A Subdued Recovery, with Damage to Undo

Nevertheless, as the January 2021 Global Economic Prospects reports, that recovery is expected to be subdued. Not only will it leave global output well below pre-pandemic levels, but even that modest rebound could be derailed by a number of risks, including interruptions in the deployment of a vaccine or turbulence stirred by the mountain of debt accumulated by many emerging market and developing economies.

To guide and nurture this fragile return to economic and public health, it will be vital to contain the pandemic and pursue a rapid and widespread distribution of vaccines, notwithstanding logistical impediments in many developing countries. Although support for businesses and households will need to continue, it will be constrained by limited fiscal and monetary policy space.

Crawling Back

The numbers are sobering and the challenge is daunting.

, exceeded only by ones linked to the two World Wars and the Great Depression. The recovery this year assumes that control measures reduce infection rates and that the vaccination process gathers pace so that vaccine coverage is widespread around the world by the end of next year.

Output in emerging market and developing economies as a group is expected to expand 5% this year, but this follows an economic blow that erased at least 10 years of per capita income gains in more than a quarter of the countries in this group. Much of the increase in GDP this year will be due to China. Excluding China, emerging market and developing economies are forecast to grow at a more muted pace of 3.4% in 2021, as many countries continue to struggle with virus outbreaks.

Despite renewed growth, this is well below the pre-pandemic pace. Further, per capita incomes are projected to be lower in the majority of these countries-an indication of the poverty reduction setback dealt by the pandemic. Logistical impediments in vaccine distribution, which may delay the vaccination process for up to a year relative to advanced economies, are likely to represent a substantial headwind to activity.

Uncertainty and Risk

In spite of the prognosis for growth if all goes reasonably well, the outlook remains highly uncertain, and a number of alternative outcomes are possible. A downside scenario in which cases spike early this year, necessitating further restrictions on activity, and in which the vaccination process is delayed, would lead to weaker and more protracted recovery with global growth estimated at a scant 1.6%. Should financial conditions tighten drastically and authorities not be able to contain financial stress and widespread defaults, financial crises could result, potentially leading to another year of decline in incomes around the world.

Among key concerns for the outlook is how the pandemic has further exacerbated debt-related risks that had raised red flags even prior to the COVID-19 shock. Debt can be used to finance growth-enhancing investments. In addition, the pandemic has necessitated large-scale borrowing to finance many critical support measures. However, previous periods of rapid debt accumulation are littered with painful reckonings, and the magnitude and speed of the recent debt buildup raises concerns about debt sustainability. Policymakers will have to balance the unwinding of fiscal support measures and ensuring fiscal sustainability with taking care to avoid premature withdrawal of necessary support measures. Debt relief may in some instances be necessary to enable hard-hit countries support their most vulnerable populations through the crisis.

Even after the recovery gets underway, the global economy is expected to experience a protracted period of below-trend output and substantial income losses. Global potential growth-the rate at which growth can be sustained at full employment and full capacity utilization-was already slowing prior the pandemic. COVID-19 has accelerated this slowdown for the global economy and emerging market and developing economies alike.