KINGSTON, Jamaica, April 9, 2021 - Prior to reading the article on "Managing Divergent Recoveries" by the Economic Counsellor and Director of Research at the International Monetary Fund, Gita Gopinath, I had my own views on the pace of the global recovery from the COVID-19 pandemic over the coming two - year period 2021 to 2022. I expected that industrial giants such as the United States, China and the European Union would lead the charge.
Gita Gopinath of the IMF is projecting a relatively strong recovery for the world economy in 2021 with a 6% projected expansion, followed by a 4.4% growth in 2022. (1.6 percentage point less than the projection for 2021). The growth over the next 2 years is predicated on the - 3.3% historic contraction of the world economy in 2020.
The achievement of these projections is predicated on the impact that the new vaccines are expected to have on the spread of the covid-19 virus around the world and the additional fiscal support in large economies, for example, the United States under new President Joe Biden.
THE CHALLENGES AHEAD
According to Gopinath, the challenge ahead is still formidable since the pandemic has not yet been subdued and the daily cases are accelerating across the world as we moved into what some scientist call the third wave. The recoveries across the world are diverging (differing) primarily as a result of three critical factors:
- The pace of the vaccine roll-out
- The level of policy support
- The level of reliance on tourism
The richer more industrialized countries are definitely ahead where vaccination roll-out is concerned and over time, based on the effectiveness of the vaccines are expected to return to normalcy or near normalcy quicker. The level of good policy to drive the control is a critical factor to ensure a successful anti-COVID-19 programme.
Without a good policy in place to give direction regarding how the containment of the virus will be achieved, countries will struggle to recover. Nations that are heavily dependent on tourism for Gross Domestic Product (GDP), will struggle significantly to recover. This is so since all the support industries for tourism, such as the airline industry and cruise shipping have been adversely affected and are struggling to survive.
Ms Gopinath says the upgrades in global growth for 2021 and 2022 are mainly due to upgrades for advanced economies, particularly to a sizeable upgrade for the United States (1.3 percentage points) that is expected to grow at 6.4 percent in 2021. This makes the United States the only large economy projected to surpass the level of GDP it was forecast to have in 2022 in the absence of this pandemic.
Other advanced economies, including the euro area, are also expected to rebound this year but at a slower pace. Among emerging markets and developing economies, China is projected to grow this year at 8.4 percent. While China’s economy had already returned to pre-pandemic GDP in 2020, many other countries are not expected to do so until 2023.
These different recovery paths are likely to create wider gaps in living standards across countries compared to pre-pandemic expectations. The average annual loss in per capita GDP over 2020-24, relative to pre-pandemic forecasts, is projected to be 5.7 percent in low-income countries and 4.7 percent in emerging markets, while in advanced economies the losses are expected to be smaller at 2.3 percent. Such losses are reversing gains in poverty reduction, with an additional 95 million people expected to have entered the ranks of the extreme poor in 2020 compared with pre-pandemic projections.
UNCERTAINY OF FORECAST
A high degree of uncertainty surrounds these projections. Faster progress with vaccinations can uplift the forecast, while a more prolonged pandemic with virus variants that evade vaccines can lead to a sharp downgrade. Multi-speed recoveries could pose financial risks if interest rates in the United States rise further in unexpected ways. This could cause inflated asset valuations to unwind in a disorderly manner, financial conditions to tighten sharply, and recovery prospects to deteriorate, especially for some highly leveraged emerging markets and developing economies.
MY VIEW ON THE RECOVERY OF CARIBBEAN ECONOMIES
Most Caribbean economies are highly dependent on tourism (with the exclusion of Trinidad & Tobago) and so the recovery of their economies is highly dependent not only how quickly and effectively they recover from the pandemic, but also how quickly their tourism source markets recover.
The dramatic drop in demand for passenger air transport due to the COVID-19 pandemic and containment measures is threatening the viability of many firms in the airline industry. At the peak of the first wave airlines were said to be operating at only 15% of capacity. The same can be said of the cruise ship industry which was virtually brought to a standstill.
It will take some time before these industries are fully revived and until then no matter how well the countries of the Caribbean mitigate the effects of covid-19, these external variables will play a critical role in the rate of economic recovery.
I guess we'll all have to wait and see the real impact of the various vaccines and fiscal adjustment programmes on the COVID-19 pandemic. We'll also have to await its consequences, to figure out how the Caribbean's economies will emerge over the next two years.