Global economic output is projected to grow by 4% in 2021 assuming widespread roll-out of a COVID-19 vaccine throughout the year, as per the World Bank’s Global Economic Prospects (GEP) report released on Tuesday. This projection is still 5% below pre-pandemic levels. India is expected to grow at 5.4% in fiscal year 2021/22 and 5.2% in fiscal 2022/23 after an expected contraction of 9.6% in fiscal 2020/21.
India’s expected contraction in the current fiscal year is due to a sharp decline in household spending and private investment. There was severe income loss in the informal sector which accounts for 4/5ths of employment, as per the GEP report. However, recent data indicate that recovery in manufacturing and services is gaining momentum. In 2021, the rebound from the low base is expected to be countered by subdued private investment growth due to financial sector weakness, the report says.
The global recovery has been dampened by the resurgence of the coronavirus but is expected to strengthen as confidence, trade and consumption start improving, supported by vaccinations. After an estimated 3.6% contraction in 2020, U.S. GDP is expected to grow at 3.5% in 2021 and the Euro area at 3.6%.
Emerging market and developing economies (EMDEs) are expected to grow at an average of 4.6 percent in 2021-22 reflecting the above average rebound in China (forecast at 7.9% and 5.2%, this year and next).
Key elements to the strength of the economic recovery would be investment that embraces the changed economic enviroment and an ability to reduce inequality, World Bank Group President David Malpass told reporters in a briefing call on Tuesday.
“The inequality of the downturn and the likely recovery is dramatic,” he said, adding that those with the lowest incomes were worst hit by the downturn and would likely take the longest to regain jobs, healthcare, vaccines and so forth in the post-COVID-19 economy. Those with job security, in contrast, and those at the top at the income scale were direct beneficiaries of substantial government and central bank support for their assets.
“Without course correction investment could remain feeble for years to come,” Mr. Malpass said, calling for governments, households and firms to respond to the new economic realities – protecting the most vulnerable and supporting policies that allow capital, labour, skills and innovation to shift to new purposes (such as green sectors).
‘Massive’ increases in global debt levels
There has been a “massive increase” in global debt levels because of the pandemic with EMDE government debt expected to increase by 9 percentage points of GDP in 2020, the report notes. The South Asian region saw the steepest increase, with India’s government debt expected to increase by 17 percentage points of GDP while service output contracts over 9%.
“Limiting the spread of the virus, providing relief for vulnerable populations, and overcoming vaccine-related challenges are key immediate policy priorities,” the report says, adding that policy makers need to balance the risks from large and increasing debt loads with the risks of slowing the economy via fiscal tightening.
“To confront the adverse legacies of the pandemic, it will be critical to foster resilience by safeguarding health and education, prioritising investments in digital technologies and green infrastructure, improving governance, and enhancing debt transparency. Global cooperation will be key in addressing many of these challenges,” the Bank says.
South Asia slowdown led by India
The South Asian region’s economy is expected to contract by 6.7 % in 2020 due to the pandemic. This was led by India’s deep recession, where the economy was already weakened by the stress in non-bank financial corporations, the report says.
Growth in South Asia is expected to be 3.3 % in 2021 and 3.8% in 2022 – significantly lower than pre-pandemic projections. Downside risks to growth predominate, as per the report, and include financial distress caused by abrupt tightening, widespread corporate bankruptcies, weaker than expected recoveries across sectors, extreme weather and climate change.
Continued asset purchase risks
Central Banks in EMDEs have sometimes deployed asset purchase programs as part of their pandemic response – these have helped stabilise financial markets when targeted to market failures, the Banks says. However, where asset purchase programs continue to expand and are perceived to finance fiscal deficits, they may erode central bank independence, increase concerns over debt sustainability and risk currency weakness, the report says.