Hopes and fears for global recovery

The recovery from the shock of Covid-19 was quicker and stronger than anybody expected a year-and-a-half ago. This we owe to a big scientific and organisational achievement: the development and mass production of effective vaccines. A depressingly large proportion of humanity is suspicious of this modern miracle. Yet this success and the recovery it has brought with it are not unalloyed joys: they bring new anxieties and challenges. That is the best way to read the latest World Economic Outlook and Global Financial Stability Reportfrom the IMF.

The biggest concern must be over the pandemic itself. As of late September 2021, 58 per cent of the population of high-income countries was fully vaccinated, against 36 per cent in emerging economies and a miserable 4 per cent in low-income countries. More than half of the world’s countries are not on track to vaccinate 40 per cent of their populations this year. The report assumes sufficient success with the global vaccination programme to bring Covid-19 under control by the end of next year. But the slow rollout increases the risk that new variants will falsify this hope.

The economic recovery, too, brings a number of concerns. Overall, it is strong, with global economic growth forecast at 5.9 per cent this year and 4.9 per cent next year. Both are what was expected in July. Even so, the Fund forecasts significant economic scarring, with the signal exception of the US, whose output in 2024, it forecasts to be 2.8 percentage points higher than it did in January 2020. (See charts.)

The biggest scars will be in Asian emerging economies (excluding China), whose output is now forecast to be 9.4 percentage points lower in 2024 than forecast in January 2020. For Latin America, the reduction is at 5 percentage points, for the world at 2.3 percentage points and for China, at 2.1 percentage points lower. But for high-income economies (other than the US) it is forecast at a mere 0.3 percentage points.

In general, Covid has affected the weakest countries and most vulnerable people the most. This is partly because they were exposed more directly to the blows and partly because they lacked the ability to cushion them, either medically or financially. Thus, in high-income and emerging and developing economies, the biggest job losses were among the young and the low-skilled. Children have suffered disruption to their schooling everywhere, but again particularly the offspring of the poor.

Despite the recovery, employment is below pre-pandemic levels. But job vacancies are high and inflationary pressures strong. This is true of headline and, to a smaller extent, core inflation. This has been in large part due to soaring commodity prices, notably oil and gas. Shortages of semiconductor chips and ships in the right places have appeared. Given the scale of the downturn in activity in 2020, such disruptions hardly seem surprising.

The concern is that this upsurge in prices will cut real incomes, while also becoming embedded in expectations, so generating a wage-price spiral and a period of stagflation. This is the central banks’ nightmare. The IMF is optimistic that inflation will prove a brief interlude. It stresses, in particular, that labour markets remain slack, wages structurally insensitive to pressure in labour markets, and inflation expectations well anchored in the large high-income countries, though less so in developing countries.

Yet, as the Fund notes, the future is even more unpredictable than usual, with most risks on the downside: emergence of more transmissible variants of the disease; persistent supply-demand mismatches and price pressures and so faster normalisation of monetary policy; turmoil in an over-extended financial sector, with exceptionally expensive assets just about everywhere one looks, as noted in the Global Financial Stability Report; and even more rapid than expected fiscal tightening. Beyond these are the biggest worries of our era: domestic political instability; climate shocks; devastating cyber attacks; mounting trade and technological tensions; and, at worst, a breakdown in relations between China and the US and even hostilities between them. Against such horsemen of the apocalypse, the IMF can muster just two saviours: faster vaccine production and distribution, and a sustained spurt in productivity.

What then must be done? The most important thing has now become the most difficult: to co-operate actively and effectively. If a crisis as global as a pandemic and a challenge as global as the climate cannot shift us out of today’s foolish introspection, nothing will. The signals of needed progress would be an accelerated effort at global vaccination, a determination to protect the most vulnerable from the longer-term impact of Covid, and an ambitious and credible agreement at COP26 in Glasgow.

By these standards, the domestic responsibilities of the central banks and finance ministers engaged with the IMF and the World Bank at their annual meetings this week are relatively simple. As economies exit the pandemic, assistance can be less generous and better targeted.

This means that it should come from the fiscal authorities. High-income countries confront no fiscal crisis. The premature austerity that followed the global financial crisis must not be repeated. Fiscal support must be generous, where it is needed, and the tightening measured. Meanwhile, a number of central banks need to start withdrawing today’s ultra-loose monetary policy. Such a rebalancing of fiscal and monetary policies would help both the people and the economy, while weaning finance off the opiate of free money. In the US and UK, the time for this is now.

martin.wolf@ft.com