In a critical time it is imperative to innovate in order to survive. This is why TextileFuture is presenting to you “The Most Innovative Companies 2020” from Boston Consulting Group. We present the most important chapters with a possiblity to download the entire report. Practically all you wanted to know on Innovations is covered in the report. We hope that will give you the necessary impetus to accelerate innovation processes in the after Covid-19 time to remain competitive and to offer new products and services from your own company.
The second feature provides you with the Latest World Economic Forecast of IMF, the International Monetary Fund that offers also scenarios for your further planning.
Here are starting the chapter excerpts of the first feature:
The Most Innovative Companies Ranking over Time
BCG has surveyed global innovation executives since 2005 to reveal the 50 companies they most admire. Explore the changing rankings and then read this year’s Most Innovative Companies report.
Facing turbulent and fast-changing markets, innovators need a well-tuned innovation system that can spot emerging product, service, and business model opportunities—and then rapidly develop and successfully scale them—over and over again.
1. They “Walk the Talk”
Innovation success starts with commitment—making innovation a priority and investing decisively behind that ambition. And boldness—being willing to pursue opportunities beyond your core. While 60 % of companies rank innovation as a top 3 priority, not all walk the talk.
In innovation—as in life—drive, size, and skill are a powerful combination. Drive to set an ambitious agenda and fund promising opportunities. Size to transform these opportunities into real sources of new revenue. And the skill, as embodied in a well-tuned innovation system, to be able to do it over, and over again.
And the world’s most innovative companies have been getting bigger. The revenue of a typical “small” company on BCG’s 2020 list of the 50 most innovative companies is USD 30 billion—up more than 170 % from USD 11 billion (in constant dollars) in our first survey in 2005.
But drive and size mean little if your innovation system cannot build on them for serial success. And here our research offers a more sobering assessment. Serial innovation is hard. Of the 162 companies that have been on our top 50 list over the past 14 years, nearly 30 % appeared just once—and 57 % appeared three times or fewer. Only 8 companies have made the list every year: Alphabet, Amazon, Apple, HP, IBM, Microsoft, Samsung, and Toyota.
When we began the research for this 14th edition of BCG’s Most Innovative Companies report, COVID-19 had not yet emerged. As we explored the data and interacted with clients, however, it became clear that this year’s core findings—about the advantages of scale and the imperative for serial innovation—may be even more relevant today as innovation leaders need to adapt to rapidly shifting patterns of supply, demand, consumer behaviour, and ways of doing business.
Moreover, our research has shown that companies doubling down on innovation during downturns—using the opportunity to invest and position for the recovery—outperform over the long term. But doing that successfully requires developing a clear innovation strategy and supporting it with appropriate investment, leveraging the advantages of scale, and ensuring that your innovation system is nimble enough to spot and seize the best opportunities quickly and decisively. As we explore these themes, we draw on our global innovation performance database of more than 1,000 firms to detail the practices that make the best stand out from the rest.
2. They Embrace the Benefits of Scale
Despite the conventional wisdom, larger companies pre-COVID-19 were not statistically disadvantaged on innovation versus smaller rivals. There are reasons to believe larger companies may now have an edge in developing winning products, services, and business models.
Committing to Innovation
Innovation is a top-three management priority for almost two-thirds of companies. This is the lowest level since the financial crisis in 2009 and 2010—perhaps reflecting the uncertain economic outlook amid geopolitical tensions even before the outbreak of COVID-19.
We can disaggregate our findings further. “Committed innovators” (45 % of the total) say that innovation is a top priority, and they support that commitment with significant investment. “Sceptical innovators” (30 % of the total) are the reverse, seeing innovation as neither a strategic priority nor a significant target of funding. And “confused innovators” (25 % of the total) are in between, with a mismatch between the stated strategic importance of innovation and their level of funding for it. (See Exhibit 1.) We find the highest proportion of committed innovators in the financial and pharmaceutical sectors (both 56 %)—and the lowest in industrial goods (37%) and wholesale and retail (32 %).
Committed innovators are winning. Almost 60% of them report generating a rising proportion of sales from products and services launched in the past three years, compared with only 30% of the sceptics and 47% of the confused. The skeptics may or may not be making wise strategic decisions—it is sometimes neither strategically sound nor feasible to pursue innovation leadership—but at least they are consistent. The confused are a puzzling lot with a worrying disconnect between strategy and innovation spending.
And winners are more likely to be committed innovators, further evidence of the divide between the best and the rest that we have discussed in the past few innovation reports. In 2019, for example, we found a wide gulf between strong and weak innovators with respect to their use of artificial intelligence (AI). We also discovered that strong innovators were making increasing use of external innovation channels such as incubators and partnerships with academic institutions. Our 2018 research showed that almost 80% of strong innovators have properly digitized innovation processes compared with less than 30% of weak innovators. The relationship between commitment and results is the latest evidence of the strong getting stronger—across a spectrum of innovation-related criteria.
How Committed Innovators Are Placing Their Bets
While many companies struggle to address multiple innovation challenges at once, committed innovators prioritize a handful and as a result address them more effectively. They focus on advanced analytics, digital design, and technology platforms. (See Exhibit 2.) Companies may embrace these enablers for different reasons. Advanced analytics, for example, are a top priority for industrial goods companies that are seeking to develop new analytics-driven value propositions, such as agricultural equipment manufacturers moving into precision farming enabled by the Internet of Things (IoT).
Even among committed innovators, only 60% report success in solving the challenges they prioritize. All companies have plenty of room to improve but doing so may be hampered by the “AI paradox” we pointed to last year—the ease of achieving powerful results with AI pilots and the difficulty of replicating those results at scale. Another issue is the challenge of making success repeatable, establishing a successful serial innovation machine. (See the related article in the 2020 report, “When It Comes to Innovation, Once Is Not Enough.”)
Consider the example of Target. The company is making a major push to innovate in its core store-based retail business and achieve synergies between offline and online commerce. Target doubled capital expenditures from 2016 to 2018. The intent is to attract foot traffic by making stores more interactive—for example, customers can better imagine how products fit their homes by using augmented-reality point-of-sale displays. The company also wants to create omnichannel customer journeys so that shoppers can seamlessly move among channels, ordering at home and picking up in stores, for instance. Target’s online sales growth outpaced its competitors in 2019, and in a sector that has been under sustained disruptive attack, it generated 25% annualized TSR for the past three years.
Innovation and Disruption
Since 2015, we have asked executives to name not only the three companies they regard as the top innovators across all industries but also the three most innovative companies in their own industry. This year, we noted a new and surprising pattern: compared with 2015, significantly more respondents named companies traditionally associated with a different industry as a leading innovator in their own industry. Think Amazon in health care or Alibaba in financial services.
In a world where every industry is becoming a technology industry to some degree, this kind of boundary-busting innovation is an increasingly important innovation capability. We have therefore added a new scoring dimension to our most innovative companies ranking methodology that captures each company’s variety and intensity of boundary breaking. Granted, some companies have always been boundary busting. For example, 3M has innovated in multiple industries over the years, including consumer goods, chemicals, manufacturing, and medtech. Yet today, we already see significantly more such activity compared with 2016—an increase of 20%. New players that are active across industry borders and exemplify this trend include firms such as Sony, Nike, Xiaomi, and JD.com.
Looking at the data on the industry level, software and services companies are the ones most frequently cited as entering other sectors—further confirmation (if any is needed) of venture capitalist Marc Andreessen’s 2011 observation that “software is eating the world”—but tech is far from the only cross-industry disruptive innovation force. (See Exhibit 3.) Automakers, chemical companies, retailers, and industrial manufacturers are also playing more and more often in other companies’ sandboxes as they see opportunities for new technology-enabled business models and revenue streams outside their own core businesses.
These disruptors are often orchestrating ecosystems that bring together the capabilities of multiple participants in a new platform or service offering. The auto industry’s shift toward autonomous driving and a mobility model is one prominent example, as demonstrated by Sony, Alphabet, and Apple, as well as automotive companies such as Tesla, Volkswagen, and Bosch.
The IoT and other technologies create opportunities for traditional companies, such as manufacturers, to transform themselves into data-enabled software or service businesses. These companies often play offense and defense simultaneously. Think of the ongoing transformations in the automotive, aircraft, and farm equipment industries, where companies are moving from manufacturing equipment to combining equipment, data, software, and connectivity to provide entirely new types of solutions. The data suggests that successful self-disruptors earned an annual TSR premium of 2.7 percentage points from 2016 to 2019 over companies that focused solely on defending their own turf.
A clear innovation ambition, appropriate resourcing, and the ability to break industry boundaries are not the only prerequisites for innovation success. As we examine in the companion articles that make up this year’s report, winners find a number of ways to differentiate themselves. And large companies are increasingly using size to flex their innovation muscles and may be even more advantaged now than before the crisis.
In Innovation, Big Is Back
Conventional wisdom suggests that when it comes to innovation, small companies have the edge. They are quick and nimble. They have no legacy organizations, technology, or infrastructure to hold them back. Because they are often privately owned, they can play for the longer term. Big companies, by contrast, are weighed down by internal bureaucracy, bound by out-of-date systems and ways of working, and if publicly traded, too focused on the next quarter’s earnings to think about the longer term.
But even before the crisis, the data suggested a more nuanced picture. While smaller companies’ scale makes coordination easier—and helps ensure that they stay closer to customers—our research found that the innovation success rates of smaller companies were not higher in any statistically significant way than those of larger ones. And today, given the greater ability of larger companies to fund investments from their own cash flows, some of them may actually have an edge.Of course, if size is not an impediment to innovation, it stops being an excuse for underperformance. After all, as we show in a companion article in this year’s report, the most innovative companies in BCG’s annual listing have been getting larger. So what distinguishes the large companies that are innovation winners from the rest?
The Big Engines that Can
Large companies face a few common obstacles. The top two issues cited by all large firms in our 2020 innovation survey are a lack of discipline in resource allocation, including insufficient rigor in cutting questionable projects while putting muscle behind those with promise (31 %), and the difficulty of uniting the organization behind the innovation strategy (27 %).
But not all large companies are alike. More than 40 % of the big companies (defined as $1 billion or more in revenue) in our 2020 sample overcome these two key obstacles. They fall into the innovation leaders category—that is, they generate a larger percentage of sales from products or services launched within the past three years than their industry median. This compares with on average 50 % of the smaller firms surveyed. (See Exhibit 1.) So, smaller companies are more likely to outperform the large firms, but the difference is small in magnitude and not statistically significant.
More Bang for the Buck
Innovation leaders appear to be remarkably alike, regardless of size. Smaller leaders make investments in innovation as a percentage of sales at a similar level as bigger companies. They are equivalent in speed to market and achieve comparable returns. The real distinctions emerge when we look at what distinguishes large leaders from other large firms.
Large innovators that outperform their big-company peers put more money behind their innovation programs—1.4 times more as a percentage of sales—and they get far greater payoffs: four times as much as a percentage of sales. (See Exhibit 2.) Surprisingly, they also take time to get things right, with large leaders reporting average times to market for innovation outside their core that are up to five months longer than the times for others.
So among the larger innovators, what are the key differences between the leaders and the laggards? To our surprise, culture does not appear to be one of them. In fact, the cultures of large companies, both leaders and laggards, look very similar. (See Exhibit 3.) Granted, an innovation culture is notoriously hard to describe or assess. Still, the data suggests culture may not be a precondition for, but rather have a correlation with—or even be an outcome of—innovation success.
Leading large innovators pursue different priorities and more carefully design their innovation systems for impact. Laggards must first put a lot of attention into fixing the basics: building new and critical incubation or development skills, gaining leadership support, and establishing strategic clarity on the direction of innovation efforts. Leaders seem to have the luxury to address higher-order issues, however, such as filling gaps in product-market fit and building a stable of scalable external partners. Leaders are also about 15 % more likely to prioritize business model innovation although not uniformly across industries. (See Exhibit 4.) Innovation at the business model level—to defend existing profit engines, to imagine entirely new offerings in response to emerging customer needs, or to adapt current business models to ongoing shifts in the business environment—can provide an important edge, particularly in turbulent environments.
These differences do not suggest that some strategic choices are better than others. They do spotlight the importance of having an internally consistent systematic approach to innovation.
Designing a Winning Innovation System
Deeper analysis of the differences between leaders and laggards in the same industry (as well as BCG’s client experience) points to leaders expanding their advantage in five aspects of their innovation systems. These are talent, ambition, governance, funnel management, and project management.
Our benchmarking database reveals that achieving just one level of improvement on our five-point maturity scale in any one of these five aspects can result in an increase in innovation output (the percentage of sales from products, services, or business models introduced in the past three years) of 0.5 to 0.8 percentage points. A one-level improvement in all five dimensions raises innovation output by 3.4 points—a big yet very much achievable number for any large company.
Inspiring Ambition. Leaders align their innovation ambition with corporate strategy and communicate the connection. The organization has a clear, shared understanding of what it means by “innovation.” Leaders also back their ambition with resource commitments of capital, operating budgets, and staff, as well as top management support. We recently helped a large energy company set its innovation ambition in an iterative process that took into account organic growth expectations and the projected shrinking size of the running business. On that basis, we derived the target growth from innovation and then validated this target with bottom-up growth potentials from different market segments. We then further assessed the resulting ambition against the availability of funds and talent.
One Steering System. Leaders increase their odds of success by establishing good-governance practices and regularly adjusting them as needs change. For example, most large companies now have a varied set of ecosystem partners and vehicles—including internal incubators, venture funds, and accelerators—to accelerate innovation by complementing their in-house development efforts. In practice, these vehicles often overlap in scope, undermining their effectiveness. We observed this dynamic at a global manufacturing company that had various vehicles with overlapping mandates, creating competitive tensions and leading to disconnects with the core business. The company corrected these overlaps by setting up a coherent steering system with specific roles and success metrics for each vehicle.
Talent First. Leaders work toward making their innovation teams go-to destinations for internal and external talent. They devote resources to attracting, training, and retaining the best people they can find—often prioritizing those with entrepreneurial experience. Yet what really drives performance, in our view, is their ability to allocate their best internal talent to innovation teams. One medtech company elevated the role of head of R&D to chief technology officer (a board-level position), trained technical managers in business so that they could become product owners capable of leading cross-functional teams, and now delivers more new digitally enabled solutions than ever.
Portfolio Mindset. Leaders pay close attention to the shape and quality of their innovation funnel—and the processes to manage it. Not surprisingly, leaders tend to have broader funnels: they have the capacity to generate more potentially valuable ideas and convert their best ideas into scalable products or services. Funnel management ultimately comes down to the quality of decision making in a few critical go or no-go decisions, as well as the ability to take both a project and a portfolio perspective at the same time. Winners create the context for better decision making by establishing a focused set of tools and criteria for making the right call, ensuring the ideal balance between hands-off and hands-on involvement, and setting the right incentives, such as not penalizing innovation teams for flagging issues or even recommending a late project pivot.
What’s more, leaders consistently run postmortem analyses to make sure that they learn from mistakes. The best innovators do this not only for failed projects but also for funding decisions that, with the benefit of hindsight, look like false positives or false negatives, to ensure better-quality decision making going forward.
Empowered Teams. Ultimately, the innovation success of a company lives and dies with the quality of its innovation teams. Good teams are small (they adhere to Jeff Bezos’s two-pizza rule) yet functionally diverse, that is, they are staffed with a mix of product managers, engineers, and designers. They typically combine data-driven (patent scanning, for example) and human-centric (such as ethnographic) methods to find solutions to problems that add value for customers.
These teams need a healthy degree of autonomy, embedded in a supportive governance framework. Ideally, they are led by a strong product owner whose top task is to maximize the desirability and viability of the innovation while keeping it technically feasible to deliver in an acceptable time and at an acceptable cost. Incentives matter. Less successful companies tend to manage teams on delivery against expected outputs, while leaders reward high-quality outcomes. A high-quality outcome could be a resounding in-market success but also the early demise of an initially promising but ultimately doomed idea.
We recently assisted a large automotive company in improving the elements of its innovation system. Early idea generation at the company now starts by pairing deep technology and regulatory foresight with customer centricity. In cross-functional ideation sessions focused on anticipated future market opportunities, teams iteratively refine their ideas by drawing up a mockup product-launch press release. These teams address technical, market, and business risks by running an open backlog of implicit, to-be-validated beliefs. Through such methodical testing, the biggest innovation risks are addressed first, greatly improving the odds of an ultimate in-market success. Senior managers set an inspiring yet achievable ambition. They make decisions on the portfolio and funnel of projects every two months, ensuring thoughtful and timely decisions well informed by their proximity to the action.
Being a great innovator is not just about embracing best practices such as the ones detailed above, although doing that is table stakes. It’s also about spotting changes in the technology or regulatory environment, in markets, and in social norms, and then understanding which doors these changes open and which they shut. In many ways, the most successful companies see innovation as a learning journey in which the destination shifts in response to changing travel conditions. As it turns out, the real innovation challenge for large companies isn’t achieving one great success—it’s doing it over, and over again.
When It Comes to Innovation, Once Is Not Enough
Remember the Macarena? The song shot to the top of 15 global music charts in 1996 and was certified platinum in seven countries. It was also a one-hit wonder. The band that created it, Los del Rio, did just fine—but they never topped the charts again.
Startups have it relatively easy. They’re only expected to get it right once. If they do, and are acquired by a larger company, it’s a big victory. Larger companies are held to a higher standard. Their valuations depend on the market’s belief that they will be able to innovate successfully into the future. If they don’t, they’re punished by the market.
As we mentioned earlier, of the 162 companies that have made BCG’s annual ranking of the 50 most innovative companies since 2005, only eight made the list every year—and only 12% ranked in the top 50 ten or more times. (See Exhibit 1.) Serial innovation is hard. But in the current rapidly shifting customer and competitive environment, it is essential.
ive companies (assuming annual reweighting) would have grown to USD 327—30% more. Over the 15 years that we have produced this report, the top innovators have outperformed the companies in the MSCI index by more than 1 percentage point a year on sales growth and by 2 percentage points annually on total shareholder return (TSR).
Everyone knows the parable of the blind men and the elephant: each man can feel and describe a part of the animal, but none of them can get a sense of the whole. Elephants are big; innovation systems are complicated and multifaceted. They involve people and teams from multiple functions. They can have lots of moving organizational parts: R&D, ecosystem partners, incubators, accelerators, and corporate venture funds, for example. They include decision-making systems, processes to guide activities, as well as many less tangible factors such as embedded tools, capabilities, and cultural norms of behavior. In recent years, we have examined specific aspects of such systems: how successful innovators source ideas, how they collaborate, how they organize to support innovation, and how they incorporate new technologies into their programs.
Companies with strong innovation systems do all these things well. But that’s often not enough. Innovation systems are dynamic. They need to be designed and regularly reworked to deliver the desired level of organic profitable growth—but they always need to be seen as a whole. On the basis of our research and experience, we assess innovation systems on ten elements. Seven relate to the innovation platforms and organization that set ambition, define innovation domains, delimit roles, shape portfolios, and measure and reward performance. And three are associated with the actual practice of moving a portfolio of projects to impact. (See Exhibit 2.)
The data from BCG’s innovation benchmarking database shows that companies with better systems achieve an increase of 5 to 20 percentage points in their innovation output (the percentage of sales from products, services, or business models introduced in the past three years).
In our experience, the most successful large innovators take a page from the instruction manual of serial acquirers and systematize the success factors. Serial acquirers integrate the discipline of effective M&A (from target identification and analysis to price setting and negotiation to rigorous post-merger integration) into their management systems. Serial innovators also understand that success depends on all facets of innovation working together toward a common goal of generating a continuing series of new products or services that make an impact where it counts—in the marketplace.
It’s difficult for leaders, even those with 20-20 vision into their organizations, to get their arms around the entire machine and identify what’s working and what isn’t. In most large organizations, the CEO is the only leader who is in a position of authority to drive an innovation system. All other leaders are left with partial or functional mandates. For them to drive change, they need to build exceptional stakeholder orchestration skills in order to cut through silos and build coalitions across the organization.
An effective innovation journey starts with doing the careful work of establishing a common language on innovation, building a fact base for framing the challenge, and getting CEO buy-in. Only then can leaders decide which issues to attack first. What is working well? What are their companies’ most pressing weaknesses? What should they scrutinize first—strategy, governance, process, talent, incentives, culture, or something else?
We have found that a series of pointed questions, each of which focuses on one of the ten essential elements of the company’s innovation system, provide a good way to start. We derived these questions from BCG’s experience working in innovation and validated them against our benchmarking database containing data on the innovation performance and organization of more than 1,000 firms. The questions for innovators in a post-COVID-19 world reflect the typical gaps we see between leading innovators (benchmark companies) and those aiming to join their ranks:
- Innovation Ambition. Do we have a shared innovation purpose? Have we established an aspirational goal aligned with corporate strategy and value creation targets that rallies our best talent to invent better ways to serve customers and society?
- Innovation Domains. Is our innovation strategy grounded in deep customer insight and foresight that help us decide what to do—and not do—and enable us to nimbly adjust to shifting opportunities? Do we focus on a limited number of innovation domains where we have a right to win?
- Innovation Governance. Do we ensure that people and budgets are aligned with our shared innovation priorities—and promptly realigned when priorities shift—even when multiple stakeholders have a voice?
- Performance Management. Do our metrics and incentives reward both predictable, incremental progress and successful step-change innovation? Do we recognize leaders who are not only able to push new ideas but also recognize failures early in the process?
- Organization and Ecosystems. Do we have clear roles for all the disparate elements of our broader innovation ecosystem—for example, R&D units, venturing vehicles, digital units, and external partners—to ensure that we collaborate seamlessly and realize our targets?
- Talent and Culture. Do we have true business builders, and do we allocate our very best talent to our most ambitious innovation challenges?
- Idea-to-Market Fit. What’s the last truly novel idea we developed that solved a “hair on fire” problem for customers?
- Project Management. Do we have a clear view of our unfair advantage relative to our competition, and do we actually manage to wield it?
- Funnel Management. Is our funnel of potentially valuable projects actually funnel-shaped or is it a cylinder? Do we learn from past mistakes?
- Portfolio Management. Do we manage our portfolio strategically, for example, to ensure balance between core and noncore, or among new products, services, and business models? Do we take nonconsensus bets that promise outsize rewards? Have we reassessed and rebalanced our priorities and our portfolio through the COVID-19 lens?
Consider the well-known history of Apple. Ranked #1 in our top 50 list for all but one year since 2005, Apple is a poster child of successful innovation. But in the late 1990s the company was in trouble, losing out to the Wintel platform. After Steve Jobs’s return in 1997, he set about recalibrating the company’s innovation system for success. He broadened the ecosystem by engaging Microsoft as a partner, strengthened governance by focusing development on the projects most likely to drive value such as the iMac, and increased ambition by defining new domains for innovation (iPod in 2001, iTunes Music Store in 2003). These moves generated the resources and attracted the talent that fuelled Apple’s serial innovation machine, which now—against the odds—outlives its original founder.
An effective innovation system takes time and experience to build. Practice, as well as learning from both successes and failures, is essential. Our list of ten questions does not replace the need for a more systematic assessment. From time to time, a company needs to reassess and revalidate all the elements of its innovation system—the “machine that makes the machine”—to ensure that it is delivering maximum value. Still, in our experience, these questions provide a starting point for innovation leaders to build a case for change, rally other stakeholders, and point to a first set of points for action. Successful serial innovators are made, not born.
The full report can be downloaded here
The second feature starts here:
IMF World Economic Outlook June 2020 Update
A Crisis Like No Other, An Uncertain Recovery
Global growth is projected at –4.9 % in 2020, 1.9 %age points below the April 2020 World Economic Outlook (WEO) forecast. The COVID-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast. In 2021 global growth is projected at 5.4 %. Overall, this would leave 2021 GDP some 6½ %age points lower than in the pre-COVID-19 projections of January 2020. The adverse impact on low-income households is particularly acute, imperiling the significant progress made in reducing extreme poverty in the world since the 1990s.
As with the April 2020 WEO projections, there is a higher-than-usual degree of uncertainty around this forecast. The baseline projection rests on key assumptions about the fallout from the pandemic. In economies with declining infection rates, the slower recovery path in the updated forecast reflects persistent social distancing into the second half of 2020; greater scarring (damage to supply potential) from the larger-than-anticipated hit to activity during the lockdown in the first and second quarters of 2020; and a hit to productivity as surviving businesses ramp up necessary workplace safety and hygiene practices. For economies struggling to control infection rates, a lengthier lockdown will inflict an additional toll on activity. Moreover, the forecast assumes that financial conditions—which have eased following the release of the April 2020 WEO—will remain broadly at current levels. Alternative outcomes to those in the baseline are clearly possible, and not just because of how the pandemic is evolving. The extent of the recent rebound in financial market sentiment appears disconnected from shifts in underlying economic prospects—as the June 2020 Global Financial Stability Report (GFSR) Update discusses—raising the possibility that financial conditions may tighten more than assumed in the baseline.
All countries—including those that have seemingly passed peaks in infections—should ensure that their health care systems are adequately resourced. The international community must vastly step up its support of national initiatives, including through financial assistance to countries with limited health care capacity and channeling of funding for vaccine production as trials advance, so that adequate, affordable doses are quickly available to all countries. Where lockdowns are required, economic policy should continue to cushion household income losses with sizable, well-targeted measures as well as provide support to firms suffering the consequences of mandated restrictions on activity. Where economies are reopening, targeted support should be gradually unwound as the recovery gets underway, and policies should provide stimulus to lift demand and ease and incentivize the reallocation of resources away from sectors likely to emerge persistently smaller after the pandemic.
Strong multilateral cooperation remains essential on multiple fronts. Liquidity assistance is urgently needed for countries confronting health crises and external funding shortfalls, including through debt relief and financing through the global financial safety net. Beyond the pandemic, policymakers must cooperate to resolve trade and technology tensions that endanger an eventual recovery from the COVID-19 crisis. Furthermore, building on the record drop in greenhouse gas emissions during the pandemic, policymakers should both implement their climate change mitigation commitments and work together to scale up equitably designed carbon taxation or equivalent schemes. The global community must act now to avoid a repeat of this catastrophe by building global stockpiles of essential supplies and protective equipment, funding research and supporting public health systems, and putting in place effective modalities for delivering relief to the neediest.
COVID-19 Crisis: More Severe Economic Fallout than Anticipated
Economic data available at the time of the April 2020 WEO forecast indicated an unprecedented decline in global activity due to the COVID-19 pandemic. Data releases since then suggest even deeper downturns than previously projected for several economies.
The pandemic has worsened in many countries, leveled off in others. Following the release of the April 2020 WEO, the pandemic rapidly intensified in a number of emerging market and developing economies, necessitating stringent lockdowns and resulting in even larger disruptions to activity than forecast. In others, recorded infections and mortality have instead been more modest on a per capita basis, although limited testing implies considerable uncertainty about the path of the pandemic. In many advanced economies, the pace of new infections and hospital intensive care occupancy rates have declined thanks to weeks of lockdowns and voluntary distancing.
Synchronised, deep downturn. First-quarter GDP was generally worse than expected (the few exceptions include, for example, Chile, China, India, Malaysia, and Thailand, among emerging markets, and Australia, Germany, and Japan, among advanced economies). High-frequency indicators point to a more severe contraction in the second quarter, except in China, where most of the country had reopened by early April.
Consumption and services output have dropped markedly. In most recessions, consumers dig into their savings or rely on social safety nets and family support to smooth spending, and consumption is affected relatively less than investment. But this time, consumption and services output have also dropped markedly. The pattern reflects a unique combination of factors: voluntary social distancing, lockdowns needed to slow transmission and allow health care systems to handle rapidly rising caseloads, steep income losses, and weaker consumer confidence. Firms have also cut back on investment when faced with precipitous demand declines, supply interruptions, and uncertain future earnings prospects. Thus, there is a broad- based aggregate demand shock, compounding near-term supply disruptions due to lockdowns.
Mobility remains depressed. Globally, lockdowns were at their most intense and widespread from about mid-March through mid-May. As economies have gradually reopened, mobility has picked up in some areas but generally remains low compared to pre-virus levels, suggesting people are voluntarily reducing exposure to one another. Mobility data from cellphone tracking, for example, indicate that activity in retail, recreation, transit stations, and workplaces remains depressed in most countries, although it appears to be returning to baseline in certain areas.
Severe hit to the labor market. The steep decline in activity comes with a catastrophic hit to the global labor market. Some countries (notably in Europe) have contained the fallout with effective short-term work schemes. Nonetheless, according to the International Labour Organization, the global decline in work hours in 2020:Q1 compared to 2019:Q4 was equivalent to the loss of 130 million full-time jobs. The decline in 2020:Q2 is likely to be equivalent to more than 300 million full-time jobs. Where economies have been reopening, activity may have troughed in April—as suggested, for example, by the May employment report for the United States, where furloughed workers are returning to work in some of the sectors most affected by the lockdown.
The hit to the labor market has been particularly acute for low-skilled workers who do not have the option of working from home. Income losses also appear to have been uneven across genders, with women among lower-income groups bearing a larger brunt of the impact in some countries. Of the approximately 2 billion informally employed workers worldwide, the International Labour Organization estimates close to 80 % have been significantly affected.
Contraction in global trade. The synchronized nature of the downturn has amplified domestic disruptions around the globe. Trade contracted by close to –3.5 % (year over year) in the first quarter, reflecting weak demand, the collapse in cross-border tourism, and supply dislocations related to shutdowns (exacerbated in some cases by trade restrictions).
Weaker inflation. Average inflation in advanced economies had dropped about 1.3 %age points since the end of 2019, to 0.4 % (year over year) as of April 2020, while in emerging market economies it had fallen 1.2 %age points, to 4.2 %. Downward price pressure from the decline in aggregate demand, together with the effects of lower fuel prices, seems to have more than offset any upward cost-push pressure from supply interruptions so far.
Policy Countermeasures Have Limited Economic Damage and Lifted Financial Sentiment
Some bright spots mitigate the gloom. Following the sharp tightening during January–March, financial conditions have eased for advanced economies and, to a lesser extent, for emerging market economies, also reflecting the policy actions discussed below.
Sizable fiscal and financial sector countermeasures deployed in several countries since the start of the crisis have forestalled worse near-term losses. Reduced-work-hour programs and assistance to workers on temporary furlough have kept many from outright unemployment, while financial support to firms and regulatory actions to ensure continued credit provision have prevented more widespread bankruptcies (see Annex 1 and the June 2020 Fiscal Monitor Database of Country Fiscal Measures, which discuss fiscal measures amounting to about USD 10.7 trillion that have been announced worldwide, as well as the April 2020 WEO and the IMF Policy Tracker on Responses to COVID-19, which provide a broader list of country-specific measures).
Swift and, in some cases, novel actions by major central banks (such as a few emerging market central banks launching quantitative easing for the first time and some advanced economy central banks significantly increasing the scale of asset purchases) have enhanced liquidity provision and limited the rise in borrowing costs (see the June 2020 GFSR Update). Moreover, swap lines for several emerging market central banks have helped ease dollar liquidity shortages. Portfolio flows into emerging markets have recovered after the record outflows in February-March and hard currency bond issuance has strengthened for those with stronger credit ratings. Meanwhile, financial regulators’ actions—including modification of bank loan repayment terms and release of capital and liquidity buffers—have supported the supply of credit.
Stability in the oil market has also helped lift sentiment. West Texas Intermediate oil futures, which in April had sunk deep into negative territory for contracts expiring in the early summer, have risen in recent weeks to trade in a stable range close to the current spot price.
Exchange rate changes since early April have reflected these developments. As of mid-June, the US dollar had depreciated by close to 4 % in real effective terms (after strengthening by over 8 % between January and early April). Currencies that had weakened substantially in previous months have appreciated since April—including the Australian dollar and the Norwegian krone, among advanced economy currencies, and the Indonesian rupiah, Mexican peso, Russian ruble, and South African rand, among emerging market currencies.
Considerations for the Forecast
The developments discussed in the previous section help shape the key assumptions for the global growth forecast, in particular with regard to activity disruptions due to the pandemic, commodity prices, financial conditions, and policy support.
Disruptions to activity in the forecast baseline. Based on downside surprises in the first quarter and the weakness of high-frequency indicators in the second quarter, this updated forecast factors in a larger hit to activity in the first half of 2020 and a slower recovery path in the second half than envisaged in the April 2020 WEO. For economies where infections are declining, the slower recovery path in the updated forecast reflects three key assumptions: persistent social distancing into the second half of 2020, greater scarring from the larger-than-anticipated hit to activity during the lockdown in the first and second quarters, and a negative impact on productivity as surviving businesses enhance workplace safety and hygiene standards. For economies still struggling to control infection rates, the need to continue lockdowns and social distancing will take an additional toll on activity. An important assumption is that countries where infections have declined will not reinstate stringent lockdowns of the kind seen in the first half of the year, instead relying on alternative methods if needed to contain transmission (for instance, ramped- up testing, contact tracing, and isolation). The risk section below considers alternative scenarios, including one featuring a repeat outbreak in 2021.
Policy support and financial conditions. The projection factors in the impact of the sizable fiscal countermeasures implemented so far and anticipated for the rest of the year. With automatic stabilizers also allowed to operate and provide further buffers, overall fiscal deficits are expected to widen significantly and debt ratios to rise over 2020–21. Major central banks are assumed to maintain their current settings throughout the forecast horizon to the end of 2021. More generally, financial conditions are expected to remain approximately at current levels for both advanced and emerging market economies.
Commodity prices. The assumptions on fuel prices are broadly unchanged from the April 2020 WEO. Average petroleum spot prices per barrel are estimated at USD 36.20 in 2020 and USD 37.50 in 2021. Oil futures curves indicate that prices are expected to increase thereafter toward USD 46, still about 25 % below the 2019 average. Nonfuel commodity prices are expected to rise marginally faster than assumed in the April 2020 WEO.
Deep Downturn in 2020, Sluggish Turnaround in 2021
Global growth is projected at –4.9 % in 2020, 1.9 %age points below the April 2020 WEO forecast.
Consumption growth, in Advanced economies in particular, has been downgraded for Emerging market and developing economies excluding China most economies, reflecting the larger- than-anticipated disruption to domestic activity. The projections of weaker private consumption reflect a combination of a large adverse aggregate demand shock from social distancing and lockdowns, as well as a rise in precautionary savings. Moreover, investment is expected to be subdued as firms defer capital expenditures amid high uncertainty. Policy support partially offsets the deterioration in private domestic demand.
In the baseline, global activity is expected to trough in the second quarter of 2020, recovering thereafter (Figure 1).
In 2021 growth is projected to strengthen to 5.4 %, 0.4 %age point lower than the April forecast. Consumption is projected to strengthen gradually next year, and investment is also expected to firm up, but to remain subdued. Global GDP for the year 2021 as a whole is forecast to just exceed its 2019 level.
Uncertainty. Similarly to the April 2020 WEO projections, there is pervasive uncertainty around this forecast. The forecast depends on the depth of the contraction in the second quarter of 2020 (for which complete data are not yet available) as well as the magnitude and persistence of the adverse shock. These elements, in turn, depend on several uncertain factors, including
• The length of the pandemic and required lockdowns
• Voluntary social distancing, which will affect spending
• Displaced workers’ ability to secure employment, possibly in different sectors
• Scarring from firm closures and unemployed workers exiting the workforce, which may make it more difficult for activity to bounce back once the pandemic fades
• The impact of changes to strengthen workplace safety—such as staggered work shifts, enhanced hygiene and cleaning between shifts, new workplace practices relating to proximity of personnel on production lines—which incur business costs.
• Global supply chain reconfigurations that affect productivity as companies try to enhance their resilience to supply disruptions
• The extent of cross-border spillovers from weaker external demand as well as funding shortfalls
• Eventual resolution of the current disconnect between asset valuations and prospects for economic activity (as highlighted in the June 2020 GFSR Update)
Growth in the advanced economy group is projected at –8.0 % in 2020, 1.9 percentage points lower than in the April 2020 WEO. There appears to have been a deeper hit to activity in the first half of the year than anticipated, with signs of voluntary distancing even before lockdowns were imposed. This also suggests a more gradual recovery in the second half as fear of contagion is likely to continue. Synchronized deep downturns are foreseen in the United States (–8.0 %); Japan (–5.8 %); the United Kingdom (–10.2 %); Germany (–7.8 %); France (–12.5 %); Italy and Spain (–12.8 %). In 2021 the advanced economy growth rate is projected to strengthen to 4.8 %, leaving 2021 GDP for the group about 4 % below its 2019 level.
Among emerging market and developing economies, the hit to activity from domestic disruptions is projected closer to the downside scenario envisaged in April, more than offsetting the improvement in financial market sentiment. The downgrade also reflects larger spillovers from weaker external demand. The downward revision to growth prospects for emerging market and developing economies over 2020–21 (2.8 perecentage points) exceeds the revision for advanced economies (1.8 percentage points). Excluding China, the downward revision for emerging market and developing economies over 2020–21 is 3.6 percentage points.
Overall, growth in the group of emerging market and developing economies is forecast at–3.0 % in 2020, 2 percentage points below the April 2020 WEO forecast. Growth among low-income developing countries is projected at –1.0 % in 2020, some 1.4 percentage points below the April 2020 WEO forecast, although with differences across individual countries. Excluding a few large frontier economies, the remaining group of low-income developing countries is projected to contract by –2.2 % in 2020.
For the first time, all regions are projected to experience negative growth in 2020. There are, however, substantial differences across individual economies, reflecting the evolution of the pandemic and the effectiveness of containment strategies; variation in economic structure (for example, dependence on severely affected sectors, such as tourism and oil); reliance on external financial flows, including remittances; and precrisis growth trends. In China, where the recovery from the sharp contraction in the first quarter is underway, growth is projected at 1.0 % in 2020, supported in part by policy stimulus. India’s economy is projected to contract by 4.5 % following a longer period of lockdown and slower recovery than anticipated in April. In Latin America, where most countries are still struggling to contain infections, the two largest economies, Brazil and Mexico, are projected to contract by 9.1 and 10.5 %, respectively, in 2020. The disruptions due to the pandemic, as well as significantly lower disposable income for oil exporters after the dramatic fuel price decline, imply sharp recessions in Russia (–6.6 %), Saudi Arabia (–6.8 %), and Nigeria (–5.4 %), while South Africa’s performance (–8.0 %) will be severely affected by the health crisis.
In 2021 the growth rate for emerging market and developing economies is projected to strengthen to 5.9 %, largely reflecting the rebound forecast for China (8.2 %). The growth rate for the group, excluding China, is expected to be –5.0 % in 2020 and 4.7 % in 2021, leaving 2021 GDP for this subset of emerging market and developing economies slightly below its 2019 level.
Global trade will suffer a deep contraction this year of –11.9 %, reflecting considerably weaker demand for goods and services, including tourism. Consistent with the gradual pickup in domestic demand next year, trade growth is expected to increase to 8 %.
Inflation outlook. Inflation projections have generally been revised downward, with larger cuts typically in 2020 and for advanced economies. This generally reflects a combination of weaker activity and lower commodity prices, although in some cases partially offset by the effect of exchange rate depreciation on import prices. Inflation is expected to rise gradually in 2021, consistent with the projected pickup in activity. Nonetheless, the inflation outlook remains muted, reflecting expectations of persistently weak aggregate demand.
Likely Reversal of Progress on Poverty Reduction
These projections imply a particularly acute negative impact of the pandemic on low-income households worldwide that could significantly raise inequality. The fraction of the world’s population living in extreme poverty—that is, on less than USD 1.90 a day—had fallen below 10 % in recent years (from more than 35 % in 1990). This progress is imperiled by the COVID-19 crisis, with more than 90 % of emerging market and developing economies projected to register negative per capita income growth in 2020. In countries with high shares of informal employment, lockdowns have led to joblessness and abrupt income losses for many of those workers (often where migrants work far from home, separated from support networks).
Moreover, with widespread school closures in about 150 countries as of the end of May, the United Nations Educational, Scientific and Cultural Organization estimates that close to 1.2 billion schoolchildren (about 70 % of the global total) have been affected worldwide. This will result in significant loss of learning, with disproportionately negative effects on earnings prospects for children in low-income countries.
Risks to the Outlook
Fundamental uncertainty around the evolution of the pandemic is a key factor shaping the economic outlook and hinders a characterization of the balance of risks. The downturn could be less severe than forecast if economic normalization proceeds faster than currently expected in areas that have reopened—for example in China, where the recovery in investment and services through May was stronger than anticipated. Medical breakthroughs with therapeutics and changes in social distancing behavior might allow health care systems to cope better without requiring extended, stringent lockdowns. Vaccine trials are also proceeding at a rapid pace.
Development of a safe, effective vaccine would lift sentiment and could improve growth outcomes in 2021, even if vaccine production is not scaled up fast enough to deliver herd immunity by the end of 2021. More generally, changes in production, distribution, and payment systems during the pandemic could actually spur productivity gains—ranging from new techniques in medicine to, more broadly, accelerated digitalisation or the switch from fossil fuels to renewables.
Downside risks, however, remain significant. Outbreaks could recur in places that appear to have gone past peak infection, requiring the re-imposition of at least some containment measures. A more prolonged decline in activity could lead to further scarring, including from wider firm closures, as surviving firms hesitate to hire jobseekers after extended unemployment spells, and as unemployed workers leave the labor force entirely. Financial conditions may again tighten as in January–March, exposing vulnerabilities among borrowers. This could tip some economies into debt crises and slow activity further. More generally, cross-border spillovers from weaker external demand and tighter financial conditions could further magnify the impact of country- or region-specific shocks on global growth. Moreover, the sizable policy response following the initial sudden stop in activity may end up being prematurely withdrawn or improperly targeted due to design and implementation challenges, leading to misallocation and the dissolution of productive economic relationships. Some of these aspects are featured in the Scenario Box, which presents growth projections under alternative scenarios.
Beyond pandemic-related downside risks, escalating tensions between the United States and China on multiple fronts, frayed relationships among the Organization of the Petroleum Exporting Countries (OPEC)+ coalition of oil producers, and widespread social unrest pose additional challenges to the global economy. Moreover, against a backdrop of low inflation and high debt (particularly in advanced economies), protracted weak aggregate demand could lead to further disinflation and debt service difficulties that, in turn, weigh further on activity.
With the relentless spread of the pandemic, prospects of long-lasting negative consequences for livelihoods, job security, and inequality have grown more daunting. Further effective policy actions can help slow the deterioration of those prospects and set the stage for a speedier recovery that benefits all in society across the income spectrum and skills distribution. At the same time, considering the substantial uncertainty regarding the pandemic and its implications for different sectors, the policy response will have to adapt as the situation evolves to maximize its effectiveness—for instance, shifting from saving firms to facilitating resource reallocation across sectors.
As discussed in the April 2020 WEO, these policy objectives are shared across emerging market and developing economies as well as advanced economies, but the former group is relatively more constrained by lower health care capacity, larger informal sectors, and tighter borrowing constraints. Moreover, some emerging market and developing economies entered this crisis with limited policy space. External support and strong multilateral cooperation are therefore essential to help these financially constrained countries combat the crisis. This is particularly the case for low-income countries. Many of these have high debt, and some are already in a precarious security situation, with scarce food and medicine. Hence, their ability to deploy the policy response needed to prevent a devastating human toll and long-lasting impacts on livelihoods depends critically on debt relief, grants, and concessional financing from the international community. Island economies that rely heavily on tourism and economies that are driven by oil exports are also likely to face long-lasting challenges.
Resources for Health Care
The pandemic continues to test health care capacity in many countries, accelerating in emerging market and developing economies. Other countries that have passed peaks in infections remain at risk of renewed surges. All countries therefore need to ensure that their health care systems are adequately resourced. This requires additional spending as needed in various areas, including virus and antibody testing; training and hiring contact tracers; acquiring personal protective equipment; and health care infrastructure spending for emergency rooms, intensive care units, and isolation wards.
Multilateral cooperation to support health care systems. The international community needs to vastly step up efforts to support national initiatives, including completing the removal of trade restrictions on essential medical supplies; sharing information on the pandemic widely and transparently; providing financial assistance and expertise to countries with limited health care capacity, including via support for international organizations; and channeling funding to scale up vaccine production facilities as trials advance so that adequate, affordable doses are quickly available to all countries.
Contain the Economic Fallout, Facilitate Recovery
Confronted with a highly transmissible virus and susceptible populations, countries have restricted mobility to curb its spread and protect lives. In the resulting deep economic downturn, the broad economic policy objectives remain similar to those discussed in the April 2020 WEO, with a continued emphasis on sizable, well-targeted measures that protect the vulnerable. As economies reopen, the focus there should gradually move from protecting jobs and shielding firms to facilitating recovery and removing obstacles to worker reallocation. Elevated debt levels, nonetheless, could constrain the scope of further fiscal support—and will pose an important medium-term challenge for many countries.
To ensure that economies are well prepared to counter further shocks, policymakers should consider strengthening mechanisms for automatic, timely, and temporary support in downturns. As analyzed in the April 2020 WEO, rules-based fiscal stimulus measures that respond to deteriorating macroeconomic conditions—such as temporary targeted cash transfers to liquidity- constrained, low-income households that kick in when the unemployment rate or jobless claims rise above a certain threshold—can be highly effective in dampening downturns.
Economies where the pandemic is accelerating. In countries where lockdowns are required to slow transmission, the emphasis should be on containing the health shock and minimizing damage to the economy so that activity can normalize more quickly once the restrictions are lifted. The objective is twofold: cushioning income losses for people to the extent possible while enabling the shift of resources away from contact-intensive sectors that will likely be persistently smaller after the pandemic.
Targeted measures, such as temporary tax breaks for affected people and firms, wage subsidies for furloughed workers, cash transfers, and paid sick and family leave are good common practices for cushioning income losses. The specific mix of targeted support should be tailored to country circumstances with due consideration for those who may not be protected by the formal safety net (as discussed below). Temporary credit guarantees, particularly for small and medium-sized enterprises, and loan restructuring can help preserve employment relationships likely to remain viable after the pandemic fades. In tandem, spending on retraining, where feasible, should be increased so that workers are better equipped to seek employment in other sectors as needed. Broader social safety nets should be enhanced, including to expand eligibility criteria for unemployment protection and provide better coverage of self-employed and informal workers.
Central bank liquidity provision and targeted relending facilities for funding-affected firms can help ensure that credit provision continues, while policy rate cuts and asset purchases can limit the rise in borrowing costs (see the June 2020 GFSR Update for details). Public infrastructure investment or across-the-board tax cuts may be less effective in stimulating demand when large parts of the economy are shut down. Nonetheless, where financing constraints permit, such measures can play an important role in supporting confidence and limiting bankruptcies.
Economies where reopening is underway. Many countries have begun scaling back stringent lockdowns. With reopening, policy focus must also shift toward facilitating recovery. This requires progressively unwinding targeted support as the recovery gets underway, incentivizing the reallocation of workers and resources where needed, and providing stimulus.
The exit from targeted support—such as wage subsidies for furloughed workers, cash transfers, enhanced elibility criteria for unemployment insurance, credit guarantees for firms, and moratoria on debt service—should proceed gradually to avoid precipitating sudden income losses and bankruptcies just as the economy is beginning to regain its footing. The sequence in which the targeted measures are unwound should take into account the structure of employment—for instance, the share of self-employed, the distribution of firms across sectors experiencing different rates of recovery, and the degree of informality in the economy.
Where fiscal space permits, as targeted fiscal support is unwound, it can be replaced with public investment to accelerate the recovery and expanded social safety net spending to protect the most vulnerable. The former can support the transition to a low-carbon economy and mitigation strategies. The latter will be particularly important given that the pandemic has taken a significant toll on lower-skilled workers (who may have a harder time securing reemployment than higher-skilled workers) and lower-income households more generally (who may not have adequate resources to purchase health care and essentials).
At the same time, hiring subsidies and spending on worker training will need to increase to facilitate reallocation toward sectors with growing demand and away from those likely to emerge persistently smaller from the pandemic. Policymakers should also address factors that can impede this reallocation, including barriers to entry that favor incumbents at the expense of potential entrants and labor market rigidities that deter firms from hiring. Easing reallocation will also involve actions to repair balance sheets and address debt overhangs—factors that have slowed past recoveries from deep recessions. This will require mechanisms for restructuring and disposing of distressed debt. Such steps to reduce persistent resource misallocation and productivity losses can further enhance the effectiveness of broader stimulus to lift aggregate demand and boost employment.
Modalities for delivering relief in countries with large informal sectors. In economies where the pandemic and associated lockdowns weigh heavily on informally employed workers, digital payment systems can provide an alternative modality for ensuring that government relief measures reach intended beneficiaries (IMF Special Series Note on COVID-19). Where individuals do not have IDs or access to mobile phones to avail of this channel, temporary workarounds can be implemented to scale up the coverage of digital payments (IMF Special Series Note on COVID-19), along with complementary in-kind support of food, medicine, and other essentials staples for households in need—for example, through local governments and community organizations.
Considering the global scale of the crisis, countries must cooperate on multiple fronts to combat the shared challenges. Besides common efforts to support health care systems, liquidity assistance is urgently needed for countries confronting health shocks and external funding shortfalls.
The G20 initiative for a temporary standstill on official debt service payments by low-income countries is an important first step to help them preserve international liquidity and channel resources to combat the health crisis. Private creditors should also provide comparable treatment. More generally, it is in the best interest of all creditors and low-income country and emerging market borrowers with high debt and large financing needs to quickly agree on mutually acceptable terms of debt relief where needed.
Multilateral assistance through the global financial safety net can help further cushion the impact of funding shocks. The IMF has enhanced the access limits to its emergency financing facilities, increased its ability to provide grant-based debt service relief, and is helping vulnerable countries with new financing through other lending facilities. Other elements of the global financial safety net have also been activated to alleviate international liquidity shortages in emerging markets, including central bank swap lines. Shared recognition that emerging market and developing economies are generally more constrained than reserve-currency-issuing advanced economies guides these actions. The longer the pandemic and its aftermath persist, the greater the need to enhance efforts to support financially constrained economies.
Beyond the pandemic, policymakers must cooperate to address the economic issues underlying trade and technology tensions as well as gaps in the rules-based multilateral trading system. The eventual recovery from the COVID-19 crisis would be endangered without a durable solution to these frictions. Building on the record drop in greenhouse gas emissions this year (reflecting significantly lower fossil fuel use during the pandemic), policymakers should implement their climate change mitigation commitments, and effort needs to be scaled up at the international level, ideally through equitably designed carbon taxation or equivalent schemes (see the October 2019 Fiscal Monitor). Low oil prices also present an opportunity to reduce harmful fuel subsidies. And the global community must act now to avoid a repeat pandemic catastrophe by building global stockpiles of essential supplies and protective equipment that can be distributed quickly to affected areas, funding research and supporting public health systems, and putting in place adequate and effective modalities for delivering relief to the neediest.
Annex: Update of Fiscal Developments and the Outlook
As the economic fallout from the COVID-19 pandemic and the Great Lockdown has become more severe, many governments have stepped up their emergency lifelines to protect people, preserve jobs, and prevent bankruptcies. The steep contraction in economic activity and fiscal revenues, along with the sizable fiscal support, has further stretched public finances, with global public debt projected to reach more than 100 % of GDP this year. As the lockdowns are unwound in many countries, policy focus needs to shift toward facilitating recovery, although uncertainty about the containment of the pandemic remains, and elevated debt could constrain the scope and effectiveness of further fiscal support. This annex updates the April 2020 Fiscal Monitor on fiscal measures in response to the pandemic, as well as the fiscal outlook. 1
More than two-thirds of governments across the world have scaled up their fiscal support since April to mitigate the economic fallout from the pandemic and the stringent lockdowns as growth is revised further down relative to the April 2020 World Economic Outlook. These measures have helped save lives, protect livelihoods, and preserve employment and business relations. Announced fiscal measures are now estimated at USD 10¾ trillion globally, up from USD 8 trillion estimated in the April 2020 Fiscal Monitor. One-half of these measures (USD 5.4 trillion) are additional spending and forgone revenue, directly affecting government budgets.2F2 The remaining half (USD 5.4 trillion) is liquidity support, such as loans, equity injections, and guarantees, including through state-owned banks and enterprises, which help maintain cashflows and limit bankruptcies, but could add to government debt and deficits down the road if these public interventions incur losses. The Group of Twenty (G20) economies continue to account for the bulk of the global fiscal support, with budget measures now standing at 6 % of GDP on average (Annex Figure 1), compared with just 3 % of GDP in April, and much higher than during 2008–10 in response to the global financial crisis.
1 This annex was prepared by the Fiscal Affairs Department.
2 See the Fiscal Monitor Database of Country Fiscal Measures in Response to the COVID-19 Pandemic for details.
Government Debt and Deficits at the Global Level
The steep contraction in output and ensuing fall in revenues, along with sizable discretionary support, have led to a surge in government debt and deficits (Annex Figure 2). Under the baseline scenario, global public debt is expected to reach an all-time high, exceeding 101 % of GDP in 2020–21—a surge of 19 %age points from a year ago (Annex Table 1). Meanwhile, the average overall fiscal deficit is expected to soar to 14 % of GDP in 2020, 10 %age points higher than last year.
Beyond discretionary fiscal measures, automatic stabilizers from taxes and social protection are expected to help cushion the fall in household incomes during the recession, but also to contribute to one-third of the rise in deficits on average. In particular, government revenues are expected to fall more than output and projected to be 2½ %age points of GDP lower, on Government debt and deficits are set to rise globally, more so than during 2008–10 following the global financial crisis.
On average, than in 2019, reflecting lower personal and corporate incomes and hard-hit private consumption. In addition, oil-exporting countries have suffered from a decline in oil revenue owing to low oil prices. The trajectory of debt and deficits is subject to high uncertainty and could drift up in an adverse scenario if activity disappoints from a resurgence in infections or if contingent liabilities from large liquidity support materialize when financing conditions tighten.3F3 Revenues could also fall more if deferred collections are not recovered in full. Public finances could deteriorate less than forecast if safe and effective vaccines become available later this year, restoring confidence and mitigating the downturn.
Fiscal Developments and Outlook by Country Income Groups
Most advanced economies have enacted further rounds of fiscal support as activity contracted more than expected. Overall fiscal deficits are now projected to widen to 16½ % of GDP on average this year, 13 percentage points higher than last year, and government debt is set to exceed 130 % of GDP during 2020–21. The large liquidity support in some advanced economies (France, Germany, Italy, Japan, United Kingdom) creates fiscal risks contingent on substantial take-up and losses. Borrowing costs, nonetheless, are expected to remain low in advanced economies. In terms of fiscal support, the United States approved another package.
3 See the Scenario Box for a summary of alternative scenarios and their growth implications in the G20 economies.
(USD 483 billion, or 2½ % of GDP) in late April, providing additional forgivable loans to small and medium-sized enterprises. Further support amounting to USD 3 trillion is pending legislative approval to fund subnational governments and additional cash transfers. Japan rolled out a massive package of USD 1.1 trillion (22 % of GDP) in late May, amounting to over 40 % of GDP when combined with measures decided in April. The package includes expanded concessional loans to affected firms. Germany announced a new package (EUR 130 billion, or 4 % of GDP, over 2020–21) in June to support the recovery, with measures to boost activity in green and digital economies. The European Union has proposed an additional EUR 750 billion (6 % of its GDP) in support over 2021–27, including a grant-based recovery fund, which, if approved, could promote green recovery and reduce the uneven impact of the pandemic on member states’ debt sustainability.
In emerging market economies, the average fiscal response to the pandemic is now estimated at 5 % of GDP, sizable but less than in advanced economies. Yet fiscal deficits are projected to widen sharply to 10½ % of GDP on average in 2020, more than double the level last year. This reflects the fiscal expansion, steep output contraction, lower commodity revenues, and higher external borrowing costs, as global financial conditions remain tighter than they were before the crisis despite recent easing (see the June 2020 Global Financial Stability Report Update). Government debt is now projected to average 63 % of GDP in 2020, continuing its upward trend with a 10 %age point surge from a year ago. Many emerging markets have scaled up their support. India has unveiled liquidity support (4½ % of GDP) through loans and guarantees for businesses and farmers and equity injections into financial institutions and the electricity sector. South Africa has temporarily expanded its unemployment support and transfers to vulnerable households. As activity begins to recover, China has continued to focus on vulnerable firms and households, including through the expansion of the social safety net, medical facilities, and digital infrastructure.
As many low-income developing countries face tight financing constraints and a less severe impact of the pandemic thus far, the fiscal response to the pandemic has been modest, at 1.2 % of GDP on average, and mostly through budgetary measures. For example, Nigeria provided tax relief for employers to retain workers and raised health care spending (0.3 % of GDP), while Ethiopia has expanded its in-kind provision of food and shelter (1.8 % of GDP).
Support measures in Vietnam have included cash transfers to the poor and higher benefits in existing social protection programs (1.2 % of GDP). As a result, the headline deficit for low-income developing countries is projected to widen to 6 % of GDP in 2020, 2 %age points higher than last year, and much higher for oil exporters. Within the group, many countries have requested a suspension of official bilateral debt repayment under the G20 Debt Service Suspension Initiative, and 45 countries have sought IMF emergency financing. While these provide temporary relief, elevated public debt—exceeding 48 % of GDP on average during 2020–21—has raised sustainability concerns in many countries.
Fiscal Policies Going Forward
As the Great Lockdown begins to ease in several parts of the world, fiscal policies will have to adapt to country circumstances, balancing the need to protect people, stabilize demand, and facilitate recovery. Where the pandemic remains acute and stringent lockdowns continue, fiscal policies should accommodate health care services to save lives and provide emergency lifelines to protect people. Where lockdowns are easing, fiscal policies should gradually transition away from firm support to better targeted household support, taking into account the extent of informality in the economy. Employment support measures will need to encourage safe return to jobs and facilitate structural shifts in labor markets for a more resilient post–COVID-19 economy. Once the pandemic is under control, broad-based fiscal stimulus to support the recovery could focus on public investment, including on physical and digital infrastructure, health care systems, and the transition to a low-carbon economy. Where fiscal space is limited, countries need to reorient revenue and spending to increase and incentivize productive investment. Making some provisions (for example, relaxing eligibility) of social protection programs more long-lasting can enhance automatic stabilizers and help tackle rising poverty and inequality. All measures should be embedded in a medium-term fiscal framework and transparently managed and recorded to mitigate fiscal risks, including loans and guarantees that do not have an immediate effect on government debt and deficits.
The Newsletter of Last Week
Euromonitor International – The Future of China’s BusinessAccording to Industry Leaders https://textile-future.com/?p=47704
The highlights of TextileFuture’s News of last week. For your convenience just click on the feature.
EU Commission clears acquisition of Italian Fiamm Energy Technology by Hitachi Chemical Company https://textile-future.com/?p=47834
Bayer announces agreements to resolve major legacy Monsanto litigation https://textile-future.com/?p=47974
AI Artificial Intelligence
X-ray vision and eavesdropping ensure quality https://textile-future.com/?p=47850
Antibacterial / Antiviral
Finally: the fast-acting, all-in-one, highly durable antibacterial and antiviral solution for textiles: RUCO®-BAC AGP https://textile-future.com/?p=47970
Hermès Handbags Pass an Early Covid Test https://textile-future.com/?p=47994
Wilhelm-Lorch-Stiftung awards ITA graduate and a project at ITA with sponsorship prizes https://textile-future.com/?p=47887
Bangladeshi Factory workers ‘face destitution’ unless UK Arcadia pays for orders https://textile-future.com/?p=47893
JD Sports buys back Go Outdoors in GBP 56.5 million pre-pack deal after appointing administrators https://textile-future.com/?p=47819
Cambodia seeks Adidas, H&M’s support for garment industry https://textile-future.com/?p=47827
Terrot continues its R&D activities during COVID-19 https://textile-future.com/?p=47981
H&M speeds up store closings in 2020 and shifts focus to online shopping https://textile-future.com/?p=47992
Composite Innovations for the Building Industry https://textile-future.com/?p=47796
Chinese exports to the EU of Textiles and Apparel increased https://textile-future.com/?p=47856
1.5 million U.S. workers filed new state unemployment claims last week https://textile-future.com/?p=47872
An early view of post-COVID-19 discretionary spending in Asia https://textile-future.com/?p=47896
Increase of 0.9 % in Swiss nominal wages in 2019 and of 0.5 % in real wages https://textile-future.com/?p=48001
Digital Magazine Production
Client consultation helps Masquelibros write new future with Ricoh Pro™ VC60000 investment https://textile-future.com/?p=47763
Announcing IDERA, Xeikon and Flint Group Bring Digital Print to the Corrugated Industry https://textile-future.com/?p=47778
Azon Matrix MONSTERJET delivers a breakthrough in digital printing with new industrial applications https://textile-future.com/?p=47881
Hundreds of garment workers for Primark and Zara factories dismissed after forming Union https://textile-future.com/?p=47823
Debt mainly held by resident financial sector in more than half of the EU Member States https://textile-future.com/?p=47739
EU-China Summit: Defending EU interests and values in a complex and vital partnership https://textile-future.com/?p=47755
Commission report: EU data protection rules empower citizens and are fit for the digital age https://textile-future.com/?p=47829
Burberry will Stage Outdoor Runway Show in September 2020https://textile-future.com/?p=47759
European producers set for 20-fold increase in nonwoven face mask output by November https://textile-future.com/?p=47816
India / Bangladesh
Greater collaboration could boost India, Bangladesh textiles sector globally https://textile-future.com/?p=47814
Sovereign funds could contribute to speeding up low-carbon transition, says new report by OECD https://textile-future.com/?p=47842
Pilot assistance system LNAS reduces noise in the approach path https://textile-future.com/?p=47746
Colback nonwovens provide support in medical face masks for Dutch healthcare under non-profit initiative https://textile-future.com/?p=47791
Markus Steilemann elected to head PlasticsEurope https://textile-future.com/?p=47935
New President of Cematex https://textile-future.com/?p=47935
John Lewis Partnership hires Pippa Wicks as John Lewis executive director https://textile-future.com/?p=47935
Republic of Korea nominates Ms Yoo Myung-hee for post of WTO Director-General https://textile-future.com/?p=47935
European Commission announces a new Director-General for its Legal Service https://textile-future.com/?p=47935
Swiss Federal Council appoints Vice President and new member of Swiss ETH Board https://textile-future.com/?p=47935
WFSGI and FESI pay tribute to passsing of “Instrumental” Past President, Frank A. Dassler https://textile-future.com/?p=47935
Kurt Bock elected as new chairman of the Supervisory Board of BASF SE https://textile-future.com/?p=47935
Neiman Marcus Group announces Board Member Resignation https://textile-future.com/?p=47935
Three decisions on Deputy Director-Generals in DG SANTE, DEVCO and GROWhttps://textile-future.com/?p=47935
The new driving force behind sales for leading e-commerce brands https://textile-future.com/?p=47807
ISKO partners with Bluesign https://textile-future.com/?p=47753
Oerlikon Barmag systems convince with product diversity https://textile-future.com/?p=47861
Commissioning of polycondensation system rounds off total industrial yarn solution https://textile-future.com/?p=47866
Simon announces Grand Opening of Siam Premium Outlets® Bangkok, Thailand https://textile-future.com/?p=47809
World Trade falls steeply in first half of 2020 states WTO https://textile-future.com/?p=47799
AATCC Tackles Laundering, Various Exposure Conditions, and Measuring E-Textiles https://textile-future.com/?p=47783
3 Free Webinars offered by University of St. Gallen, Switzerland in English https://textile-future.com/?p=47836