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Uneven Economic Growth for the Years Ahead

Posted: Monday, October 19th, 2020

Estimated Reading Time: 2 minutes

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The COVID-19 pandemic stopped the economic growth in the developed world. Moreover, it triggered a sharp, global recession with long-term effects.

The International Monetary Fund (IMF) released its last World Economic Outlook (WEO) recently. It shows economic growth scenarios for all the regions, with decent growth estimates for the developed countries. However, the main point the report makes is that many risks to the estimates exist, some of them difficult to overcome.

Asian countries weathered the pandemic better. Perhaps because of their experience with other viruses in the past, the discipline, the systems that were already in place, etc. Because of that, the IMF sees faster economic growth in developing and emerging Asian countries in 2021, far exceeding the drop in 2020.

Economic Growth

The world real GDP growth in 2021 is expected to reach 5.2%, after contracting -4.4% in 2020. However, the road ahead is full of risks. To start with, 2020 is not over yet. Also, the couple of months left until the end of the year may change the forecast completely.

Risks to Economic Growth Tilted to the Downside

As expected, the number one risk to future economic growth is a new virus outbreak. We already see it in Europe and the United States. Belgium, for instance, decided to close all its restaurants and bar for an entire month. Moreover, other countries contemplate similar measures, showing that the fight against the virus is far from over. Weaker demand may contribute to cross-boarder spillovers, creating regional economic shocks.

Geopolitical tensions rose too, despite the pandemic holding the headlines. The IMF sees the global oil supply as a threat to economic growth due to increased ties between OPEC+ member countries and other oil-producing ones.

Insolvencies, tightening financial conditions, liquidity shortfalls, or trade uncertainty come to complement the IMF’s list of risks to its economic projections.

Latin American and the Caribbean economies will take the biggest hit in 2020. The IMF report projects -8.1% GDP contraction for the region, the largest in the world. Because in 2019 the region effectively had no economic growth, the projected 3.6% growth in 2021 is not enough to compensate for the decline. Moreover, if any or more of the risks presented will materialize, the region is at risk of a deepening recession.

Besides the gloom and doom, the IMF also sees reasons to be optimistic. For example, pandemic strengthened international solidarity, for instance. Also, recent developments in therapeutics made it possible to keep the number of deaths associated with the second wave of infections relatively low. Moreover, vaccine trials proceeded with full speed ahead, and some economies recovered better than expected.

All in all, the report shows uneven and sluggish economic growth ahead. With so many uncertainties around, any projection is at risk of being invalidated sooner rather than later.

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