Will Covid-19 vaccines inject hope into the global economy?

Last week, the International Monetary Fund (IMF) released its biannual flagship report, World Economic Outlook (WEO), which is usually announced during IMF’s traditional pow-wows - annual gatherings together with the World Bank, in autumn and spring. 

Since the outbreak of the Covid-19 pandemic, IMF and the World Bank have been holding these meetings virtually. The recent report is more optimistic than its previous editions published after the Covid-19 pandemic, which has brought on the worst global recession since World War II. 

The world economy, in real terms, contracted 3.3 percent in 2020, according to estimates by IMF staff. Advanced economies (AEs) contracted 4.7 percent, while emerging market and developing economies (EMDEs) shrank 2.2 percent last year. 

Among G-20 economies, only China and Turkey, both EMDEs, registered overall positive growth in 2020. In Europe, Turkey and Ireland were the only economies that recorded growth, while the European Union, as a block of 27 economies, contracted 6.1 percent in 2020.

The successful administration of vaccines in several countries has brought optimism and encouraged international economic organisations and economists to revise global growth projections for 2021 and onwards. The IMF’s recent report projects 6 percent real GDP growth for the global economy in 2021, 0.8 percentage points higher than its projection in October 2020.

Economic recovery across the world will vary from country to country, mainly due to ‘uneven and unfair’ – as described by the UN Secretary-General Antonio Guterres – distribution of vaccine among countries. 

Yet, the possibility of eventual vaccination across the world diminishes uncertainties to a significant extent, if not at all. Coupled with policy response and financial support from governments to mitigate the impact of the pandemic and prop up the economy, economists will find themselves in perfect position to make bold estimates about future. 

Robust growth is in part a result of the base effect. In 2020, the global economy suffered a $3 trillion loss in terms of GDP at purchasing power parity. While this provides a base, hence a denominator effect, for stronger recovery, it is also a fact that one-third of the growth will go towards making up for the loss in 2020, to reach or surpass pre-pandemic levels.

Growth forecast for 2021

Economic expansion in 2021 will mainly come from emerging markets and developing economies, consisting of 156 economies according to the IMF's definition, accounting for 62 percent of global growth in 2021. However, excluding China, the contribution by EMDEs will be 37.5 percent, while advanced economies (39 economies again, according to the IMF definition) will make up slightly more than 38 percent of global GDP growth.            

Two-thirds of global growth in 2021 is expected to come from 10 countries alone. According to calculations based on IMF’s recent estimates, this will be the case for the next six years as well. The US and India are expected to make larger contributions in 2021 than their historical performance over the past two decades. This is mainly because of the low base effect, as both economies contracted 3.5 percent and 8 percent respectively in 2020.  

Challenges for economic recovery

While there are several reasons to be optimistic, there are still uncertainties that may change the course of economic recovery and growth in the world. Firstly, the ultimate success of the vaccine is still a wait and see game, despite a significant decrease in the number of covid-related deaths in countries with high rates of vaccination. 

Secondly, uneven distribution of the vaccine may cause a K-shaped recovery and will eventually impose a drag on global growth. While economies with successful vaccination programs will rebound strongly, recovery in economies with insufficient vaccination will significantly falter. 

In some poor countries, this could have dire economic and social consequences. In this regard, COVAX (Covid-19 Vaccines Global Access) may play a key role in providing equitable access to the vaccine. Advanced economies with full access to the vaccines should further support such initiatives. 

Once some economies, especially advanced economies, are back on track, they may phase down or end financial support. If uncoordinated, this may repeat the taper tantrum of 2013, which caused significant capital outflows from emerging markets. 

Last but not least, pre-pandemic trends, such as geopolitical risks, increasing protectionism, and aging populations will continue to pose challenges for the global economy, albeit to a lesser extent. All of these challenges and risks require strong international cooperation and coordination.