What’s Next Economically?

As the world moves from the pandemic to endemic phase of COVID-19, or perhaps gets drawn back in with a new Variant of Concern, there is still a lot if uncertainty ahead. Regardless of the health situation, disparity in vaccination access, global supply chain issues, economic dislocation, government debts, inflation, and a host of other issues means these are unpredictable times.

Recently though, International Monetary Fund Managing Director Kristalina Georgieva made some statements at a virtual meeting of the G20 Finance Ministers and Central Bank Governors which can help shine a light on what’s next economically, at least according to the IMF.

“Even as the global economic recovery continues, its pace has moderated. Three weeks ago, we downgraded our global forecast to a still-healthy 4.4 percent – partially because of reassessment of growth prospects in the United States and China.

Since then, incoming economic indicators point to weaker growth momentum in 2022 due to the emergence of the Omicron variant and supply chain disruptions that are more persistent than previously anticipated. At the same time, inflation readings remain high in many countries, financial markets are more volatile, and geopolitical tensions have sharply increased.

Strong international cooperation and extraordinary policy agility will be crucial to navigate a complex ‘obstacle course’ through 2022.”

Georgieva then went on to focus on three major priorities which the IMF believe are key to getting the world’s economies back on track for growth.

“First, we need to broaden efforts to combat what might be described as ‘economic long COVID.’ We project economic losses from the pandemic to be nearly US$13.8 trillion by end-2024 – and Omicron is a reminder that a durable and inclusive recovery is impossible while the pandemic continues. There remains great uncertainty about how effective the health protections that have been built will be in the face of other possible variants.

In this environment, our best course of action is to move from a singular focus on vaccines to ensuring that each country has equal access to a comprehensive COVID-19 toolkit that also includes tests and treatments. Keeping these tools updated as the virus evolves will require continuous investment in medical research, disease surveillance, and health systems that help countries reach ‘the last mile’ in every community. The World Bank’s announcement on mobilizing further toward reaching that goal is welcome.”

She then moved on to the scourge of growing inflation.

“Second, many countries will need to navigate a tightening monetary cycle. In the context of a high degree of uncertainty and significant differences across countries, macroeconomic policies need to be carefully calibrated to individual country circumstances. The risk of potential spillovers, especially for emerging markets and developing countries, also needs to be managed. We must fight inflation without impairing the recovery.”

Finally, Georgieva laid out concerns that many countries now face unsustainable debt levels.

“Third, countries need to give greater priority to fiscal sustainability. Extraordinary fiscal measures deployed during the crisis helped prevent another Great Depression. But they also pushed up debt levels to historical highs. In 2020, we observed the largest one-year debt surge since the Second World War, with global debt—both public and private—rising to $226 trillion.

And while many countries are facing higher debt, we should prioritize help to those countries who need a debt restructuring. “

The share of low-income countries at high risk or already in debt distress has doubled since 2015 – from 30 percent to 60 percent today, and several face the immediate need to restructure their debt.

Solutions include:

• Offering a debt service standstill during negotiations to avoid squeezing a country precisely when it is under financial pressure;

• Providing clear and timebound processes that foster confidence and facilitate implementation, including participation of private creditors; and

• Finding ways to bring in countries that are not currently covered by Common Framework by expanding is perimeter.

The IMF Director concluded her remarks by reminding the G20 of the need to worry about the environment at this time of economic crisis.

“We must sustain momentum on global efforts to implement the Paris Agreement, which requires a large increase in investment toward low-carbon and climate resilient development. Critical here are clear policy signals from governments to decarbonize the economy, including through carbon pricing mechanisms to create incentives for the private sector to invest in mitigation.”