Opinion: Charting a course back to prosperity

As the world’s financial and political elites swap the slopes of Davos for their spare bedrooms, it’s fair to say the World Economic Forum looks a little bit different this year. But that hasn’t stopped economists from putting in their two cents about the trajectory of the global economy. Richard Dawson explores the key projections from the International Monetary Fund (IMF)’s World Economic Outlook

In normal times, the world’s political leaders, business executives, economists and journalists would be descending on the Swiss ski resort of Davos this week to discuss the great and many challenges facing the planet.

This year however, the World Economic Forum (WEF), like everything else, is taking place online.

Against a backdrop where the global public health emergency is converging with underlying systemic crises like climate change, economic inequality and poverty, the Davos meeting is perhaps more relevant in 2021 than in most years.

One of the main functions of the event is for economists to provide forecasts on the outlook for the global economy.

This year, the International Monetary Fund (IMF) got the ball rolling with its World Economic Outlook.

While it’s been something of a fool’s errand trying to predict the trajectory of global growth in the midst of a pandemic that can change very quickly, this most recent forecast probably holds more weight than previous ones, purely because a path out of the coronavirus chaos can now be glimpsed.

Relative to the IMF’s October 2020 forecast, the pandemic response has evolved substantially from vaccine development and trials to vaccine approval and mass distribution.

And, although many countries are experiencing a second wave that has become more deadly than the first, it is perhaps no longer premature to say that the end of the pandemic is on the horizon.

As such, the global economic outlook has improved, and world GDP is now projected to grow by 5.5 per cent in 2021 and 4.2 per cent in 2022. The 2021 figure represents a 0.3 per cent improvement relative to the IMF’s previous forecast.

The projected recovery follows a severe and historic global economic collapse in 2020, now estimated at -3.5 per cent. This also represents a 0.9 per cent improvement relative to the October forecast, reflecting stronger than expected growth in the second half of 2020.

However, a 3.5 per cent contraction is still far, far beyond anything seen for generations.

World GDP is estimated to have shrunk by just 0.1 per in 2009 following the global financial crisis, for example.

The IMF says that the strength of the recovery is projected to vary significantly across countries, depending on access to medical interventions (vaccines and treatments), effectiveness of policy support (government spending), exposure to cross-country spillovers and the structural characteristics of the crisis.

In the advanced economies, which include the US, Germany, France, Italy, Spain, Japan, the UK and Canada, growth is projected to be 4.3 per cent in 2021 and 3.1 per cent in 2022.

In the emerging market economies, which include China, India the ASEAN-5, Brazil, Mexico and other developing countries, growth is projected to be much stronger – 6.3 per cent in 2021 and 5 per cent in 2022.

The advanced economies were also at a disadvantage in 2020, recording a sharper contraction of -4.9 per cent compared to just -2.4 per cent in the emerging market economies.

This largely reflects the fact that parts of Asia have handled the pandemic much better than parts of Europe and the US.

For the UK, which yesterday (January 26) became the first country in Europe to surpass the grim milestone of 100,000 coronavirus fatalities, the IMF actually downgraded its outlook for 2021.

The UK economy is now projected to grow by just 4.5 per cent this year, down from 5.9 per cent in the October forecast.

In 2022 however, growth is projected to be 5 per cent, a 1.8 per cent improvement on the previous forecast.

What this means in practice is that it will take the UK longer to return to pre-pandemic levels of output relative to other countries.

The UK also experienced the second largest contraction (-10 per cent) of any advanced economy in 2020, second only to Spain (-11.1 per cent).

The IMF poses three questions that could affect the accuracy of its outlook.

First, how will restrictions needed to curb transmission affect activity in the near term?

Second, how will vaccine rollout expectations and policy support affect activity?

Third, how will financial conditions and commodity prices evolve?

On the first point, if the UK example is anything to go by, restrictions will have a significant impact on activity in the near term.

The latest flash UK composite PMI for January 2021 shows that business activity declined at the fastest rate since May 2020. The January reading was 40.6, down from 50.4 in December.

On the second point, the UK vaccine rollout has been one of its few success stories of the pandemic, with Britain having vaccinated at least 10.4 per cent of its population.

Policy support has also been significant, with the Treasury having spent around £300 billion on its pandemic response so far.

The answer to the third point is anyone’s guess. I have watched in amazement as equity markets have recovered much more strongly than the economies where the companies listed on them are based.

But with government stimulus in full flow, it’s difficult to tell whether or not valuations, for either companies or commodities, are justified.

To summarise, while it would be remiss of me not to mention the degree to which uncertainty is still clouding the economic picture, it is difficult to see how things are not going to get much better this year.

2021 will get off to a sluggish start because of the national lockdown we’re currently living through. But moving into Q2 and the second half of the year, the UK economy should grow from strength to strength.

The IMF believes that the virus will be brought to low levels everywhere by the end of 2022, but I reckon we’ll be charting a course back to prosperity long before that.