On January 26, the International Monetary Fund (IMF) released its most recent World Economic Outlook report, giving companies worldwide reason for cautious optimism about the coming year. The report projects the global economy to grow at a rate of 5.5% in 2021—a 0.3 percentage point increase from the previous forecast in October. Despite the improved outlook, the IMF warns that challenges related to global vaccine rollouts and emerging COVID-19 variants could jeopardize the recovery.
Why the IMF Improved Its 2021 Global Economic Forecast
According to the IMF report, the global economy contracted at a rate of 3.5% in 2020—nearly a full point less than the 4.4% downturn that the organization predicted in October. The IMF attributes the improvement to unexpectedly strong global economic activity in the second half of 2020. The encouraging close to 2020 puts the global economy at a better starting point for 2021. Analysts say momentum will continue if vaccine rollout improves, countries provide financial aid, and the banking environment remains stable.
Vaccine rollouts at the end of 2020 helped improve this year’s outlook, according to the report. To meet the IMF’s new growth projections, countries must be more adept at administering the vaccine to citizens. Similarly, as scientists develop increasingly effective treatments, countries must improve their ability to distribute them. By making vaccines and medical aid more readily accessible, countries avoid the financial repercussions that come with implementing social distancing measures.
Advanced economies will inject significant sums of capital into their economies in 2021. The IMF expects government-led relief efforts in the United States and Japan, along with the rollout of the European Union’s newly created Next Generation EU recovery fund, to not only boost those economies but create a positive global ripple effect.
The IMF also expects major banks to maintain their current policy settings until the end of 2022, creating financial conditions conducive to economic recovery. In advanced economies, companies continue to borrow money with friendly interest rates. In developing countries, more companies will have access to loans, increasing their ability to endure economic hardship caused by the pandemic.
How COVID-19 Variants Affect the Global Economic Growth Forecast
The report balances the optimism with one cause for concern about the outlook for 2021 and beyond.
The IMF points to uncertainty caused by COVID-19 variants in South Africa, Mexico, and the United Kingdom. “Much now depends on the outcome of this race between a mutating virus and vaccines to end the pandemic, and on the ability of policies to provide effective support until that happens,” said IMF chief economist Gita Gopinath. Because COVID-19 variants spread faster and are potentially more deadly than the original strain, countries must accelerate vaccination and financial relief efforts to mitigate risk.
United States President Joe Biden recently pledged to contribute to the World Health Organization’s COVAX initiative, designed to increase vaccine access in developing countries. Gopinath calls this move a “very big step” in controlling the variants’ spread but advocates for advanced economies to provide further aid. “Much more will be needed, because as we can see, given the mutating virus, that this is not a problem that’s going away anytime soon,” Gopinath said.
The United States, China, and India See Changes in Growth Projections
While the IMF’s recent report is good news for the global economy, certain countries see more favorable outlooks than others.
India is the biggest beneficiary of the revised growth projections. The IMF expects the country to see an 11.5% growth rate in 2021—a 2.7% increase from the previous World Economic Outlook report. According to Kristalina Georgieva, IMF Managing Director, India’s healthy outlook for 2021 is due to its government implementing strict lockdown measures early in the pandemic, followed by a series of pro-growth financial policies. “What we see is that [decisive lockdowns], combined with policy support, seems to have worked well,” Georgieva said. “If you look at mobility indicators, we are almost where we were before COVID in India, meaning that economic activities have been revitalized quite significantly.” India is the only country poised for double-digit growth in 2021.
The new IMF report upgraded the outlook for the U.S. Analysts expect the U.S. GDP to grow at a 5.1% rate in 2021, up from 3.1% in the previous forecast. Since the last IMF World Economic Outlook report, the U.S. government passed a $900 billion relief package. With President Biden recently taking office, his administration is underway for an additional $1.9 trillion relief package, which would further boost the outlook for the U.S.
The report was not as favorable for China, though it is still primed for significant GDP growth in 2021. The IMF dropped the country’s 2021 growth estimate by one-tenth of a percentage point. The downtick comes after China displayed an economic resurgence at the end of 2020. “China returned to its pre-pandemic projected level in the fourth quarter of 2020, ahead of all large economies,” said Gopinath. The IMF expects China to post an 8.1% rise in GDP in 2021, putting the country at the forefront of the global economic recovery.
Navigate Changes to the Global Economy with a Proven Partner
As the world emerges from an unprecedented international financial event, the global economic outlook for 2021 and beyond remains uncertain—even after recent optimism from the IMF. For companies that operate internationally or plan to expand their global footprint, making smart growth decisions requires continuously tracking world economic trends and changes in individual markets. Velocity Global is ready to help.
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