Speech

Speech on the Global and Asia Economic Outlook

July 10, 2020

AS PREPARED FOR DELIVERY

Hello, everyone. It gives me great pleasure to join you today at the Greater Bay Area Chief Economist Forum and to engage in dialogue with you on issues of common interest.

We are now halfway through 2020. In the first half of the year, the COVID-19 pandemic has been at the forefront of global discussion. Indeed, for many of us, 2020 is unquestionably a year like no other we have seen in our lifetime. On the one hand, the pandemic has affected the entire world. On the other hand, we also see that countries are working hard on the health front to contain the spread of the virus and to save lives. At the same time, on the economic front, countries are also using policy measures to stabilize their economies and safeguard people’s livelihoods.

Next, I would like to talk about three things.

First, the global and Asian economic outlook and financial developments.

Since the beginning of the year, and especially over the past 5 months, the COVID-19 pandemic coupled with governments’ necessary responses to save lives, including isolation, social distancing and home quarantine, have triggered the worst downturn since the Great Depression in the 1930s.

Though still affected by the pandemic, several countries have started to reopen their economies and are making efforts to resume work and production. However, in the absence of a medical solution (for example, the development, production, and use of effective medicines and vaccines), the strength of the recovery remains highly uncertain.

Since the outbreak of the COVID-19 pandemic, the IMF has issued itsWorld Economic Outlook (WEO) and its Global Financial Stability Report (GFSR) twice, in April and again in June. In the April WEO report, our projection of global output in 2020 was brought down substantially to -3.0 percent from 3.3 percent. In our June report, the projection was further revised downward by 1.9 percent to -4.9 percent. In other words, we believe the impact of the pandemic on world output is much bigger than we thought two or three months ago.

Almost all our member countries are seeing their growth forecasts this year revised downward, and most into negative territory. A synchronized deep downturn in 2020 is taking place, in both advanced economies (-8 percent) and emerging market and developing economies (-3 percent; -5 percent if we exclude China). Over 95 percent of countries are projected to have negative per capita income growth in 2020, with export-dependent economies particularly affected.

Given that the pandemic is still developing across the globe and many countries have yet to bring it under control, there remains tremendous uncertainty surrounding our 2020 annual growth forecast. On the upside, better understanding of the virus and more progress on vaccines and effective medicines could substantially bolster confidence that we will overcome the pandemic sooner. Larger, more forceful economic and financial policy support could also lead to faster and more complete recovery. On the downside, further waves of infections, a rapid tightening of financial conditions, declining trade, and rising geopolitical tensions, among other factors, could further erode confidence with respect to consumption and investment, leading to deeper downturns or slower growth. Global trade is projected to collapse by nearly 12 percent in 2020.

Next, what can we say about the economic and financial outlook in Asia?

With the exception of China, most Asian economies have had to ramp up their containment measures since the release of our April WEO report. The current picture of virus cases differs across the region. Some countries are experiencing rapidly rising cases each week. Others are trying to flatten their curves. And yet others have been relatively successful in getting the virus under control. The main impact of lockdowns on the real economy is in the second quarter of 2020 for most Asian economies excluding China.

About our GDP forecast, for the first time in recent memory, Asia’s output is expected to contract by 1.6 percent—a further downgrade from our April projection of zero growth. Asia’s economic growth in the first quarter of 2020 was, in fact, better than projected in April—partly owing to early stabilization of the virus in some countries. But, according to our June report, projections for 2020 have been revised downward for most of the countries in the region on account of weaker global conditions and more protracted containment measures in several emerging economies.

We are projecting that only a very small number of economies in Asia and the Pacific will actually grow this year, including China by 1.0 percent. Most economies in the region are expected to contract in 2020, and some quite sharply—Korea by around 2 percent, India by 4.5 percent, Japan by 5.8 percent, and some other economies by even more, given their dependence on remittances, tourism, and/or commodities.

It is also important to note that across Asia, on the demand side the only spending that is growing in 2020 is government consumption and investment, in emerging as well as advanced economies. In other words, economies are relying heavily on government stimulus.

Second, it will take longer for the global and Asian economies to recover.

We believe that the recovery will start in 2021, and our projection of global output in 2021 is 5.4 percent. This may sound good, but it is 0.4 percent lower than our April forecast of 5.8 percent, and combined with the sharp contraction in 2020, it implies a cumulative loss to the global economy over two years (2020–21) of over USD 12 trillion from this crisis. Hotels, tourism, the travel industry, among others, will be particularly impacted.

As for Asia, in 2021 we project a pick-up of 6.6 percent, with China growing at 8.2 percent. This too has been revised downward from our April forecast (by 1 percent), leaving the level of Asia’s real GDP 5 percent lower in 2021 compared to pre-crisis projections. In other words, we expect output losses in Asia from the pandemic to be persistent. And, unfortunately, some of this will be permanent. We are assuming a recovery of the private sector in 2021, but the pace is slower than previously expected. Moreover, the assumptions regarding this private-sector–led recovery may turn out to be somewhat too optimistic.

Why are we expecting this kind of slow and partial recovery?

Here I wish to emphasize the following reasons.

First, the scope and duration of lockdown have been more substantial than expected, and we are already seeing some permanent negative effects, despite policy stimulus. A recent study, which was conducted by IMF staff and covers 57 economies, shows that lockdowns have led to a contraction in industrial production of about 12 percent a month. Even when lockdown measures are fully relaxed, economic activity is not likely to return to full capacity, on account of social distancing and other containment measures. There may be a negative impact on productivity, as surviving businesses enhance workplace safety and hygiene standards. Also, many Asian economies depend on tourism, remittances, and in-person contact services, which will take a lot longer to recover.

Second, trade growth has slowed down. Global trade contracted by 3.5 percent in the first quarter relative to the same period last year. For Asian economies, the overall picture that they heavily depend on global supply chains has not changed, so that they cannot grow by themselves while the whole world is suffering. Fundamentally reorienting the growth model towards domestic demand and away from heavy reliance on exports is a process that has already started, but it is clear that the region still depends on demand from other parts of the world. Given the sharp recession in advanced economies outside Asia, it is expected that the overall exports of Asia will contract quite significantly in 2020.

Third, domestic inequality was already rising fast in Asia and our recent research shows that past pandemics added to this inequality, especially hurting the employment prospects of those with limited education. Not only is inequality widening, but the adverse impacts of the COVID-19 shock are made even worse in Asia, which has a high proportion of informal workers. This can leave deeper economic scars, make the recovery more protracted, and pose greater challenges to social protection and health care systems.

Fourth, high debt levels will be a common problem in the global economy and Asia. Weakened household and corporate balance sheets in many Asian countries can weigh on investor sentiment and affect the pace of the recovery, amplifying the scarring effects.

And finally, should the private-sector-led recovery not occur as we are currently forecasting, policymakers in Asia will not have the space to provide much economic and financial policy support as they have been able to do in 2020 so far.

Third, how to support the recovery with effective and strong policy measures?

For policymakers across the globe, the severe downturn and slow recovery mean that we are not out of the woods yet. There is a need for careful attention and great prudence as policymakers prepare their policy response.

Let’s first look at short-term policies for the pandemic and the recovery from it.

On the positive side, the recovery is benefitting from tremendous policy support—particularly in advanced economies—and to a lesser extent in emerging market and developing economies. Global fiscal support now stands at over $10 trillion. In addition, major central banks have provided substantial additional stimulus via interest rate cuts, liquidity injections, and asset purchases, which has eased financial conditions. In many countries, these measures have succeeded in supporting people and preventing large-scale bankruptcies, thus helping to reduce lasting scars and aiding the recovery.

Although the real economic outlook is still not positive in many countries, the exceptional policy support, particularly by major central banks, has driven a strong recovery in financial conditions. Equity prices have rebounded and credit spreads have narrowed. Portfolio flows to emerging market and developing economies have stabilized. And currencies that sharply depreciated have strengthened. By preventing a financial crisis, policy support has helped us avoid even worse outcomes. Yet at the same time, the disconnect between real and financial markets raises concerns of excessive risk taking and is a significant vulnerability.

Currently, some countries have begun to reopen their economy and resume work and production. The focus of their policy support will need to move toward encouraging people to return to work, as well as to helping reallocate workers to sectors with growing demand and away from shrinking sectors. Support for a recovery should also include actions to repair balance sheets and address debt overhangs. This will require strong insolvency frameworks and mechanisms for restructuring and disposing of distressed debt.

As for Asia, fiscal and monetary policy support has been substantial—on an unprecedented level—and especially so in Japan, Australia, Singapore, and New Zealand. Support in Asian emerging markets has been mainly in the form of guarantees, loans, and quasifiscal activities, on account of a lack of fiscal space in government budgets. These helped to provide support to firms facing liquidity constraints.

Do we see the need for more support in Asian countries in the future? It depends on whether there are second waves of infection. In some cases, where government support is temporary, the authorities will need to look at whether they renew or revise measures to avoid creating serious fiscal pressures. Some low-income developing countries and small island states will need to actively seek additional budget support from development partners.

There are some specific challenges facing Asian countries. Let me discuss two of these. The first challenge, as mentioned before, is the worsening inequality and high levels of informality, which make it difficult to implement policy support, and which may exacerbate the scarring left by the crisis. The second challenge is capital flow volatility. If financial-market jitters return, then we may see the use of capital flow measures.

The international community has a responsibility to ensure that developing economies can finance critical spending by providing concessional financing, debt relief, and grants. At the same time, emerging market and developing economies must also have access to international liquidity. As there are a large number of emerging economies in Asia, ensuring financial market stability, making available central bank swap lines, and deployment of a global financial safety net, will all be imperative.

As for the medium and longer term, besides fighting the pandemic and promoting recovery, policymakers in Asia will also have to focus on the structural challenges in the region. In fact, these challenges have already been in existence before COVID-19, and the pandemic has highlighted the importance of addressing them.

The first such challenge is population aging, which we at the IMF have written a great deal about. One important finding is that demographic trends could subtract ½ to 1 percentage point from annual GDP growth over the next three decades in countries like Japan where the aging problem is quite severe. Therefore, policies should incentivize greater labor-force participation by women and others to offset the impact of population aging.

Slowing productivity growth is a second major challenge. Policies should foster greater corporate dynamism by promoting the healthy entry and exit of firms, helping firms to address their debt overhang, and encouraging business innovation, so as to promote productivity growth. In some Asian countries for example, 5-10 percent of the total corporate capital stock is tied up in so-called “zombie” firms. If this problem can be solved, resources can be redirected to more competitive, innovative, and productive uses.

The third challenge is to promote trade openness. For decades, Asian economies used to benefit from rapid trade growth. But in recent years, they have also felt the impact from slowing trade on their economy. We notice that countries are making strong efforts to resolve trade and technology disputes, and that they are still promoting regional integration and improving the multilateral rules-based trading system. Our modeling suggests that further trade liberalization and regional integration could, over time, lead to a new equilibrium in which Asia’s GDP would be higher by more than 10 percent.

The fourth challenge relates to new technologies. Digitalization and automation offer huge opportunities to Asia and to the world. Two-thirds of the world’s industrial robots are used in the region, and the share of retail sales taking place online is 1½ times larger in Asia than in Western Europe or the United States. In the current COVID19 crisis, the digital economy has played a key role, in terms of enabling working from home, improving business flexibility, and enhancing the efficiency of resource allocation. But these new technologies also bring challenges, such as the need to combat growing inequality (including the digital divide) and to support those displaced by new technologies.

Finally, policies should promote both mitigation and adaptation to climate change, and this will require global cooperation. Where conditions permit, countries should undertake green public investment to accelerate the recovery and support longer-term climate goals. We will need to work together and make concerted efforts to develop mechanisms for carbon pricing and to promote investment in resilient infrastructure.

Conclusion

Global cooperation is vital to deal with both this truly global crisis and the more structural challenges that will remain with us in the medium to long term. The crisis has emphatically illustrated how necessary and beneficial our global linkages are. The virus knows no borders, and the only way to conquer it is to work together. For Asia, which is highly integrated in the global value chain, external demand is especially important. The strength of its recovery will likely depend on the openness and innovation capability of Asia and other parts of the world, as well as on forging stronger links within the region and enhancing regional / sub-regional cooperation and integration, including the development of the Greater Bay Area.

The IMF will continue to do all it can to ensure adequate international liquidity, provide emergency financing, support the G20 Debt Service Suspension Initiative, and furnish advice and support to countries during this unprecedented crisis. Globally, we have provided substantial lending support to our member countries. In the Asia-Pacific region, we are constantly engaging with our members. In terms of lending, so far for the Asia Pacific region we have agreed on four emergency funding programs and one IMF debt-relief arrangement. In terms of capacity development, despite connectivity challenges, our work has continued virtually on topics like cash management, supervisory responses to the crisis, and actions to safeguard tax compliance after the crisis.

In short, we are facing a complex situation, with major tasks and serious challenges ahead. Only by working together can we ensure that the global economy continues to move toward a greener, smarter, and fairer path of recovery. The IMF stands ready to provide all possible assistance to its membership.

Thank you once again for inviting me to participate, and I wish you every success in this event!