Global Economic Prospects

The global economy is set to expand 5.6 percent in 2021—its strongest post-recession pace in 80 years. This recovery is uneven and largely reflects sharp rebounds in some major economies. In many emerging market and developing economies (EMDEs), obstacles to vaccination continue to weigh on activity. By 2022, last year’s per capita income losses will not be fully unwound in about two-thirds of EMDEs. The global outlook remains subject to significant downside risks, including the possibility of additional COVID-19 waves and financial stress amid high EMDE debt levels. Policy makers will need to balance the need to support the recovery while safeguarding price stability and fiscal sustainability and to continue efforts toward promoting growth-enhancing reforms. See Less

Growth in East Asia and Pacific (EAP) is projected to accelerate to 7.7 percent in 2021, largely reflecting a strong rebound in China. Nevertheless, output in two-thirds of the countries in the region will remain below pre-pandemic levels until 2022. The pandemic is expected to dampen potential growth in many economies, especially those that suffered most from extended outbreaks of COVID-19 and the collapse of global tourism and trade. Downside risks to the forecast include, the possibility of repeated and large COVID-19 outbreaks amid delayed vaccinations; heightened financial stress amplified by elevated debt levels; and the possibility of more severe and longer-lasting effects from the pandemic, including subdued investment and eroded human capital. Disruptions from natural disasters are a constant source of severe downside risk for many countries, especially island economies. On the upside, risks include accelerated vaccination rollouts and greater-than-expected spillovers from recoveries in the United States and other major economies. See Less

Growth in Europe and Central Asia (ECA) is projected to reach 3.9 percent in 2021, with firming external demand and elevated industrial commodity prices offsetting the negative impact of recent resurgences in new COVID-19 cases. Regional growth is forecast to remain at 3.9 percent in 2022 as the recovery in domestic demand gains traction. The outlook remains uncertain, however, with uneven vaccine rollouts and the withdrawal of domestic macroeconomic support measures weighing on the regional recovery. Growth could be weaker than projected if the pandemic takes longer than expected to abate, external financing conditions tighten, or policy uncertainty and geopolitical tensions rise further. Legacies of the pandemic, including slowdowns in physical and human capital accumulation, loom over the medium-term outlook if left unaddressed. See Less

Growth in Latin America and the Caribbean (LAC) is projected to be 5.2 percent in 2021—a rebound insufficient to return GDP to 2019 levels this year after a historically deep recession in 2020. The rebound will be supported by moderate progress in vaccine rollouts, relaxation of mobility restrictions, and improved external economic conditions. Per capita income losses will still be deep in 2022, particularly for small island economies in the Caribbean. Although spillovers from robust growth and additional fiscal support in the United States through trade and confidence channels are an upside risk to the baseline forecast, the balance of risks is tilted to the downside. Key downside risks include a slower-than-expected COVID-19 vaccine rollout; further surges in new COVID-19 cases, including from variant strains of the virus; adverse market reactions from social unrest or strained fiscal conditions; and disruptions related to social unrest or to climate change and natural disasters. See Less

Output in the Middle East and North Africa region is projected to grow by a subdued 2.4 percent in 2021, only half the pace of the recovery that followed the 2009 global recession. Higher oil prices have bolstered growth prospects in oil exporters, but the improvement has been limited by new virus outbreaks and mixed vaccination progress. COVID-19 resurgences have also worsened the outlook for oil importers. By 2022, regional activity is expected to remain 6 percent below pre-pandemic projections. Risks to the regional outlook remain predominantly to the downside. Limited vaccine progress suggests that the pandemic may intensify again, new variants may emerge, and mobility restrictions may be reimposed. The region is also exposed to risks from conflict and social unrest, high debt in some economies, and unfavorable commodity price developments. These risks could interact and further undermine living standards, increase deprivation for vulnerable communities, and heighten food insecurity. See Less

Output in South Asia is expected to expand 6.8 percent in 2021, a pace on par with average growth for the previous decade (2010-19). Stronger-than-expected momentum at the beginning of the year has been disrupted by a large surge of COVID-19 cases. Despite continued recovery, output in 2022 is forecast to be 9 percent below pre-pandemic projections. Poverty rates have risen, and by the end of this year more than half the new global poor are expected to live in the region. The outlook could be weaker if vaccination does not proceed as quickly as assumed. Moreover, financial sector balance sheets are at risk of deteriorating, as policy measures put in place at the peak of the pandemic are scaled back, which could constrain the provision of credit and investment needed to support the recovery. See Less

Output in Sub-Saharan Africa (SSA) is expected to expand a modest 2.8 percent in 2021, and 3.3 percent next year. Positive spillovers from strengthening global activity, better international control of COVID-19, and strong domestic activity in agricultural commodity exporters are expected to gradually help lift growth. Nonetheless, the recovery is envisioned to remain fragile, given the legacies of the pandemic and the slow pace of vaccinations in the region. In a region where tens of millions more people are estimated to have slipped into extreme poverty because of COVID-19, per capita income growth is set to remain feeble, averaging 0.4 percent a year in 2021-22, reversing only a small part of last year’s loss. Risks to the outlook are tilted to the downside, and include lingering procurement and logistical impediments to vaccinations, further increases in food prices that could worsen food insecurity, rising internal tensions and conflicts, and deeper-than-expected long-term damage from the pandemic. See Less

As the global economy rebounds from the COVID-19-induced global recession, the accompanying strength in global trade offers an opportunity to jump-start the recovery in emerging market and developing economies (EMDEs). Lowering cross-border trade costs could help revive trade growth. Trade costs are high: on average, they double the cost of internationally traded goods in comparison to domestic goods. Tariffs account for only one-fourteenth of average trade costs; the bulk of trade costs are incurred in shipping and logistics, as well as cumbersome trade procedures and processes at and behind the border. Despite a decline since 1995, trade costs remain almost one-half higher in EMDEs than in advanced economies; about one-third of the gap may be accounted for by higher shipping and logistics costs and another one-third by trade policy. A comprehensive reform package to lower trade costs would include trade facilitation measures; deeper trade liberalization; efforts to streamline trade processes and clearance requirements; better transport infrastructure; more competition in domestic logistics, retail, and wholesale trade; and less corruption. Some of these measures could yield large dividends: among the worst-performing EMDEs, a hypothetical reform package to improve logistics performance, maritime connectivity, and border processes to those of the best-performing EMDEs is estimated to halve trade costs. See Less

After declining in the first half of 2020, global inflation has rebounded quickly on recovering activity. While global inflation is likely to continue rising in the remainder of this year, inflation is expected to remain within target bands in most inflation-targeting countries. Among emerging market and developing economies (EMDEs) where recent price pressures may raise inflation above those economies’ target ranges, such pressures may not warrant a monetary policy response—provided they are temporary and inflation expectations remain well-anchored. However, higher inflation may complicate the policy choices of EMDEs that are in danger of persistently breaching their inflation targets while also relying on expansionary policies to ensure a durable recovery. Measures to strengthen central bank credibility can help anchor inflation expectations in these economies. Unless risks from record-high debt are addressed, EMDEs remain vulnerable to financial market stress should investor risk sentiment deteriorate as a result of actual or perceived inflation pressures in advanced economies. Low-income countries are likely to experience rising aggregate and food price inflation in the remainder of this year, exacerbating food insecurity and threatening to increase poverty. Attempts to control food prices through price subsidies in many countries, or the re-emergence of protectionist policies could drive global prices higher and prove to be self-defeating. See Less

Global growth is set to reach 5.6 percent in 2021—the strongest post-recession pace in 80 years. Nonetheless, the recovery is expected to be highly uneven, and there is substantial uncertainty about the strength and durability of this anticipated upturn beyond 2021. This box explores two alternative scenarios. In a “Faltering Recovery” scenario, the global economy slows in response to the possibility of recurring local COVID-19 outbreaks, mounting inflationary pressures, and a sharp tightening of global financial conditions during the next two years. In contrast, in a “Sustained Expansion” scenario, vaccine-driven COVID-19 containment, re-opening, and ambitious reforms catalyze an even stronger response of private activity and potential output, with positive global spillovers. These scenarios illustrate that the current signs of recovery may be fleeting and underscore the need for policy makers in emerging market and developing economies (EMDEs) to take advantage of present opportunities to put in place growth-enhancing reforms. See Less

Inflation in low-income countries (LICs) increased in the run-up to, and following, the outbreak of COVID-19. The rise has been largely driven by increases in food prices and currency depreciations. Higher prices for food, which accounts for about half of consumption in LICs, threaten to increase poverty. In the near term, further rises in global agricultural prices are likely to add to inflationary pressures in LICs. Subsequently, an expected stabilization of commodity prices and moderate demand growth are likely to result in a gradual decline in consumer price inflation. Attempts to lower food price inflation through price subsidies in a large number of countries, or the re-emergence of protectionist policies, could drive global prices higher and prove to be self-defeating. See Less