Twice a year, the International Monetary Fund (IMF) publishes its “World Economic Outlook” with forecasts for global economic development. The latest forecast was published at the beginning of April this year. Five key points are particularly interesting from my point of view.

#1 Improvement in the global economic outlook

When the April 2020 economic outlook was released, the Corona pandemic was still in its early stages in Western countries. The projected slump in global real gross domestic product (GDP) for 2020 was three percent.

The longer the pandemic lasted, the more apparent its magnitude became. In October, the feared decline in GDP for 2020 was 4.4 percent. Compared with October 2020, the estimate for 2020 has improved noticeably. The estimated 2020 global economic contraction is now 3.3 percent. This change in expectations also applies to the expected economic recovery in 2021.

world economic outlook
There are several reasons for the improvement in the global economic outlook over the past six months:
  • In the developed economies, governments have spent gigantic amounts of money to support the economy and employment. In the U.S., Joe Biden launched a $1.9 trillion stimulus package in March 2021 – the largest ever (Biden’s $1.9 Trillion Rescue Plan Set To Turbocharge U.S. Economy : NPR).
  • The rapid development of vaccines has given hope that the number of infections can be contained. This has allowed for a growing normalization of social life – and therefore of the economy.
  • In China, where the pandemic peaked in the first quarter of 2020, the economy recovered surprisingly well. The country is again buying many products from the rest of the world. Exports to China are leading to a global economic upswing.

#2 Economic recovery evades developing countries

Advanced economies are the drivers of the improved global economic outlook. In April 2020, their economic slump in 2020 (minus 6.1 percent) was still expected to be stronger than their recovery in 2021 (plus 4.5 percent). This has now been reversed: the economic upturn hoped for in 2021, with a plus of 5.1 percent, is stronger than the GDP slump in 2020 (minus 4.7 percent).

The economic growth expected in the U.S. in 2021 is particularly strong. Extensive economic stimulus packages are the main reason why the IMF expects real GDP to rise by 6.4 percent in 2021. This will more than offset the GDP decline of 3.5 percent in 2020.

For the emerging and developing economies as a whole, economic growth is expected to increase by 6.7 percent in 2021. This will more than offset the decline of minus 2.2 percent in 2020. This applies in particular to Asia, with China leading the way.

However, there are also many emerging and developing economies for which the outlook is less good. In these economies, there is a lack of funds for government stimulus programs and the purchase of urgently needed vaccines. Economies that depend heavily on tourism have been hit particularly hard. They suffered huge GDP slumps in 2020, which mostly cannot be made up even through 2022.

world economic outlook

#3 No economy was spared from economic slump – not even China!

While the global economy and the vast majority of countries saw their GDP shrink in 2020, China managed to grow its real economic output by 2.3 percent. This means that the country seems to have come through the crisis better than the rest of the world.

However, it should be noted that the Chinese economy’s growth rates before the Corona crisis were much higher than in the rest of the world. Let’s compare the average economic growth of the five years before the Corona pandemic (i.e. 2015 to 2019).

We can see that China’s economic development is still better than that of selected industrialized nations, but the differences are narrowing. For 2021, the IMF expects the Chinese economy to grow by 8.4 percent. From 2022 through 2024, however, average economic growth of only 5.4 percent is predicted.

world economic outlook

#4 Stimulus packages and tax shortfalls cause public debt to rise sharply.

The extensive government measures to stabilize the economy mean a sharp rise in government spending. At the same time, an economic slump means that tax revenues collapse. The result is a strong rise in the government debt ratio in advanced economies. This ratio indicates how large the government debt is in relation to the country’s GDP.

Government debt in 2020, measured in this way, is compared with the corresponding average figure for 2015 to 2019 in the chart below. In a number of advanced economies, the public debt ratio in 2020 was 15 to 25 percentage points higher than the previous five-year average. In 2021, this indicator is expected to rise further in the vast majority of countries – primarily because further government aid measures will be required.

#5 U.S. Federal Reserve could start the race to raise interest rates

Growing government debt leads to rising interest expenditure by the government. However, at the current low interest rates, these spending increases are manageable. Only when interest rates rise worldwide will interest expenditure increase noticeably.

I see the highest probability of interest rate increases starting in the U.S. If the U.S. economy were actually to grow at the 6.4 percent rate in 2021, there would be a risk of the economy overheating. The consequence would be a rise in prices. To prevent a high rate of inflation, the Federal Reserve would have to raise key interest rates in the USA.

When interest rates rise in the U.S., it becomes more attractive for investors in the rest of the world to withdraw their money from other countries and invest it in the U.S. However, since governments and companies in the rest of the world still need loans, they will have to offer higher interest rates as well, resulting in a global rise in interest rates.

This will be a problem for highly indebted states and companies because interest expenses will rise. A corresponding threat of corporate and sovereign bankruptcies would damage the economic upswing.

Therefore, a key challenge for economic policy is to find a balanced way to end this phase of high government spending and ultra-loose monetary policy without stalling the economic upturn.

Recommended reading: International Monetary Fund (2021): World Economic Outlook April 2021 – Managing Divergent Recoveries. Washington DC.