A K-Shaped recovery, this time on a global scale

The wealthiest countries are leading the way out of the crisis, particularly the United States, whose economy is now projected to expand by 6.4% in 2021. The euro area is expected to expand by 4.4% and Japan is forecast to expand by 3.3%, according to the IMF.

Among emerging market and developing economies, China and India are expected to drive growth. China’s economy is projected to expand by 8.4%, offering its own significant boost to overall global growth, and India’s is expected to expand by 12.5%.

But within advanced economies, low-skilled workers have been hit the hardest and those who lost jobs could find it difficult to replace them. And low-income countries are facing bigger losses in economic output than advanced economies, reversing gains in poverty reduction and risking long-lasting pandemic-era scars.

Emerging market economies in many cases have fewer resources for fiscal stimulus, vaccine investments and labor force retraining — factors that put them at risk of falling behind and getting stuck as the world starts its rebound.

If their growth lags badly, the fact that big economies like the United States are accelerating could compound the pain. A stronger American growth outlook is already pushing up market-based interest rates on U.S. government debt. As that happens, it attracts capital from abroad, making borrowing more expensive in already-weak economies and risking currency volatility.

Researchers at the IMF pointed out in a recent blog post that it was important that rates on U.S. debt are rising because of a strengthening economic outlook, one that will benefit many economies by stoking demand for their exports. Still, “countries that export less to the United States yet rely more on external borrowing could feel financial market stress.”

Most U.S. officials have focused on how stronger domestic growth could actually help the rest of the world as American consumers buy foreign goods and services. “This year the U.S. looks like it’s going to be a locomotive for the global economy,” Richard Clarida, the vice chair of the Fed, said during a recent speech.

Yellen made a similar argument on Tuesday during a panel discussion at the IMF, at which she urged countries not to let up on fiscal support.

“Stronger growth in the U.S. is going to spill over positively to the entire global outlook and we are going to be careful to learn the lessons of the financial crisis, which is ‘don’t withdraw support too quickly,’” she said.

There are risks that spillovers could work the other way — slower vaccination progress abroad could come to weigh on American and global improvement. While roughly 500 doses of the vaccine have been administered per 1,000 people in the United States, based on New York Times vaccination data, that number is about 1 per 1,000 in Mali and Afghanistan.

Monica de Bolle, a senior fellow at the Peterson Institute for International Economics who studies emerging markets, noted that large swaths of the world — including South America and parts of Africa — could take until 2023 or later to reach widespread vaccination, based on forecasts from the Economist Intelligence Unit.

“There’s a race right now between these variants of concern and vaccines,” she said during a webcast event Tuesday. She urged “global cooperation and attention” to how disparities in vaccine distribution affect inequality and economic recoveries.

The IMF agrees. Vitor Gaspar, the fund’s director of fiscal affairs, said that advanced economies would continue to be at risk even if the virus were raging in developing countries that are not major economic powers, noting that the virus cannot be eradicated anywhere until it is eradicated everywhere. For that reason, he said, investing in vaccinations is critical.

“Global vaccination is probably the global public investment with the highest return ever considered,” Gaspar said in an interview. “Vaccination policy is economic policy.”

While global policy bodies are warning about diverging growth and public health outcomes, some Wall Street economists have taken a more optimistic tone.

“We think market participants underestimate the likely pace of improvement in both the public health situation and economic activity in the remainder of 2021,” Jan Hatzius at Goldman Sachs wrote in an April 5 research note.

Vaccinations are high or progressing in Canada, Australia, Britain and the euro area. In emerging markets, Hatzius wrote, Goldman economists expect 60% to 70% of the population to have “at least some immunity” by the end of the year when counting prior coronavirus infection and vaccine proliferation.

“The laggards are China and other Asian countries, although this is mainly because Asia has been so successful in virus control,” he wrote.

How fast global recoveries proceed could be critical to the policy outlook, both in government support spending and in central bank monetary help.

From the Fed to the European Central Bank and Bank of Japan, monetary authorities have employed a mix of rock-bottom rates, huge bond purchases and other emergency settings to try to cushion the pandemic’s fallout.

Organizing bodies have echoed Yellen's comment: They argue that it’s important to see the recovery through, rather than pulling back on economic help early.

Global policymakers “generally view the risks to financial stability associated with early withdrawal of support measures as currently greater than those associated with a late withdrawal,” Randal Quarles, the Federal Reserve’s vice chair for supervision and head of the global Financial Stability Board, said in a letter released Tuesday.

The IMF said Tuesday that it was keeping a close eye on interest rates in the United States, which could pose financial risks if the Fed raises them unexpectedly. It also urged countries to maintain targeted fiscal support — and to be ready to provide more if future waves of the virus emerge.

“For all countries, we’re not out of the woods, and the pandemic is not over,” said Gita Gopinath, the IMF’s chief economist.