Speech

Crisis and Opportunities: New Finance and New Economy in a New Situation

October 24, 2020

Greetings from Washington DC.

It is my great pleasure to speak to you on behalf of the International Monetary Fund and to be with you—virtually, at least—in our dynamic host city of Shanghai. Even in these challenging times, this city stands as a symbol of technology and innovation, reminding us of our collective capacity to build a better future.

Today, I will focus my remarks on four topics: (i) the global and Asia-Pacific economic outlook; (ii) lessons we have learned so far from the Asia and Pacific region’s experience in dealing with the COVID-19 crisis; (iii) challenges and opportunities arising from the pandemic; and (iv) policies to build smarter, greener, and more inclusive economies.

I. Global and Asia-Pacific Outlook

Let me start with the global outlook.

The ascent to a full recovery will likely be long, uneven, and uncertain, yet there are some reasons to be hopeful. Testing has been ramped up, treatments are improving, and vaccine trials have proceeded at an unprecedented pace. And recent data suggest that many economies have started to recover at a faster pace than anticipated.

Global growth is projected at minus 4.4 percent in 2020 and plus 5.2 percent in 2021. Our 2020 prediction is less severe than our June 2020 projections. The revision is driven by a 2.3 percentage point increase in projected growth for advanced economies, reflecting their better second-quarter GDP numbers. In addition, China’s return to growth has been stronger than expected in June, and we have revised our 2020 forecast for China up by 0.9 percent. Indeed, we saw continued signs of that more rapid recovery in the third quarter data that were just released. For many other emerging market and developing economies, however, prospects remain precarious.

The fiscal, monetary, and regulatory responses across the world—unprecedented in their scale and speed—helped support households’ disposable income, protected firms’ cashflow, and bolstered banks’ provision of credit. Collectively these actions have so far prevented a recurrence of the financial catastrophe of 2008–09 at the global level.

Let me turn now to the outlook for the Asia and Pacific region. In a nutshell, we have a multispeed recovery in the region.

Many countries have successfully contained the initial wave of the virus.

In some cases, however, later waves or localized outbreaks have emerged. And sadly, a few countries are still striving to flatten the infection curve.

For the region as a whole, growth has been downgraded by 0.6 of a percent from our June projections. We now forecast a 2.2 percent contraction for the region in 2020—the most severe contraction in living memory. Indeed, last October, before the pandemic, we had projected the Asia and Pacific region to grow at 5.1 percent in 2020. The expected loss of output in the Asia and Pacific region is likely to be tremendous and may take years to recover.

Bucking this trend, China’s growth outlook has improved to 1.9 percent from the June projection of 1.0 percent. As the world’s second largest economy, China remains the main trading partner for the region, accounting for more than 20 percent of the Asia and Pacific region’s total trade. China’s recovery will support growth in the Asia and Pacific region and the rest of the world.

Let me turn now to risks.

Our forecast is subject to exceptionally high uncertainty. On the upside, progress on vaccines may be faster than expected. The Asia and Pacific region is well situated in this regard, with China and India being major global producers of vaccines and medicines.

But there are perhaps more risks to the downside: The virus itself could resurge. Progress on treatments and vaccines might be slower than anticipated, and access may be unequal. Economic activity could be lower than expected, with renewed social distancing and lockdowns. And deteriorating financial sentiment could trigger a sudden stop in new lending or result in a failure to roll over existing debt.

II. Lessons from the Asia and Pacific Region

The Asia and Pacific region’s experience highlights two key lessons.

First, an early public-health response, when infection rates are still low, is vital to flatten the infection curve. On this front, the Asia and Pacific region did particularly well in comparison to other regions, probably because of its experience with previous pandemics.

Second, relaxing containment measures only after the virus has been suppressed is associated with better economic outcomes. On this front, the Asia and Pacific region likewise did well in general, with most countries reopening their economies when new cases were low, which has paved the way for a strong economic recovery.

Going forward, the ability of countries to contain the virus without resorting to strict lockdowns will be a key driver of economic outcomes.

III. Medium- and Long-Term Challenges and Opportunities

Now let me turn to medium- and long-term challenges and opportunities.

Before the pandemic, the Asia and Pacific region faced important challenges. These included population aging, slowing productivity growth, high corporate and household debt, and rising inequality. And the crisis is expected to amplify some of these.

For example, the economic contraction this year has worsened corporate and household leverage ratios and caused banks’ NPLs to rise, which may ultimately weigh on credit provision. Public balance sheets also have deteriorated, affecting governments’ ability to absorb risk and support growth. The pandemic could also worsen inequality. Our recent research finds that, following the pandemic, income inequality is likely to rise further over the medium term unless decisive measures are taken to change course.

IV. Opportunities to Build a Better Future

It is now a moment of transformation to build a better future. As the world works to defeat the pandemic, countries can transform their economies to be smarter, greener, and more inclusive.

Let me mention two areas where the Asia and Pacific region could seize opportunities.

First, digitalization and automation, on which the Asia and Pacific region has been at the forefront.

Digitalization has kept many firms going during the pandemic, by allowing many employees to work from home. It also allowed students to keep learning and households to receive lifeline support—despite outbreaks and lockdowns. Digitalization also helped governments deliver key government services, such as cash transfers to informal workers.

The Asia and Pacific region is also a leader in the use and production of industrial robots. For example, in 2018, nearly two-thirds of the world’s operational stocks of industrial robots were in the region, and more than 40 percent of the world’s new robots were installed in China.

One silver lining of the pandemic could be to accelerate the spread of new technologies, boosting productivity and growth.

Second, a greener recovery.

The need for investment provides an opportunity to shape the environment for years to come through green measures that also boost growth and employment.

Here too in many areas the Asia and Pacific region is leapfrogging. For example, China remains a world leader in renewable power and electric vehicle deployment in recent years.

We welcome China’s new commitment to carbon neutrality by 2060 and encourage all countries to scale up their ambition in their submissions for COP26 next year. Our research shows that a combination of increasing carbon prices, along with green infrastructure investment and subsidies to renewables production, can help our environment while also boosting growth during the post-pandemic recovery.

V. Policy Recommendations

So, how to meet the challenges and reap the opportunities? Here, let me highlight a few of the policy priorities going forward.

First, Asia-Pacific economies should continue their efforts at containing the health crisis.

Second, monetary and financial policies should remain supportive when output gaps remain large and inflation low, while reducing vulnerabilities in both corporate and financial sectors. Fiscal support needs to be better targeted to the most vulnerable, including spending on health facilities and social safety nets. Structural reforms, including in labor market, are needed to limit scarring and curb the rise in inequality, which will help to achieve long-term productivity gains.

Third, countries should scale up their efforts towards greater digitalization, as well as mitigation and adaptation efforts for a greener recovery.

And finally, collaboration and cooperation will need to continue in the areas of health, vaccines, and trade and investment.

VI. Conclusion

To conclude, we are seeing a less dire contraction, but the global recovery will be long, uneven, and uncertain. Macro policy support must not be withdrawn before the recovery has gained traction. And perhaps most important, policymakers will need to look beyond the immediate recovery and make sure that any measures implemented now also serve the longer-term need to help generate more inclusive, smarter, and greener growth in the period ahead.

Thank you!