Keeping the recovery on track

11.24.2021

Economic growth has picked up this year, helped by strong policy support, the ongoing deployment of effective vaccines and the gradual resumption of many economic activities, particularly in service sectors.

Recovery remains very uneven, with different outcomes across countries, sectors, and demographic groups in terms of production and employment, leaving countries facing different political challenges. In some countries where production has returned to pre-pandemic levels, such as the United States. In other countries, especially in Europe, employment has largely remained, but output and total hours worked have not yet fully recovered. A rapid upturn in activity has occurred in several emerging market economies, but in some cases, it has been accompanied by high inflationary pressures.

In the economic sphere, annual global GDP growth is expected by 5% in 2021 and 2022. It will be driven by a significant recovery in Europe and the likelihood of additional fiscal support in the United States, as well as reduced household savings will stimulate growth prospects in advanced economies. Despite the rise in global GDP above pre-pandemic levels, disparities in production and employment remain in many countries, especially in emerging and developing countries where vaccination rates are low.

Inflation is on the rise in the US, Canada, the UK and emerging market economies, although it remains low in advanced economies in Europe and Asia. Higher commodity prices and global transportation costs now add about 1.5 percentage points to the G20’s annual consumer price inflation, which caused inflation to skyrocket in 2020.It is projected to decline from 4.5% by the end of 2021 to about 3,5% by the end of 2022, remaining above the pre-pandemic level. Supply pressure should ease gradually, wage growth will remain moderate and inflation expectations will remain subdued, but short-term risks are on the rise.

The economic impact of the Indian Delta strain has been relatively moderate in countries with high vaccination rates. However, when considering its immediate consequences, the impact on global supply and cost chains can be emphasized. Rapid progress in vaccinations or a sharper reduction in household stocks would boost demand but would also potentially increase short-term inflationary pressures. Slow progress in vaccine deployment and the continued spread of new viral mutations could lead to poorer recovery and greater job losses. The difficult policy choices faced by emerging market economies and rising inflation also pose a potential downside risk. Governments need to ensure that all necessary resources are used to roll out vaccinations as quickly as possible around the world to save lives, safeguard income and control the virus. A more determined international effort is needed to provide low-income countries with the resources they need to vaccinate their populations for their own and global benefits.

Macroeconomic policy support remains necessary, although short-term prospects are still uncertain, labor markets have not yet recovered, and policy mix depends on economic development in each country. A supportive monetary policy should be maintained, but clear guidance is needed on the horizon and the extent to which any excess inflation will be tolerated, as well as the planned timing and sequencing of possible steps towards normalizing monetary policy. Fiscal policy should remain flexible and depend on the state of the economy. Premature and abrupt withdrawal of political support should be avoided, as the short-term prospects are still uncertain.

A robust fiscal framework that provides clear guidance on the medium-term path to debt sustainability and likely policy changes along the way will help maintain confidence and increase transparency in budget options. Stronger public investment and enhanced structural reforms are needed to improve resilience and improve prospects for sustainable and equitable growth.

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