World Economic Outlook Revised | Barita Insights | April 19, 2021

Even with the high uncertainty surrounding the path of the pandemic going forward, a way out is becoming increasingly visible thanks to the development and deployment of vaccines that can reduce both the severity and frequency of infections.
The IMF is now projecting a stronger recovery in 2021 and 2022 for the global economy compared to their previous forecast. After an estimated contraction of -3.3% in 2020, the global economy is projected to grow at 6% in 2021 and 4.4% in 2022. The revised projections for 2021 and 2022 are 0.8% and 0.2% stronger than in the previous forecast, reflecting additional fiscal support in a few large, developed economies and the anticipated boost from the deployment of vaccines going forward. Naturally, the strength of the projected recovery varies across countries, and this will likely weigh on the severity of the health crisis, the extent of disruptions to domestic operations, the exposure each country has to cross-border spillovers and how effective both fiscal and monetary policy actions will be in limiting damages caused by the pandemic.

United States
The US economy contracted 3.5% on an annual basis in 2020. What stood out from the expenditure breakdown was the strength of consumer durables outlays and the boom in residential investment, up 14.1% in 2020. The decline in business investment was also shallower than expected, which highlights the extent to which policy support cushioned the private sector. According to the IMF, the United States is projected to return to pre-covid levels in the first half of 2021. The policies put forward have continued to support activities in sectors less exposed to social distancing and restrictions of face-to-face interactions, which has been evident in the first quarter of 2021. Purchasing Managers Indices (PMI) surveys, consumer spending and job market data now all point to GDP rising by around 4% annualized in Q1 2021. The Biden administration’s US$1.9 trillion rescue package is expected to further boost GDP over 2021 to 2022, with significant spill-overs to main US trading partners. Strong GDP growth will help to bring unemployment down, but this will be tempered by a recovery in labor force participation as restrictions are eased. By 2022, the IMF expects unemployment will still be above 4%, short of the Fed’s assessment of maximum unemployment levels. The rate of inflation will rise above 3% in April driven by commodity price rises, base effects of core personal consumption expenditure and temporary supply chain pressures. Long-term inflation risk has also increased. However, the rise in inflation will be gradual given labour market slack.

Euro Area
In the euro area and the United Kingdom, activity is expected to remain below pre-covid levels into 2022. With respect to the October 2020 World Economic Outlook (WEO), projections for 2021 have been revised down in Europe while they’ve been revised up in Japan and the United States. The downward revision in Europe is more than offset by stronger than expected growth in the United States and Japan, which was supported by additional fiscal support in both countries at the end of 2020. In the euro area, the deteriorating health situation at the turn of the year led to a tightening of existing restrictions including a full lockdown in Germany. However, growth in Q4 2020 was not as weak as feared, given the much stronger-than-anticipated GDP outturn in France and unexpected expansions in Germany and Spain. The final outturn for 2020 was a decline of -6.6% versus expectations of -7.6% in December. Notably, the slow rollout of the vaccine programme is likely to weigh on the growth going forward. The European Commission now aims to inoculate 70% of adults by the end of summer. As such, in the near term, restrictions are expected to remain in place and hence economic activity is likely to rebound more noticeably from Q3 2021 going forward. Given the recent recovery in government bond yields and concerns around enforcing stricter financial conditions, The European Central Bank (ECB) has communicated that it will be stepping up the pace of assets purchases over the next three months. The ECB also said that the recent increases in inflation was driven by temporary factors, including the reversal of Germany’s value-added tax (VAT) rate cuts and changes to the weight in the Harmonised Index of Consumer Prices. Euro rise in inflation highlights weak services inflation, labor market slack and they expect the downward shock to inflation to persist.

Latin America and the Caribbean
Despite a sharp drop in 2020, only a mild and relatively unequal recovery is expected in Latin America and the Caribbean in 2021. The longer-term outlook for countries in the Caribbean will depend on the path of the pandemic. Most countries have not secured enough vaccines to cover their population. Additionally, 2021 projections for the tourism-dependent Caribbean economies have been revised down by 1.5%points to 2.4%. However, given Jamaica’s dependency on tourism, the IMF’s revised projection for Jamaica’s Real GDP is expected to be 1.5% for 2021 and 5.7% for 2022. This growth doesn’t anticipate that Jamaica will return to pre-covid levels until 2022 (Growth in 2019: 1.7% and 2020: 1.6%). A variety of factors will determine the way forward. Key variables include a) trajectory of the virus; b) the deployment and effectiveness of COVID-19 vaccines; c) the impact of fiscal and monetary support; d) the status of labour markets and household consumption; and e) the pace at which mobility and travel restrictions are lifted. Notably, with the projected growth in the US economy, we expect that this will not only improve our tourism sector but also improve our remittance inflows.