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3 July, 2020 06:11:27 PM / LAST MODIFIED: 3 July, 2020 06:26:02 PM

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The IMF lowers its growth forecasts: but some signs of resilience in key economies

Jaseem Ahmed
The IMF lowers its growth forecasts: but some signs of resilience in key economies

Despite the IMF’s lowered growth forecasts, there are grounds for optimism for the Bangladesh economy in recent studies suggesting US and Europe could recover rapidly
With economies crashing worldwide as never before, the international agencies have downgraded their growth forecasts. Thus, in its Bangladesh Country Report of 5 June, the IMF forecasts  a real economic growth rate of 3.8% in 2020 (down sharply from 7.9% in 2019), 5.7% in 2021, and a healthy 8.2% in 2022.

This would bring a dramatic end to an unprecedented decade of growth of above 7 percent per annum  in real terms.

The World Bank has even lower forecasts for Bangladesh extending to 2022, initially  projected at about 2% per annum in its earlier South Asia Regional report, and now lowered further to about 1% per annum in its recent Global Economic Prospects 2020 publication.

Additionally, in its 20 June update to its World Economic Outlook, the IMF forecasts a sharper contraction in global and major national economies compared to its April forecasts, and a slower recovery.  This is bound to have  a further adverse knock-on effect on Bangladesh.

However, there are also grounds for optimism. Thus, many US economists now see prospects for a rapid recovery in which unemployment could decline by an unprecedented 1 percentage point per month! Indeed, US employment increased by 2.5 million in May.

And while the IMF assumes that fear of the pandemic will deepen “precautionary” behavior among both consumers and firms,  hence slowing the recovery everywhere, US economists are stressing  structural  factors in the US labor market  - which have limited job destruction  - on which they are basing their analysis.

The US shares these factors with key Eurozone economies, suggesting the possibility that, absent a continuation of the widespread lockdowns experienced in the second quarter 2020, that these two economies are well placed for a recovery that might be faster and stronger than international agencies  currently anticipate.

For Bangladesh, which is highly reliant on its exports to the USA and the Eurozone, the good news is that despite larger expected contractions in 2020 in the Advanced Economies (-8%), the IMF has revised upwards its 2021 forecasts for Europe, and in particular for Spain and Italy, which are major markets for Bangladeshi garments and which are now both expected to grow at about 6.3% in 2021 (and the US at 4.5%). 

Separately, there are some hopeful external developments with preliminary indications in the UK of a surge in expenditures for a range of consumer goods. This is reinforced by high frequency credit card data in the US, which also indicates a resurgence in consumer expenditures.

Two big issues. The IMF has done an excellent job in bringing a host of complex and unprecedented issues into an illuminating  framework but, in the light of the above, there is value in re-examining two key issues.  First, the expected speed of recovery after the current recession. Second, the current positioning of the US and European labor markets for rapid recovery on which recent research suggests a more positive outlook. Both factors have major relevance for Bangladesh.

The Bank of England’s Monetary Policy Committee Report of May 2020 helps to clarify the first issue.

Speed of economic recovery. The BoE has forecast a staggering contraction of -14% in the UK economy in 2020, followed by a mighty V-shaped recovery in which GDP grows at 15% in 2021. The key issue, which applies to all countries including Bangladesh, is how quickly the economy reverts back to its trend growth path.  For the UK, since the economy is expected to contract initially, there is the additional question of when GDP gets back to its previous level.

The BoE’s illustrative scenario envisages a strong recovery that leads to the level of GDP reverting to its previous level in 2022, and a return to its pre-crisis growth path  around 2023 or shortly thereafter. For Bangladesh, while the IMF and WB still expect it to grow in 2020, although at sharply diminished rates, it is unclear  when – and if – they expect it to return to its trend growth path.

The BoE emphasizes, as do the MDBs, that lockdown and containment measures introduced across the world in response to Covid-19 have had a sharp impact on both demand and supply, with consumer spending and expenditures by firms both contracting.  However, BoE assumes that this will be temporary, although the duration may be extended if the initial contraction is amplified by other factors,  such as prolonged uncertainty, and by further disruptions to international trade or impairment of the financial sector.

In this, BoE draws on its review of the economics literature: “Many of the papers which estimate the impact of hypothetical pandemics predict that they are largely temporary, with GDP growth recovering sharply in the quarters following the outbreak and returning close to its pre-pandemic level by the end of two years.”

Scarring” in the economy slows recovery. The vital question for the medium term economic outlook is whether there is “scarring” from a longer term fall in confidence that leads to lower investment  - hence to lower productivity and economic growth -   as well as lower private consumption expenditures, and  difficulties in getting the unemployed back to work. BoE expects that stimulus measures underway will mitigate the potential for “scarring”, and the UK economy should be able to get back to a strong recovery relatively quickly.

The view that a rapid recovery is likely in principle – provided the pandemic is contained -  is reiterated by Oxford University’s Simon Wren-Lewis, an early modeler of the economic impacts of pandemics, writing recently on “V-shaped recoveries”.

Evidence for scarring strongest after a financial crisis. Conversely, the strongest evidence of “scarring” or “persistence” in adverse economic impacts is following a recession after a financial crisis.  It is not clear that the current crisis will have the same impact.   Clearly, however, the economies hit by the Asian Financial Crisis in 1997, and the Atlantic-economies at the epicenter of the Global Financial Crisis in 2008, suffered a permanent fall in their growth rates of output and productivity as a result of a permanent decline in the investment to GDP ratio.

Thus, Malaysia’s pre-AFC investment to GDP ratio of 40% fell to about 20% after the crisis, and it suffered a long-lasting fall in its  productivity growth and its economic growth rate. The same qualitative effects have been noted by recent OECD reports for Europe after the GFC.

Scarring in Bangladesh economy? The World Bank’s low-growth forecasts for Bangladesh – recently lowered yet again - seem to point to this possibility, in terms of the  impact of the pandemic  with potentially  persistent medium and long term consequences.  That would imply that Bangladesh will experience the adverse long term consequences that typically occur following a full scale financial sector crisis, without having first gone through the economic contraction that typically follows such crises.

Impossible?  No  -  but unlikely unless global lockdowns are extended, and if stimulus measures are inadequate. 

However, clearly the MDBs are correct that  lower remittances and exports will be the key channels for the adverse external hits to the Bangladesh economy.  While exports have fallen substantially, the reduction in remittances has been muted if looked at over the first five months of the year, but are more significant from March onwards.  A different picture emerges over the fiscal year 2020: remittances were at record levels! The bottom line is that Bangladesh’s overseas workers can be expected to do whatever they can to help sustain their families back home.  They are heroes, and no one should count them out.

Bangladesh’s economic prospects: domestic and external factors. Subject to adequate containment of the pandemic, economic prospects will be shaped, domestically, by the scale and scope of the stimulus measures that the government puts in place to shore up private consumption and enable firms to retain workers on a temporary basis. Externally, much will depend on the speed and magnitude of the recovery in Advanced Economies.

Quick recovery in key Advanced Economies? Professor Robert Hall one of  America’s most eminent economists has recently reviewed previous recessions in the US and concludes  that a rapid and strong US economic recovery is possible. He bases this on the unusually high proportion of the unemployed who report that they have not been fired, but are on “temporary layoffs” and expect to return to work within six months.

This means that – unlike a typical US recession -  the all important employer-employee relationship has not been severed,  thus improving the prospects of their rapid rehiring once the economy is allowed to reopen.

This contrasts with the most recent recession, induced by the Global Financial Crisis in 2008, in which there was large scale job destruction in the US as a result of which it took some 7 years for “excess” unemployment to be eliminated.

EU recovery prospects.  Further insight is provided by a comparative study at the Brookings Institution which argues that the very much higher unemployment rate in the US – about 14% - and the much lower rate of about 7.3% in much of the EU reflect structural institutional differences  (but point to a similar basis for rapid recovery). 

Thus in the US, the unemployment rate appears to be higher because government unemployment benefits are being provided directly to workers by the state, while in Europe they are provided through employers to employees who  - although not working - are still regarded as being ready at hand for  reemployment by the firm.

US and EU Labour markets may both recover quickly. The institutional difference aside, the key factor is that in the US  73% of its unemployed workers receiving government benefits in May report that they are not seeking work because they are on “temporary layoffs”: they are not “unemployed” in the traditional sense. European researchers at the Centre for Economic Policy and Research suggest that in both the US and EU labour markets may not  have “crashed” in the conventional sense, and may be similarly poised for recovery.

The supply chain is critical. All this provides a more optimistic setting for economic recovery in Bangladesh and the global economy.  For this to happen Bangladesh must overcome the broad vulnerability to supply chain disruptions that it shares with other countries.  However, this is where risks are concentrated.  Thus, at the international level there is evidence that once an affected  supplier ceases production, even  after it resumes operations there is a lengthy delay before previous contractual relations are reestablished.

This is a key risk domestically for all supply relationships, and even more so for our international garments industry which should seek every avenue now to safely reduce the duration of their work disruption.  Government support for investment in implementing physical distancing in the garments sector, and in remote work in other critical sectors such as finance, can be an important input.

Subsidising wages of workers during pandemic. A key insight guiding policy at this time  is the importance of ensuring that employers do not fire their workers, but are assisted by the government  in making payments to them to enable them to stay afloat until the economy recovers. The Bangladesh government’s Taka 50 billion fund to help pay salaries for 4 million export workers strikes the right note, in principle.

Pessimism is self-fulfilling. A broader  issue  is that it is vital not to be swayed by the idea that a quick recovery is impossible.  As  Professor Simon Wren-Lewis observed recently – The problem with the belief that the economic recovery will be neither quick or complete is that it can be self-fulfilling.”

The relevant issue is that we face a massive crisis that is global in which recovery depends not on our stars, or even on national “pre-existing conditions”, but on the policies we adopt - both to contain the pandemic and to provide the stimulus and support measures in the scale and scope needed to get a complete recovery.

The massive scale of the fiscal response.   The size of the fiscal stimulus in advanced economies  is noteworthy, as is the mix of financing.  Two examples: Germany, where the fiscal effort is about 34% of its pre-crisis GDP of which only 4% is on-budget, i.e. backed by future primary surpluses; and the UK, where 4% of the 20% of GDP effort is on-budget while the rest is in terms of contingent-liabilities.  (Data from UK’s Resolution Foundation).

In comparison, the Bangladesh government’s mix of liquidity and other stimulus measures have placed limited pressure on its fiscal outlays.  Prior to  the recent Budget, despite measures amounting to Taka1 trillion – or 3.6% of GDP – much of this, as the IMF notes, was in the form of bank loans using bank’s own capital resulting in much smaller fiscal costs of Taka 275 billion.

Vital to support the vulnerable. Of this, transfer payments to the vulnerable amounted to about Taka 30 billion.  The World Economic Forum has suggested an additional 4% of GDP-effort for an unconditional cash transfer program to sustain consumption amongst the needy.  While that may be too large a figure, it addresses a vital issue: shoring up private consumption is critical to making the lockdown tolerable,   to ensuring equity, and to reigniting high growth.

There will be concerns about “leakages” from stimulus measures and pressure on the fiscal deficit. Yet a gigantic effort is underway across the world to counter the pandemic-induced global economic contraction and safeguard lives and livelihoods. Bangladesh cannot do less. Indeed, in these extraordinary times an excessive caution is counter-productive.

World economy is in uncharted waters: Key implications.   First, the unprecedented  increase in “temporary layoffs” in Europe and the US suggest that firms are more optimistic about the future than has been commonly supposed; they expect to rehire their employees on furlough. Based on this, many US economists believe that “excess” unemployment caused by the pandemic could be eliminated within a year by a fast economic recovery.   But the window of opportunity for re-hiring workers and for rapid economic recovery to be triggered is closing.

Second, a strong US recovery (and in Europe) would be good news for Bangladesh, where there is an additional element of a potentially important development in that remittances from the US rose to second place in January and February. It is too early to assess the long term significance of this, but  if it continues it will provide some measure of  support to our economy.

Third, the world is  in uncharted waters as a result of the pandemic and there is great uncertainty on all forecasts, not least those for US economic recovery - especially in view of signs of a surge there in new Covid-19 infections.

Fourth, it is crucial to go all-out to stem the pandemic, and to cushion the economic impact of the crisis, regardless of “conventional” concerns about debt-sustainability and fiscal deficits.

Finally, where does this leave Bangladesh?  In a nutshell – in a not-unpromising position,  given the strong pre-pandemic economic performance. Thus, among the government’s most notable achievements during the last decade is its stewardship of the highest, sustained period of growth in the nation’s history. In addition, it has acted prudently to contain debt  and to build up foreign exchange reserves, thereby acquiring buffers that will allow it to scale up its stimulus measures as needed without imperiling debt sustainability.  (The debt-GDP ratio of 35.9% in 2019 is projected to peak at a relatively modest 41.1 % in 2022.)

However, there remain major challenges over the medium term in the form of low revenue capabilities, and the need for sustained expenditures for the public health infrastructure and the social safety net. And, as the IMF notes, there are vulnerabilities in the banking sector that need to be addressed once the pandemic is contained.  These issues are difficult to address, yet they are key to a prosperous and resilient economic future. Of our neighbours in Southeast and East Asia, only those who successfully addressed these issues were able to make their way to Upper Middle Income or Advanced Economy status.

For the present, successfully harvesting the boro crop recently has provided additional breathing space for national policy and strengthened domestic confidence.  Furthermore, having in June acquired  external financing of $733 million from the IMF, the government can take satisfaction in having narrowed its financing gaps.

Bangladesh now is in a relatively enviable position: with most world economies contracting, it is one of the few still expected to have positive growth. But this can change. Thus, the government has a choice – to work within the scope of the IMF’s lower - but still reasonable growth forecasts for the national economy, or to go all out to accelerate recovery and ensure that the economy returns to its trend growth ASAP.

Present institutional constraints might seem to constrain the reform path to be chosen, but this is not the case.  As the Asian Financial Crisis demonstrated, the key is not to step back from reforms because of constraints, institutional, budgetary, or otherwise. Rather, the scope of reforms should be envisioned in full at the outset, with their timing and sequence in implementation determined by priorities.  Thus, since key institutional and capacity constraints take many years to overcome – they must be addressed early. 

No crisis should be wasted. The time to act is now.

The author is a former Secretary General of the IFSB. Prior to that, at the ADB, he supervised macroeconomic stabilization and financial sector reform programs in Southeast Asia.

 

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Published by the Editor on behalf of Independent Publications Limited at Media Printers, 446/H, Tejgaon I/A, Dhaka-1215.
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Editor : M. Shamsur Rahman
Published by the Editor on behalf of Independent Publications Limited at Media Printers, 446/H, Tejgaon I/A, Dhaka-1215.
Editorial, News & Commercial Offices : Beximco Media Complex, 149-150 Tejgaon I/A, Dhaka-1208, Bangladesh. GPO Box No. 934, Dhaka-1000.

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