The global economy is expected to expand by 4% in 2021, the World Bank has announced in its January 2021 Global Economic Prospects.
This expansion assumes that an initial rollout of a vaccine for the novel coronavirus (COVID-19) becomes widespread throughout the year.
The report noted that a recovery, however, will likely be subdued, unless policy makers move decisively to tame the pandemic and implement investment-enhancing reforms.
“Although the global economy is growing again after a 4.3% contraction in 2020, the pandemic has caused a heavy toll of deaths and illness, plunged millions into poverty, and may depress economic activity and incomes for a prolonged period,” the report read, “Top near-term policy priorities are controlling the spread of COVID-19, and ensuring rapid and widespread vaccine deployment.”
To support economic recovery, authorities also need to facilitate a re-investment cycle aimed at sustainable growth that is less dependent on government debt, the report added.
World Bank Group President David Malpass said, “While the global economy appears to have entered a subdued recovery, policymakers face formidable challenges, in public health, debt management, budget policies, central banking and structural reforms, as they try to ensure that this still fragile global recovery gains traction and sets a foundation for robust growth.”
Malpass also said, “To overcome the impacts of the pandemic and counter the investment headwind, there needs to be a major push to improve business environments, increase labour and product market flexibility, and strengthen transparency and governance.”
The collapse in global economic activity in 2020 is estimated to have been slightly less severe than previously projected, mainly due to shallower contractions in advanced economies and a more robust recovery in China.
In contrast, disruptions to activity in the majority of other emerging market and developing economies were more acute than expected.
“Financial fragilities in many of these countries, as the growth shock impacts vulnerable household and business balance sheets, will also need to be addressed,” said Carmen Reinhart, Vice President and World Bank Group Chief Economist.
The near-term outlook remains highly uncertain, and different growth outcomes are still possible, as a section of the report details. A downside scenario in which infections continue to rise, and the rollout of a vaccine is delayed, could limit the global expansion to 1.6% in 2021.
Meanwhile, in an upside scenario with successful pandemic control and a faster vaccination process, global growth could accelerate to nearly 5 percent.
In advanced economies, a nascent rebound stalled in the third quarter (Q3), following a resurgence of infections, pointing to a slow and challenging recovery. US GDP is forecast to expand 3.5% in 2021, after an estimated 3.6% contraction in 2020.
In the euro area, output is anticipated to grow 3.6% in 2021, following a 7.4% decline in 2020. Activity in Japan, which shrank by 5.3% in the year just ended, is forecast to grow by 2.5% in 2021.
Aggregate GDP in emerging market and developing economies, including China, is expected to grow 5% in 2021, after a contraction of 2.6% in 2020. China’s economy is expected to expand by 7.9% this year following 2% growth last year.
Excluding China, emerging market and developing economies are forecast to expand 3.4% in 2021 after a contraction of 5% in 2020. Among low-income economies, activity is projected to increase 3.3% in 2021, after a contraction of 0.9% in 2020.
The World Bank report further highlighted that policymakers need to continue to sustain the recovery, gradually shifting from income support to growth-enhancing policies. In the longer run, in emerging market and developing economies, policies to improve health and education services, digital infrastructure, climate resilience, and business and governance practices, will help mitigate the economic damage caused by the pandemic, reduce poverty and advance shared prosperity.
Central banks in some emerging market and developing economies have employed asset purchase programmes in response to pandemic-induced financial market pressures, in many cases for the first time.
When targeted to market failures, these programmes appear to have helped stabilise financial markets during the initial stages of the crisis. However, in economies where asset purchases continue to expand and are perceived to finance fiscal deficits, these programmes may erode central bank operational independence.
They also risk currency weakness that de-anchors inflation expectations, and increase worries about debt sustainability, the report elaborated.