Strong policy action required to maintain economic recovery, IMF chief says

For many economies, including the US, Japan and some in Europe, economic activity in the third quarter turned out stronger than expected

IMF managing director, Kristalina Georgieva, says strong policy action by governments is still required to support the economic recovery seen in the third quarter of this year. AFP

The global economy continued a better-than-expected recovery in the third quarter of this year, but as momentum slows with a surge in Covid-19 infections, policy makers must continue to provide fiscal and monetary support, the International Monetary Fund's chief said.

“Data since our latest projections confirm the global recovery has continued," Kristalina Georgieva, IMF managing director, said in a blogpost ahead of the G20 leaders’ virtual summit this week.

Third quarter economic activity was better than expected in United States, Japan, and the Euro area, she said. On Thursday the latest data from the Organisation for Economic Co-operation and Development shows economic output rebounded in some of the 37 OECD member states by 9.0 per cent in the third quarter, after unprecedented falls in the first half of the year. However it remains 4.3 per cent below its pre-crisis high.

“The most recent data for contact-intensive service industries [however] point to a slowing momentum in economies where the pandemic is resurging,” Ms Georgieva said.

Even with a breakthrough in vaccines, the resurgence of the pandemic shows how uncertain an economic recovery will be, she said. The virus has infected 56.5 million people and claimed more than 1.35 million lives. Its resurgence has forced some of Europe's biggest economies back into lockdowns.

Financial lifelines, such as cash transfers to households and augmented unemployment benefits that were rolled out early on in the pandemic by governments, have either ended, or are set to expire by the end of the year. Job losses, especially in the travel and tourism sector, are still projected to be sizable, Ms Georgieva said.

“That is why we need continued strong policy action to combat uncertainty," she said. "Success here depends on us acting swiftly – and acting together.”

Key priorities for countries are ending the health crisis, reinforcing an economic bridge to recovery and building the foundation of a better global economy, Ms Georgieva said.

The virus has tipped the global economy into its worst recession since the 1930s. Last month, the IMF said it expects global output to shrink 4.4 per cent this year and expand 5.2 per cent next year.

Ms Georgieva urged the group of world’s 20 biggest economies, the G20, to continue multilateral efforts to help the poorest nations through the crisis.

Since March, the group has rolled out nearly $12 trillion in fiscal stimulus. That has been supported by about $7.5tn in monetary actions by central banks globally. These measures have supported the global banking system, provided liquidity to financial markets and put a floor under the global economy.

G20 leaders are meeting online November 21 and 22 for their annual summit held under the presidency of Saudi Arabia this year.

Continued support of poor and indebted countries is imperative, Ms Georgieva said in a separate G20, surveillance Note to the G20 leadership.

“Debt relief, grants and concessional financing, including from private creditors, will help [these] economies conserve international liquidity," she said. It will help these economies to "direct scarce resources to health spending and economic relief for their populations until the crisis subsides”.

Earlier this month finance ministers and central bankers agreed on a joint framework to restructure government debt owed by some of the poorest nations. The move follows the group's initiative of a time-bound debt suspension of 44 countries in April, making $14 billion in funds available to fighting the pandemic.

"For many economies – including the United States, Japan, and the Euro Area – economic activity in the third quarter turned out stronger than expected"

The IMF chief called for similar measures that mirrored US President Franklin Roosevelt's New Deal, which were a series of programmes, projects, financial reforms, and regulations enacted to pull America out of the Great Depression.

Ms Georgieva also called for a "synchronised infrastructure investment push" in the post pandemic era to "invigorate growth, limit scarring, and address climate goals".

Global GDP can jump 2 percentage points by 2025 if G20 countries with larger fiscal space increase their infrastructure spending by 0.5 per cent of GDP next year and 1 per cent in the following years – while economies with smaller fiscal room invest a third of that amount, she said.

“This compares with just below 1.2 per cent for an unsynchronised approach,” Ms Georgieva said. “If countries acted alone, it would take about two-thirds more spending to achieve the same outcomes.”

The IMF chief reiterated the organisations call for multilateral support and a reduction of trade tensions and restrictions. Strengthening rules-based trade, an international system of taxation where “everyone pays their fair share”, will foster equality, she said.

“Without these, the global economy will face a much more challenging road ahead.”

While a medical solution to the crisis appears tenable with several vaccine breakthroughs, global coordination is needed to beat the virus across borders, she said.

Stepping up multilateral efforts on the manufacturing, purchase and distribution of vaccines – especially in poorer nations is needed, she said.

It also requires “removing recent trade restrictions” on all medical goods and services, including those related to vaccines.

“We estimate that faster progress on widely shared medical solutions could add almost $9tn to global income by 2025,” Ms Georgieva said. "This would help narrow the income gap between poorer and richer nations at a time when inequality between countries is set to increase."