IMF World Economic Outlook points to uneven recovery

The October 2020 update of the WEO assumed significance as the world economy struggles to come out of the pandemic impact.

Oct 20, 2020 08:10 IST India Infoline News Service

The IMF World Economic Outlook (WEO) presents global growth updates on a periodic basis. The October 2020 update of the WEO assumed significance as the world economy struggles to come out of the pandemic impact. According to estimates put out by the John Hopkins Institute, the pandemic had already claimed more than 1.2 million lives with the US, India, Brazil and Russia among the worst affected.

The pandemic and the impact on GDP growth is now fait accompli. What really matters is how quickly economies can recover and how effectively sustain growth post-pandemic. One of the deep risks of the pandemic is that nearly 9 crore people are expected to fall into extreme poverty with countries like India and other developing economies worst hit.

How the world economy is expected to shape up in next 2 years?

Country / Region Real GDP Growth
2019 (%)
Real GDP Growth
2020 (%) - Projected
Real GDP Growth
2021 (%) - Projected
United States 2.2 -4.3 3.1
Canada 1.7 -7.1 5.2
United Kingdom 1.5 -9.8 5.9
Germany 0.6 -6.0 4.2
France 1.5 -9.8 6.0
Italy 0.3 -10.6 5.2
Spain 2.0 -12.8 7.2
Japan 0.7 -5.3 2.3
China 6.1 1.9 8.2
India 4.2 -10.3 8.8
Russia 1.3 -4.1 2.8
Brazil 1.1 -5.8 2.8
World Economy 2.8 -4.4 5.2
Advanced Economies 1.7 -5.8 3.9
Emerging Markets 3.7 -3.3 6.0
Data Source: IMF

These are calendar year figures but the impact would be almost similar for countries like India that follow Apr-Mar fiscal year. The IMF has projected a real recession for the world economy in 2020, with the Advanced Economies likely to see much deeper cuts compared to the emerging markets. Even the recovery in 2021 is expected to be much more rapid in emerging markets as compared to the advanced economies. However, these numbers may be skewed because of China, which has a huge impact on EM data.

Among all the large economies in the world, China is expected to be the only country to show positive GDP growth of 1.8% in 2020. Indian economy is expected to contract by nearly -10.3% in 2020 as per IMF estimates. IMF has specifically pointed out to this dichotomy as having the potential of widening the gap between India and China. In fact, three years back, India had successfully overtaken China in terms of real GDP growth but that advantage appears to have been negated. If you exclude China from the emerging markets index, then the GDP contraction in emerging markets and advanced economies is almost the same at -5.8% for 2020.

How the estimates changed for various segments?
Data Source: IMF

This chart compares the estimates of GDP growth in advanced economies, China and other Emerging Markets. Three things follow. Firstly, the estimates of GDP growth in China are getting progressively better. Secondly, even the estimates for advanced economies improved sharply from -8.1% in June to -5.8% in October. This is clearly the outcome of very aggressive fiscal stimulus that most advanced economies like the US, EU and Japan have implemented in the last few months.

The real area of concern is the segment of emerging markets excluding China. This segment has seen a consistent downgrading of real GDP growth from -2.3% in April to -5.8% in October 2020. This downgrade has been driven by repeated downgrade of Indian GDP growth as the high levels of fiscal deficit have restrained the Indian economy from getting too aggressive with fiscal stimulus.

Key takeaways for India from the IMF World Economic Outlook

One thing is clear that if India does not act fast, it may cede the growth advantage that it had built up over China 3 years back. Here is what needs to be done.

• Out of the 9 crore persons pushed into deprivation globally, a big chunk of them are in India. While the global fiscal support has been to the tune of $12 trillion, Indian stimulus has been less than $200 billion. That may have prevented a financial catastrophe but it is far from sufficient to revive growth.

• India tops on the health hazard and must push on the vaccine efforts to prevent another health crisis. India will need more global cooperation in ensuring that adequate doses of vaccines are made available to people here.

• It may be fiscally expensive, but Indian will have to continue to provide income support, targeted cash transfers and wage subsidies; apart from unemployment insurance. That can stave of large scale bankruptcies at an individual and business level.

• In India, the wealthy are not paying sufficient tax and the government has to seriously work on the progressivity of taxes so that the rich and the wealthycorporations pay their fair share of taxes.

What, perhaps, caught the attention of active Twitter users is the statement that Bangladesh will cross India in per capita GDP by next year and sustain the edge? Ironically, the Bangladesh GDP is growing this year. That may be symptomatic of all the challenges pointed out by the IMF.

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