Protecting the fragile world economy
Balancing accommodative monetary policy and flexible macro-prudential measures holds the key
The key point about the nearterm outlook is that the global economy is recovering. But we should keep two things in mind. First, although the recovery following reopening in May is better than our forecast in June, a global recession for 2020 overall is a foregone conclusion. We expect the global economy to shrink 4.4 percent in 2020. Second, although growth in 2020 looks better than expected earlier, the prospects for the global economic recovery remain quite uncertain: we do not know how consistent the pace of recovery will be or how synchronized it will be across regions.
The upward revision of our (IMF’s) global economic forecast relative to the June World Economic Outlook is due to the strong GDP data for the second quarter in major economies such as the United States, China, the eurozone and Japan. Yet China is expected to be the only major economy to maintain positive growth throughout 2020, at 1.9 percent.
Data for the third quarter of some countries have been released very recently. For instance, the US grew 7.4 percent quarter-on-quarter, or 33.1 percent at an annual rate. China grew 4.9 percent. It is important to note that recent survey data and high-frequency data indicate that the pace of recovery in major economies has diverged, particularly in services.
For example, preliminary data for October show that the purchasing managers’ index for services has strengthened in the US and the United Kingdom while weakening in Japan and some countries in the European Union.
Global performance in the fourth quarter remains to be seen; these outturns may also vary across countries.
In addition, the pandemic in some countries has relapsed on a large scale, which has cast a shadow over the prospects for the next phase of the recovery. Of course, it may be too early to make a conclusion about next year’s growth by looking at the impact of these repeated epidemics.
At the International Monetary Fund, we are emphasizing that the recovery is likely to be a “long, uneven, and uncertain ascent”. One of the biggest variables is COVID-19, including the effectiveness of policies in curbing its spread going forward. The good news is that the more we know about the virus and coping methods (such as vaccines, medicines and treatments), the stronger our confidence in defeating the virus will be.
On the other hand, the recovery of economic activity could be weaker than expected if progress in treatments and vaccine development were to become slower than expected.
Since the global outbreak of COVID-19 at the beginning of the year, many countries have responded with massive fiscal, monetary and regulatory supportive measures, the scale and speed of which are unprecedented. These measures have effectively supported the disposable income of residents, while safeguarding corporate cash flow and bolstering banks’ credit supply.
The total global fiscal support has now reached $11.7 trillion, and the monetary authorities of major advanced economies have also provided $7.5 trillion in liquidity support. This support has put a floor under the global economy and helped markets to avoid repeating the experience of the global financial crisis in 2008-09.
Looking ahead, countries will still face many problems and serious challenges that will need to be resolved, including some difficult choices. Different countries face different conditions, including in terms of their external environment and their risk tolerance. We believe that in terms of the global economy as a whole, it is important to avoid premature withdrawal of macroeconomic support before the consolidation of the recovery.
In terms of monetary and macroprudential policy, there is a broad consensus that low interest rates will exist for a longer period of time. On the one hand, low interest rates would help in supporting the recovery. On the other hand, these may also contribute to increasing risk appetite, leading to excessive and lower quality credit. An obvious policy challenge is how we can balance accommodative monetary policy and flexible macro-prudential policies.
From the perspective of fiscal policy, the challenges are obvious. Protecting livelihoods and preventing long-term or structural scarring to the economy were widely shared objectives during the IMF-World Bank annual meetings this year. At the same time, global public debt has reached a record high, accounting for around 100 percent of global GDP.
The sustainability of global debt faces serious challenges in the future. Therefore, having a clear medium- and long-term fiscal sustainability framework is critical. Where countries have relatively weak economic fundamentals, the challenge of debt sustainability is even more severe and needs to be addressed urgently.
It needs to be emphasized that even if the policy direction is clear, countries may have differing success in realizing their policy goals given their different policy tools, market sophistication, implementation capacity, and communication ability. Therefore, the selection and implementation of policies must be flexible, precise, and adapted to local conditions.
At the same time, the pandemic has helped people to focus their minds on the importance of building a better future. I see major transformational momentum for achieving a smarter, greener and more inclusive recovery. The international community should capitalize on this momentum and strengthen cooperation.
Here, I want to focus on one of the key aspects: green recovery. And I want to emphasize three points.
First, green recovery is necessary. Recent IMF research suggests that if no further action is taken to reduce greenhouse gas emissions, the Earth will embark on a path of no-return toward higher temperatures. The pressure caused by global warming has become more and more obvious with natural disasters becoming more frequent.
Our analysis suggests that the loss of global economic output will exceed 20 percent by 2100 if no further action is taken. The pandemic has raised awareness about protecting the environment and respecting nature. Therefore, it is urgent to reduce greenhouse gas emissions.
Second, green recovery is achievable. Our research shows that early and comprehensive action can help to achieve the overall goal of global carbon neutrality by the middle of this century. These measures include raising carbon taxes or introducing carbon emissions trading, as well as subsidies, guarantees and investment to increase the supply of lowcarbon energy, carbon capture, and carbon storage.
Among these, raising the price of carbon emissions will provide incentives to improve energy efficiency, promote the transfer of resources from high-carbon industries to lowcarbon industries, and lay a solid foundation for long-term sustainable economic growth. Green investment can bolster the transformation of the economy while quickly adding new aggregate demand to the macro economy and thus providing buffers to absorb the cost of economic transition related to the rise of carbon price.
And third, green recovery needs to be well prioritized. Green investment during the early stages of the economic recovery can buoy economic growth and boost employment while supporting low-carbon industries, taking advantage of favorable fiscal and monetary policies.
Combined with a gradual phase-in of moderate carbon pricing, the net effect on growth in the short run would be positive. Carbon prices would need to be raised thereafter to help achieve the goal of carbon neutrality by mid-century, but our research suggests that the drag on growth during this transitional period would be negligible — no more than 0.1 percent annually compared with the base case, which is completely within an acceptable range.
In short, supporting green recovery will help improve the environment and promote growth and employment. In this respect, it is commendable that China has made a commitment to achieve carbon neutrality by 2060. We also encourage other countries to scale up their ambition in their submissions for next year’s UN Climate Change Conference.
Overall, the global economic recession in 2020 seems to be less dire than we had expected earlier. Nevertheless, the global recovery will be long, uneven, and uncertain.
With a new and challenging start in the post-pandemic era, we should fully maintain the continuity of macroeconomic policy support and consolidate the recovery. Looking ahead, policy support should be prioritized to achieve resilient and sustainable growth, including, in particular, green recovery. Let us seize the opportunity to embark on a more inclusive, smarter, and greener economic recovery path.