IMF More Optimistic, Gopinath Says Biden Plan Would Boost US

Good news! Albeit news that most folks won’t be inclined to care much about.

The IMF adopted a more upbeat stance on the global economy in its latest outlook, saying the recession will likely be shallower than previously thought.

“Amid exceptional uncertainty, the global economy is projected to grow 5.5% in 2021 and 4.2% in 2022,” the latest World Economic Outlook, released on Tuesday, said. “The 2021 forecast is revised up 0.3 percentage point relative to the previous forecast, reflecting expectations of a vaccine-powered strengthening of activity later in the year and additional policy support in a few large economies.”

As you can imagine, the IMF emphasizes that now is not the time to revert to pre-pandemic thinking on… well, on anything.

“Policy actions should ensure effective support until the recovery is firmly underway, with an emphasis on advancing key imperatives of raising potential output, ensuring participatory growth that benefits all, and accelerating the transition to lower carbon dependence,” they said Tuesday, adding that “strong multilateral cooperation is required to bring the pandemic under control everywhere.”

The last four years saw the world move away from “strong multilateral cooperation,” with predictably bad results, culminating in an at times discordant response to the global health crisis.

Indeed, the US, under the previous administration, resorted to blame-casting, abandoned WHO, and accused China of deliberately “seeding” (to quote Peter Navarro) the virus in advanced economies. Irrespective of your opinion on China’s culpability, publicly castigating Beijing and implicitly accusing Xi of knowingly unleashing the pathogen on the world didn’t do much to facilitate cooperation or fact-finding, both of which would have been difficult enough on their own.

In advanced economies, the IMF sees the US and Japan reclaiming pre-pandemic (i.e., end-2019) activity levels later this year. For Europe and the UK, a full recovery won’t likely be achieved until 2022.

The Fund raised its forecast for the US by two percentage points versus the October projections, citing “carryover from the strong momentum in the second half of 2020 and additional support from the December 2020 fiscal package.” A smaller upgrade for Japan was similarly ascribed to stimulus plans.

It’s useful to quote at length from the full outlook in the interest of answering persistent reader inquiries about why it is that advanced economies and developed nations with sufficient monetary sovereignty have considerable leeway to battle the crisis, while emerging markets are constrained (to a greater or lesser degree). Consider the following:

Advanced economies continue to enjoy extremely low borrowing costs and can use the opportunity to provide fiscal support as needed to ensure a lasting recovery. Moreover, with well-anchored inflation expectations and subdued inflation pressure across the group, monetary policy should remain accommodative until the recovery takes firm root. Such policies would also have positive spillovers for more constrained economies and lower the likelihood of disruptive portfolio shifts stemming from divergent policy stances across countries in the recovery phase.

Emerging market economies should maintain fiscal and monetary support where debt sustainability is not at risk and where inflation expectations are well anchored. Where emerging market central banks continue to deploy asset purchase programs, the objectives should be clearly communicated—in particular, their consistency with price stability mandates. Beyond policy space considerations, strategies for macroeconomic and financial stability—including exchange rate policies—will vary according to the structure of individual economies and the types of shocks they confront during recovery. In countries with deep financial markets and low balance sheet mismatches, exchange rate flexibility can effectively absorb shocks and limit resource misallocation. In countries with balance sheet vulnerabilities and market frictions, foreign exchange intervention and temporary capital flow management measures may, under some circumstances, be useful, including for enhancing the autonomy of monetary policy to respond to domestic inflation and output developments.

There’s nothing “new” there, but it’s a handy reference for those who sometimes struggle to understand why myself (and others) are insistent on the notion that citing emerging markets when arguing against fiscal-monetary cooperation in advanced economies is a nonsense argument. It is, in the simplest possible terms, apples to oranges. Extreme examples (e.g., comparisons between the US and Venezuela) are straw men, and references to Italy, Spain, Portugal, and Greece, are non sequiturs — they’re not monetary sovereigns, and when their sovereign stepped in forcefully, bond market “vigilantes” didn’t just relent, they turned to buyers, driving borrowing costs for Europe’s periphery below those for the US government.

In any event, coming quickly back to the IMF’s latest outlook, chief economist Gita Gopinath, speaking during an online briefing, said Joe Biden’s $1.9 trillion stimulus proposal has the potential to boost US economic output by 1.25% this year and 5% over three years.

She called that estimate “preliminary,” and noted that “many things are still being worked out at this point.”

Yes, “many things” do indeed remain to be “worked out.” Just ask Mitch McConnell.

In her written assessment, Gopinath delivered a reminder of just how damaging 2020 really was. “Even though the estimated collapse (-3.5%) is somewhat less dire than we had previously projected (-4.4%) owing to stronger-than-expected growth in the second half of last year, it remains the worst peacetime global contraction since the Great Depression,” she wrote, adding that “because of the partial nature of the rebound, over 150 economies are expected to have per-capita incomes below their 2019 levels in 2021.”


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