Global economy will grow by 4% in 2021, deployment and investment are key to supporting recovery

The global economy is expected to grow 4% in 2021, assuming the initial rollout of the COVID-19 vaccine becomes mainstream throughout the year. A recovery, however, is likely to be moderate, unless policymakers take a decisive decision to tame the pandemic and implement investment-friendly reforms, the World Bank said in its January 2021 statement. Global economic outlook.

Although the global economy is growing again after contracting 4.3% in 2020, the pandemic has taken a heavy toll of death and disease, plunged millions of people into poverty, and can depress economic activity and income for an extended period. The main short-term political priorities are to control the spread of COVID-19 and to ensure a rapid and widespread deployment of vaccines. To support economic recovery, the authorities should also facilitate a reinvestment cycle aimed at sustainable growth less dependent on public debt.

“As the global economy appears to have entered a moderate recovery, policymakers face enormous challenges – in public health, debt management, fiscal policies, central banking and structural reforms – so let them try to ensure that this still fragile global recovery gains ground and lays the foundations for robust growth, ”said World Bank Group President David Malpass.

“To overcome the effects of the pandemic and counter headwinds in investment, a major effort is needed to improve the business environment, increase the flexibility of the labor and product market, and enhance transparency and accountability. governance.”

The collapse in global economic activity in 2020 is estimated to have been slightly less severe than expected, mainly due to shallower contractions in advanced economies and a more robust recovery in China. In contrast, disruptions to business in most other emerging markets and developing economies have been more severe than expected..

“The financial weaknesses in many of these countries, as the growth shock impacts the vulnerable balance sheets of households and businesses, will also need to be addressed,” said the Group Vice President and Chief Economist. World Bank, Carmen Reinhart.

The short-term outlook remains highly uncertain and different growth outcomes are still possible, as a section of the report details. A downward scenario in which infections continue to rise and the deployment of a vaccine is delayed could limit the global expansion to 1.6% in 2021. Meanwhile, in an upward scenario with effective control pandemic and a faster vaccination process, global growth could accelerate to almost 5 percent.

In advanced economies, a nascent rebound halted in the third quarter following a surge in infections, indicating a slow and difficult recovery. US GDP is expected to increase by 3.5% in 2021, after an estimated contraction of 3.6% in 2020. In the euro area, output is expected to grow 3.6% this year, after a decline of 7.4% in 2020. Activity in Japan, which fell 5.3% in the year just ended, is expected to grow 2.5% in 2021.

The aggregate GDP of emerging and developing countries, including China, is expected to grow by 5% in 2021, after contracting 2.6% in 2020. China’s economy is expected to grow by 7.9% this year after growth by 2% last year. Excluding China, emerging markets and developing economies are expected to grow 3.4% in 2021 after shrinking 5% in 2020. Among low-income economies, activity is expected to grow 3.3% in 2021, after a contraction of 0.9% in 2020.

Analytical sections of the last Global economic outlook report examining how the pandemic amplified the risks of debt accumulation; how it could hold back long-term growth in the absence of concerted reform efforts; and what risks are associated with the use of asset purchase programs as a monetary policy tool in emerging and developing countries.

“The pandemic has dramatically exacerbated debt risks in emerging and developing countries; The weak growth outlook is likely to further increase the debt burden and erode the ability of borrowers to service debt, ”said Ayhan Kose, World Bank Acting Vice President for Fair Growth and Institutions financial said.

“The world community must act quickly and forcefully to ensure that the recent build-up of debt does not end in a series of debt crises. The developing world cannot afford another wasted decade.

As severe crises have done in the past, the pandemic is expected to have lasting adverse effects on global activity. It is likely to worsen the slowdown in global growth projected over the next decade due to underinvestment, underemployment, and declining labor force in many advanced economies. If history is any guide, the world economy is heading for a decade of growth disappointments, unless policymakers put in place comprehensive reforms to improve the fundamental drivers of equitable and sustainable economic growth.

Policymakers must continue to support the recovery, gradually shifting from income support to growth-friendly policies. Longer term, in emerging and developing countries, policies aimed at improving health and education services, digital infrastructure, climate resilience, and business and governance practices will help mitigate the economic damage caused by pandemic, reduce poverty and advance shared prosperity.

In the context of a weak fiscal position and high debt, institutional reforms aimed at stimulating organic growth are particularly important. In the past, the growth dividends resulting from reform efforts were recognized by investors in upgrading their long-term growth expectations and increasing investment flows.

Central banks in some emerging markets and developing economies have used asset purchase programs in response to financial market pressures induced by a pandemic, in many cases for the first time. When targeted at market failures, these programs appear to have helped stabilize financial markets during the early stages of the crisis.

However, in economies where asset purchases continue to expand and are seen to finance budget deficits, these programs can erode the operational independence of the central bank, risking currency weakness which undermines inflation expectations. and heightened concerns about debt sustainability.