting demand for their exports. However, “countries which export less to the United States and which depend more on external borrowing could feel tensions in the financial markets”.

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

Yellen made a similar point on Tuesday at a roundtable at the IMF, in which she urged countries not to abandon budget support.

“Stronger growth in the United States 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 to ‘not withdraw support too quickly'”, a- she declared.

There are risks the fallout could work the other way around – a slowdown in vaccination progress overseas could weigh on the US and global improvement. While about 500 doses of the vaccine have been given per 1,000 people in the United States, according to immunization data from the New York Times, the number is about 1 in 1,000 in Mali and Afghanistan.

Monica de Bolle, a senior researcher at the Peterson Institute for International Economics who studies emerging markets, noted that large parts of the world – including South America and parts of Africa – could take until 2023 or later to achieve widespread vaccination, based on forecasts from the Economist’s Intelligence Unit.

“There is a race right now between these worrisome variants and vaccines,” she said on a webcast on Tuesday. She called for “global cooperation and attention” on how disparities in vaccine distribution affect inequalities and economic recovery.

The IMF agrees. Vitor Gaspar, the fund’s director of fiscal affairs, said advanced economies would continue to be threatened even if the virus raged in developing countries that are not great economic powers, noting that the virus cannot be eradicated. leaves as long as it is not eradicated everywhere. For this reason, he said, investing in immunization is essential.

“Global immunization is possibly the highest return global public investment ever envisioned,” Gaspar said in an interview. “Vaccination policy is economic policy.”

As global political bodies warn of divergent growth and public health outcomes, some Wall Street economists have taken a more optimistic tone.

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

Vaccinations are high or increasing in Canada, Australia, Britain and the euro area. In emerging markets, Hatzius wrote, Goldman economists expect 60% to 70% of the population to have “at least some immunity” by the end of the year, counting infections prior to coronavirus and vaccine proliferation.

“The laggards are China and other Asian countries, although this is mainly because Asia has been successful in combating viruses,” he wrote.

How quickly global recoveries unfold could be critical to the political outlook, both in terms of government support spending and central bank monetary assistance.

From the Fed to the European Central Bank and the Bank of Japan, monetary authorities have used a mix of extremely low rates, huge bond purchases, and other emergencies to try to dampen the fallout. the pandemic.

Organizing bodies echoed Yellen’s comment: They argue that it is important to see the recovery come to an end, rather than withdrawing aid quickly.

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

The IMF said on Tuesday it was closely monitoring interest rates in the United States, which could pose financial risks if the Fed unexpectedly raises them. He also urged countries to maintain targeted budget support – and be prepared to provide more if future waves of the virus emerge.

“For all countries, we are not out of the woods and the pandemic is not over,” said Gita Gopinath, IMF chief economist.