Every six months, by tradition, to coincide with its spring and autumn meetings, the International Monetary Fund provides an update on the outlook for the global economy. In recent years it has supplemented that with world economic outlook updates in January and late June or July.
Many things have changed as a result of the pandemic. The meetings these economic assessments are intended to inform have moved online, as has a lot else. Time will tell whether such gatherings resume, and in what form.
Nonetheless, these world economic outlooks provide a useful framework for analysing the enormous economic impact of the pandemic. In January 2020, when the IMF’s outlook provided the backdrop for the world economic forum in Davos — the last such meeting — people had begun to be aware of a new and potentially dangerous virus in China, but few thought it would have much of an economic impact.
In the IMF’s January 2020 world economic outlook, neither coronavirus nor Covid-19 merited a mention, the latter unsurprising because it had not yet been named. At that time, the IMF thought the world economy would show a modest acceleration compared with 2019, with global growth of 3.3 per cent in 2020 and 3.4 per cent in 2021 after 2.9 per cent in 2019. The IMF saw risks to that outlook, most notably from the US-China trade war but also from climate events such as fires and flooding.
Prospects for America were dull, with 1.6 per cent growth predicted in both 2020 and 2021, not much better than the weak growth then seen in prospect for Britain, 1.4 per cent and 1.5 per cent respectively, continuing the poor post-2016 trend.
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Advanced economies, including the US and the UK, would grow only slowly, by 1.6 per cent a year. The world would be pulled along by emerging and developing economies, growing by 4.4 per cent and 4.6 per cent respectively, and in particular by emerging Asia, with growth of nearly 6 per cent a year.
Things have changed, and the point here is not to attack forecasters, but to show the impact of a pandemic that, even 15 months ago, few saw as a big short-term risk to the economy.
So, according to the IMF’s latest economic outlook, published a few days ago, the world economy shrank by 3.3 per cent last year, easily its worst performance since the Second World War, and a mirror image of its forecast growth rate in January 2020.
America’s economy contracted by an estimated 3.5 per cent last year, the eurozone by 6.6 per cent and the UK, on latest estimates, by 9.8 per cent. The UK’s slide would have been bigger than either the US or the eurozone even allowing for differences in measuring health and education output.
That is the bad news. Global gross domestic product in 2019 was roughly $88 trillion (£64 trillion). Replacing a 2020 growth rate of 3.3 per cent with a fall of a similar amount carries a cost in lost output of nearly $6 trillion. That is £4.4 trillion, £4,400 billion, equivalent to taking two economies the size of the UK, plus a bit more, out of the world economy altogether.
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Now for the good news. Though the data on Covid-19 is far from uniformly good, and in some parts of the world, downright worrying, economic prospects are improving fast. The IMF’s new global economic forecast is for a 6 per cent expansion this year, almost double what it expected in January 2020, followed by 4.4 per cent next year.
This is, most definitely, a US-led global recovery, boosted by Joe Biden’s $1.9 trillion stimulus package and successful vaccine rollout, with a growth forecast of 6.4 per cent this year, followed by 3.5 per cent in 2022.
The UK does well, too, with growth predicted at 5.3 per cent and 5.1 per cent respectively. Some economists think this is too cautious, given the smaller-than-feared drop in monthly gross domestic product in January and evidence in the purchasing managers’ surveys of a significant upturn since then, even with most lockdown measures still in place.
Given the size of the fall in GDP last year, this country needs all the growth it can get. Though the UK is expected to outpace the eurozone, where predicted growth is 4.4 per cent and 3.8 per cent in 2021 and 2022 respectively, it will take longer to make up lost ground. China got back to pre-pandemic levels of GDP last year and America will do so this year, followed by the eurozone next year. But on IMF forecasts, the UK will not get back to 2019 GDP until 2023. Spain, with an even bigger fall in GDP last year, 11 per cent, is scheduled for a stronger recovery but is in a similar position.
I should say at this point that economists have different ways of measuring the recovery to pre-pandemic levels. There is the one outlined above, but it can also be done on a quarterly basis — in other words, in which quarter does the economy get back to where it was in the final quarter of 2019, before the pandemic struck? There is quite a debate about this. Some think it will happen before the end of this year, the Bank of England early 2022, and the National Institute of Economic and Social Research not until late 2023.
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There is another interesting aspect to the outlook. We have got used to a world economy driven by emerging economies, including China, the biggest of all. Indeed, this was what the IMF envisaged ahead of the pandemic. But, while emerging economies are set to grow well over the next couple of years, by 6.7 per cent and 5 per cent respectively, the gap between their growth and that of advanced economies will be smaller than for many years.
There is another way of looking at this, which the IMF does, and that is by looking at medium-term losses in GDP. Comparing what it now expects for 2024 with what it thought would happen in January 2020, America is a clear winner: its economy being about 0.5 per cent bigger by then. Advanced economies as a whole do not fare badly, on the assumption that, eventually, all successfully roll out vaccine programmes. They are down on what was previously expected, but only by 1 per cent, while China is 2 per cent smaller than previously anticipated.
The big losses, in contrast, are in the emerging world, with overall GDP losses of more than 4 per cent for them as a whole, the largest in sub-Saharan Africa, 5.5 per cent, Latin America, 6.5 per cent, and emerging Asia (excluding China), a hefty 8 per cent. The pandemic has changed the world and tilted it back in favour of the West.
PS
I have written a lot about Scotland and independence, mostly the negative consequences. Scotland’s notional budget deficit is a multiple of the UK as a whole and may have hit 30 per cent of GDP in 2020-21. London School of Economics research by Thomas Sampson showed that from a trade perspective, independence would be two to three times more costly for Scotland than Brexit.
It is nice, therefore, to report on something different. The Hunter Foundation, established by the Scottish entrepreneur and philanthropist Sir Tom Hunter, commissioned Oxford Economics to recommend ways of raising Scotland’s long-run growth rate. Its report was endorsed on Friday by 27 Scottish business leaders.
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It says, convincingly, that the current policies of the UK or Scottish governments will not raise Scotland’s underlying growth rate, and it sets a target of closing the per capita GDP gap with Denmark and Norway by 2035. That would involve raising Scotland’s productivity growth to 3.5 per cent a year, from an average of 1.2 per cent over the 2000-2019 period, and much lower over the past decade.
Oxford looks at three ways this could be done. The first is by borrowing and spending a lot more, particularly on infrastructure. The second would be by deregulation and the third with an extensive and effective industrial policy.
Could it work? For a country with a huge deficit and Scottish government funding per person 31 per cent above English levels, according to the Institute for Fiscal Studies, a borrowing and spending strategy does not look viable. Oxford sees limited scope for stronger growth via deregulation. That leaves industrial policy doing most of the work. If there is an industrial policy that will raise productivity growth to 3.5 per cent a year — something the UK has never achieved on a sustained basis — we would all like some of that.