Three items in this TextileFuture’s Newsletter will brief you on the latest worldwide economic developments with plentiful facts and figures

Again TextileFuture’s Team is presenting to you different items in view to “A new growth formula for manufacturing in India” based upon a briefing by McKinsey Consultancy, followed by IMF International Monetary Fund, entitled the “United Kingdom: IMF Staff Concluding Statement of the 2020 Article IV Mission” with latest fact and figures.

The piece of resistance,however,  is the freshly published “G-20 Report on Strong, Sustainable, Balances, and Inclusive Growth” with an enormous richness of figures that might help you during these strange and uncertain times for your own business planning. It includes also the related blog from IMF.

Keep safe and healthy!

Here starts the first item:

A new growth formula for manufacturing in India

By guest authors Rajat Dhawan and Suvojoy Sengupta. Rajat Dhawan is a senior partner in McKinsey’s Gurgaon office, where Suvojoy Sengupta is a partner. The authors wish to thank Kanmani Chockalingam, Dinesh Babu Gnanasekar, Ketav Mehta, and Moomal Rathore for their contributions to this article.

This article was edited by Josh Rosenfield, an executive editor in the New York office.

India’s manufacturing sector could become an engine for economic growth and jobs—if it can specialize. Eleven high-potential value chains could more than double its manufacturing GDP in a few years.

he COVID-19 pandemic has exposed the fragility of the world’s supply chains for medicines and medical products, food, energy, vehicles, telecom equipment, electronics, and countless other goods. Certain companies have begun to reconfigure their sourcing and manufacturing footprints for greater reliability and resilience, setting up more locations so that they don’t have to depend on just a few geographies. But some nations are not yet ready to take full advantage of these shifts.

India stands out as one such country: a potential manufacturing powerhouse that has yet to realise its promise. From fiscal year 2006 to fiscal year 2012, India’s manufacturing-sector GDP grew by an average of 9.5 %  per year. Then, over the next six years, growth declined to 7.4 % . In fiscal year 2020, manufacturing generated 17.4 %  of India’s GDP, little more than the 15.3 %  it had contributed in 2000. (By comparison, Vietnam’s manufacturing sector more than doubled its share of GDP during the same interval.) And in the past 13 years, India’s manufacturing-sector share of employment increased by just one % age point, compared with a five-point increase for the services sector.

As our colleagues argue in the McKinsey Global Institute report India’s turning point: An economic agenda to spur growth and jobs, developing globally competitive manufacturing hubs represents one of the biggest opportunities for India to spur economic growth and job creation this decade. This article offers a closer look at how to do that. We identify 11 manufacturing value chains with strong potential to operate in international markets, power growth, and provide long-term employment and skill pathways for millions. Their potential comes from several factors. First, these value chains are well positioned to capitalize on India’s advantages in raw materials, manufacturing skill, and entrepreneurship. Second, they can tap into four market opportunities: export growth, import localization, domestic demand, and contract manufacturing.

Lastly, the 11 value chains stand to benefit from a fresh, focused approach to industrial policy. This approach would not entail the sort of far-reaching bureaucratic reforms that can lower input costs and improve the ease of doing business across many sectors. (Such reforms could be valuable, but their slow pace to date has resulted in feeble gains for manufacturers.) Rather, the new reforms would specifically catalyze the growth of India’s manufacturing value chains by helping them lift their productivity, secure know-how and technology, and gain access to capital. With these reforms, and complementary actions by manufacturing companies, we estimate that the 11 value chains could more than double their GDP contribution to USD 500 billion in seven years, while powering extensive job creation at a time when the COVID-19 crisis has pushed millions below the poverty line.

A transformative opportunity: 11 manufacturing value chains, UAS 300 billion of GDP potential

While some companies and sectors in India’s manufacturing industry have delivered strong returns on invested capital (ROIC), most have not. According to our analysis, nearly 700 of the top 1,000 manufacturers produced returns that were less than their cost of capital in 2018, thereby destroying value. By contrast, the sectors that generated healthier returns saw increases in invested capital during the four years from 2016 to 2019 (Exhibit 1).

Several conditions help explain why Indian manufacturers tend to create limited value. Some have to do with the costs of infrastructure and key inputs. Poor logistics causes delays and raises inventory costs; high prices for power and credit inflate operating expenses. Other conditions are inherent to the value chains. The small, fragmented companies that make up some value chains cannot operate productively, let alone at peak efficiency; cannot innovate quickly enough to keep up with competitors; and cannot command price premiums because they lack strong brands.

At the same time, many of India’s manufacturing value chains enjoy important advantages that could help power them to rapid growth. India’s natural resources (for example, iron ore, bauxite, high solar insolation, and cotton) and low-cost labor are a boon to makers of basic metals, textiles and apparel, renewable energy, and chemical products. The country’s large numbers of well-trained workers lend strength to skill-intensive value chains such as pharmaceutical formulations, capital goods, and automotive components. And many manufacturing value chains in India operate in close proximity to strong domestic markets. The makers of fast-selling technology products, for example, enjoy ready access to millions of Indian consumers.

Achieving new levels of competitiveness and scale

Although the advantages described above are helpful, they are not enough to propel India’s manufacturing value chains to global competitiveness. The value chains must develop further, at significant expense and effort, before they can become global champions. To identify manufacturing value chains with the best global prospects, it is helpful to define groups by their states of development and the types of support that would help them most (Exhibit 2).

  • Mature value chains that must scale up. These value chains possess sophisticated capabilities and healthy supplier ecosystems, which contribute to higher productivity. They serve domestic demand and have proven their ability to compete in export markets, and they don’t rely on imported supplies. Their challenge is to increase both exports and domestic sales. Pharmaceutical formulations, automotive components and vehicles, and chemical products fit this description.
  • Established but underweight value chains that must transform. Some of India’s manufacturing value chains produce goods mainly for domestic buyers. But troublesome shortcomings prevent them from competing outside the domestic market. In the food-processing value chain, for example, companies are neither large nor productive enough to make a product assortment that can compete on quality and cost in export markets. Another shortcoming, seen in India’s aerospace and defense (A&D) value chain, is a lack of technological sophistication, relative to peers in other countries. Larger manufacturers will need to strengthen their own capabilities as well as those of smaller suppliers.
  • Emerging value chains that India must seed. Compared with other Asian countries, India has invested less in so-called “sunrise” sectors, such as semiconductors and solar, and now trails far behind. But India can still capture a sizable share of the global market for low-carbon technologies (such as energy storage, hydrogen equipment, carbon capture and sequestration, electric two-wheelers, drones, and lithium-ion cells). A practical approach is for large industrial-promoter groups to work with global OEMs on accessing the technology and capital needed to establish local manufacturing capacity that would first serve the large domestic market.

According to our analysis, these categories include 11 manufacturing value chains that can generate, within the next seven years, about USD 320 billion more in gross value added (GVA) than they do now. About 80 %  of that GVA potential resides in six value chains: chemical products and petrochemicals, agriculture and food processing, electronics and semiconductors, capital goods and machine tools, iron ore and steel, and automotive components and vehicles (Exhibit 3).

To realise this potential, the 11 value chains will need to pursue the following four opportunities:

  • Growth of domestic sales (USD 180 billion of additional GVA). Indian manufacturers could tap into healthy consumer markets for products such as fast-moving consumer goods, consumer durables, food products that come from agri-processing, agrochemicals, marine products, automotive products, aluminium, and renewables. To capture this opportunity, manufacturers in these markets should consider focusing on moves like offering quality products in smaller formats and at different price points. Several of these consumer markets will grow as GDP per capita increases, provided that enabling factors such as consumer credit and attractive retail interest rates are in place.
  • Export growth (USD 70 billion to USD 75 billion of additional GVA). Exports of manufactured goods could increase from 14 %  of manufacturing GDP to more than 25 % . Much of that increase could come from sectors where Indian manufacturers are already competitive, such as generic pharmaceutical formulations, farm equipment, auto components, small cars, steel, textiles, and processed goods. To compete in foreign markets, manufacturers must achieve economies of scale, meet international quality standards, comply with foreign regulations, and sustain R&D investments.
  • Import localization (USD 55 billion to USD 60 billion of additional GVA). India’s manufacturers could challenge foreign competitors for market share in a few strategic sectors, such as electronics, A&D, capital goods, active pharmaceutical ingredients (APIs), and petrochemical intermediates. Our analysis suggests an opportunity to reduce India’s spending on imports from 30 %  of all manufactured goods to 15 to 20 % . To capture this opportunity, domestic manufacturers would need to upgrade the technology and quality of their offerings while lowering prices. Short-term trade protections might be necessary to help local value chains catch up with foreign ones.
  • Contract manufacturing for global markets (USD 4 billion of additional GVA). Indian manufacturers are operating well below their maximum capacity, with utilization ranging from 60 to 70 %  across sectors, according to the Reserve Bank of India. In select value chains, such as light and heavy engineering, chemicals and APIs, farm equipment, machine tools, electrical goods and machinery, and automotive, Indian manufacturers could fulfill overseas orders in the near term through tolling (where one company provides the raw materials to a third party, which manufactures the product) or contract manufacturing (where the third-party company both sources the materials and provides the services to manufacture them). These arrangements would need to match underutilized assets with the right markets and companies.

Three priorities for supporting the growth of India’s manufacturing value chains

As India’s turning point makes clear, various reforms can help lift the competitiveness of India’s companies. These reforms include some that target particular sectors. In this section, we look more closely at three sets of policy interventions that could—if enacted in conjunction with actions that manufacturing companies themselves can take—accelerate the growth of manufacturing value chains specifically. (For an example of how such policy interventions and business actions can work together in an individual value chain, please see the sidebar, “Catalysing growth in the agricultural and food value chain.”)

Catalysing growth in the agricultural and food value chain

By some measures, India is one of the world’s agricultural success stories. From 1950 to 2014–15, the country’s food grain production increased by a factor of more than five. The country now ranks as the second-largest source of agricultural goods in the world. From 2015 to 2017, India produced 22 %  of the world’s rice and 12 %  of wheat—the second-largest shares of both crops—along with 3 %  of soy. India is also the biggest producer of milk.

Yet it is also apparent that the country’s agriculture and food sector could generate more economic value than it does today. For some crops, India’s agricultural productivity lags behind that of other countries. Corn growers in India have achieved annual average yields of 2.5 tons of corn per hectare over the last ten years, less than one-fifth the yield achieved in the United States, where yields are highest. India’s agriculture and food sector also makes relatively modest amounts of value-added foods. High-value-added products make up less than 15 %  of India’s agricultural and food exports, much less than major food-producing countries such as China (49 % ) and the United States (25 % ).

As shown in Exhibit 3, we estimate that the agriculture and food value chain has the potential to increase its annual GVA output by USD 60 billion. Capitalizing on these opportunities would require policy interventions and business actions across all three of the following priority areas (exhibit):

  • Raising productivity by strengthening farmer–producer organizations so they can diffuse new technologies and promote sound agronomic practices, such as minimum tillage and plant-population management.
  • Securing know-how and technology through investments in technologies such as precision agriculture and research and development of improved seeds and inputs.
  • Accessing capital to fund investments in water infrastructure, irrigation facilities, storage, and other physical assets. To facilitate investment, policy makers might consider various interventions to support and expand lending in the sector.

Raising productivity

To become globally competitive, India’s manufacturing value chains must lift their productivity—in GVA output per full-time-equivalent worker—closer to global standards. They have a long way to go in this regard: their labor productivity and capital productivity are both low. Compared with India, manufacturing productivity in Indonesia is twice as high; in China and South Korea, productivity is four times higher. (Especially wide disparities can be seen in certain sectors. For example, South Korea’s electronics manufacturing sector is 18 times more productive than India’s, and its chemicals manufacturing sector is an astonishing 30 times more productive.) While other developing economies such as China have managed to catch up with advanced economies in capital productivity, India’s capital is only about two-thirds as productive as China’s.

Improvements to key manufacturing processes could increase the productivity of Indian companies in the chosen value chains by a factor of five—with a tripling of labor productivity and a capital-productivity increase of one and a half to two times. By adopting Industry 4.0 and automation technologies and investing in analytics, reskilling, and upskilling, Indian manufacturers could accelerate the capture of many of these gains.

Policy reforms that help create better infrastructure and logistics could also help Indian manufacturing become more productive. Many of the country’s manufacturers particularly need ecosystems of nearby suppliers. For example, companies that make high-tech goods such as computers, electronic and electrical equipment, and telecommunications equipment must have reliable access to components. By providing incentives to suppliers that operate within port-proximate export-processing (or coastal economic) zones, policy makers can make a tremendous difference in favor of Indian manufacturers.

Other opportunities for Indian manufacturers to boost their productivity include offering more value-added goods, with higher product quality, better packaging, and stronger brands. Such enhancements would allow them to command higher prices, leading to one and a half to three times higher GVA (for example, in food processing, capital goods, steel, and steel products). Unlike other opportunities described in this section, this one can be captured without making major investments, which would improve companies’ ROIC. Improvements in ROIC could result in further benefits for Indian manufacturers. Better returns would help them attract more capital, and as their profits increase, they could reinvest their capital surpluses rather than seek outside investment.

Securing know-how and technology

While India’s established manufacturing value chains possess the technology and know-how they need to compete with overseas peers, the less-developed value chains do not. To be sure, manufacturers themselves must source technology through acquisitions and alliances. The government can also help. One approach: create a stable framework of time-bound and conditional localization incentives to entice global companies to set up operations in India, either independently or with a local partner. For example, leaders in India’s automotive industry generally believe that high import tariffs on finished vehicles allowed the industry to develop local product-development, supplier, and manufacturing capabilities. Over time, this manufacturing base grew stronger and more competitive, enabling exports of automotive components and finished vehicles to reach more than USD 25 billion even as these tariffs were progressively reduced. 1

Such an approach would greatly help value chains such as A&D. The government has already raised the limit of foreign direct investment (FDI) to 74 %  to alleviate the concerns of global defense companies about the transfer of technology. The Indian government might capitalize on this by providing localization incentives and expediting awards of local A&D manufacturing contracts.

Additional support for high-technology and low-carbon value chains might come from viability-gap funding (VGF), in which the government provides some capital to make projects financially viable. For example, India imports nearly all of the LCD panels that go into electronic devices made in the country. The country lacks the technology to set up an LCD-panel factory, and the investment case for such a plant does not hold up in the current tariff regime. Combined with time-bound tariffs or incentives, VGF could help improve the returns from investments in such a factory to 10 to 12 %  of the invested capital.

Accessing capital

The availability of capital will be the single-biggest obstacle to increasing India’s manufacturing GDP. With an incremental capital-to-output ratio between 4.5 to 6.0 (which could become more favorable with productivity gains), India’s manufacturing sector would need investments totalling USD 1.0 trillion to USD 1.5 trillion over the next seven years to double its GDP in the same timeframe, provided that India also raises its GVA capture in these value chains by 25 % .

Financial reforms would help stable, cash-generating manufacturers attract low-cost domestic capital from long-term savings pools, such as pension funds and insurance. However, these savings pools alone cannot supply as much capital as Indian manufacturing companies will need. They will also have to tap other sources. Many of the larger domestic manufacturing companies generate adequate returns and so are likely to attract investors. If India’s recent FDI growth continues and manufacturing doubles its share of FDI, then FDI could provide 25 to 30 %  of the capital that Indian manufacturers will need over the next seven years. Patient long-term investors, such as those in Japan, are strong candidates. India receives only 1.5 to 2.0 %  of its annual FDI from Japan but could collect several times more than this if it made an aggressive push.

India has an opportunity to raise its manufacturing competitiveness and become a supplier of choice not only for its large consuming class but also for global markets. The specialization approach that focuses on eliminating roadblocks in the chosen value chains holds great promise for bringing together manufacturers and, with government support, raising productivity, securing superior know-how, and generating higher returns on capital. 

Here starts the second feature:

United Kingdom: IMF Staff Concluding Statement of the 2020 Article IV Mission

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a membr countryx. Missions are undertaken as part of regular (Usually annual) consultation under Article IV of the context of a request to use IMF resources (borrow from the IMF) as part of discussions of staff monitored programmes, or as part of other staff monitoring economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

The pandemic has taken a significant human toll in the UK. It hit an economy already facing strains from Brexit and longer-term challenges (e.g. low productivity growth), but which had rebuilt fiscal and private sector buffers post 2008. The authorities’ aggressive policy response—one of the best examples of coordinated action globally—has helped mitigate the damage, holding down unemployment and insolvencies. Still, GDP has dropped dramatically, and private and public debt levels are set to rise significantly. A sharp initial economic rebound now faces headwinds from a second Covid-19 wave, Brexit-related uncertainty, rising unemployment, and stress on corporate balance sheets.

•             Continued policy support is essential to see the economy through the pandemic and the transition to the post-Brexit trade regime. Fiscal policy should continue to accommodate the costs of programs now in place to protect workers and firms directly affected by the pandemic. There is room to loosen monetary policy in the near-term.

•             Invigorating growth as the pandemic subsides will require an additional fiscal policy push, and this should take advantage of opportunities to “build forward better”. Current plans would lift public investment to address productivity, climate goals, and regional inequality. There is a case to spend more, if project effectiveness can be preserved at higher scale.

•             Fiscal consolidation, to stabilize and reverse the rise in public debt ratios, should start once the private sector begins to durably lead the recovery. It should be gradual, while preserving investment and a strong social safety net. Planning can start now to guide expectations. As inflation will likely stay subdued, monetary policy should remain accommodative.

•             Policies should remain anchored within robust frameworks. The crisis points to issues in setting new fiscal rules, more constrained monetary policy space, and gaps in non-bank financial regulation (also at the international level). The UK’s frameworks have an enviable track record and should be adapted where needed to continue to deliver their objectives.

•             We encourage the UK and EU authorities to make every effort to reach a post-Brexit trade agreement and finalize preparations for its implementation.

The global pandemic has taken a deep toll on the UK population, adding to pre-existing economic challenges. Despite containment measures and sharply higher health spending, infection and mortality rates have been relatively high. The pandemic arrived as the UK was preparing to transition to a post-Brexit trade regime, still under negotiation with the EU. The country also faced longer-term challenges, including raising productivity growth, addressing regional inequality, dealing with population aging, and meeting net zero climate targets by 2050. At the same time, the UK had built up buffers and policy space since the 2008 crisis, with public and private balance sheets both significantly improved.

The authorities’ aggressive economic policy response has extended safety nets, limiting the potential long-term damage to productive capacity. The unprecedented and coordinated package of fiscal, monetary, and financial sector measures has supported incomes, kept unemployment down (preserving worker-firm matches) and curbed bankruptcies (preserving firm-specific capital)(chart). Still, GDP dropped precipitously, reflecting lockdowns and social distancing, and remains some 10 % below pre-crisis levels. The cost of this response has been a sharp deterioration of the public sector’s balance sheet, although borrowing costs have fallen and there remains fiscal space.

Private debt levels are also rising sharply, but the banking system remains well-capitalized and liquid, reflecting reforms post- 2008 and measures taken since March to preserve financial stability.

The outlook is for a muted recovery with risks weighted to the downside. The sharp summer rebound in activity faces strong headwinds from a second wave of Covid-19 infections, Brexit-related uncertainty, rising unemployment, and stress on corporate balance sheets. We project the economy to contract by 10.4 %  in 2020 and to recover partially in 2021, with growth at 5.7 % , in both cases downwardly revised from our latest WEO forecast. Reduced capital accumulation, persistent unemployment (as job losses in low skill sectors create skills mismatches), and lower productivity growth will hold GDP 3-6 %  below its pre-pandemic trend through the medium-term. Inflation is expected to climb to the 2 %  target only gradually, as compressed demand and rising unemployment muffle production cost increases. Projections are, however, subject to unusually high uncertainty, and downside risks related to a prolonged Covid-19 impact and a no-deal Brexit could bring more persistent unemployment and corporate balance sheet stress.

Continued commitment to monetary and fiscal policy support remains essential. This boosts expectations and confidence and helps the economy work through the effects of the pandemic. The skewed distribution of risk argues for an aggressive approach, to rule out a sharper and more extended period of deleveraging.

•             Monetary policy should be loosened to guard against the considerable risk that projected inflation remains below target. A commitment to further government bond purchases over the next 12 months would be effective to this end. Other tools like negative policy rates could be brought in incrementally when needed, and it will be important to complete an assessment about how the net impact of such an approach could be maximized.

•             Fiscal policy should continue to accommodate the ongoing costs of pandemic health, job, and small business support schemes. These have proven to be an essential temporary extension of the safety net. Recent adjustments to extend job schemes and more tightly link them to the degree of pandemic impact are an important enhancement. We welcome further reviews to ensure their continued effectiveness in limiting scarring. There is a case to extend guaranteed lending along similar lines, with availability and the burden borne by firms and banks linked to pandemic impact. The various schemes should be allowed to naturally sunset as the direct impact of the pandemic on the economy subsides.

•             Fiscal policy will also need to provide a meaningful additional push to invigorate the recovery as the pandemic starts to subside, and the opportunity should be taken to “build forward better”. The planned expansion of the public investment program could help raise productivity (e.g. by supporting digitalization), address regional inequalities, and reduce carbon emissions. There is a case to go even further than planned, provided projects can be well targeted and managed. In this context, recent measures to enhance project selection and ensure compliance with spending processes are welcome. An externally validated assessment of the full oversight framework, using the IMF’s public investment management assessment methodology, could help identify remaining gaps.

Financial sector policies should continue to buttress the system’s ability to fund the recovery. The strong position of the banking system suggests that releasing regulatory buffers was appropriate, and banks can put these buffers to use to provide funding for the recovery. In view of macroeconomic risks, close supervision of banks should continue and, in line with Fund advice in other jurisdictions, dividend payment restrictions should be extended to ensure that capital remains ample after losses start to materialize. Pandemic business loan support schemes have been useful to sustain lending. It will be important to better define the trigger points and procedures for the activation of government guarantees to avoid tying up bank resources. Small and medium size enterprises will also need better access to long-term debt and equity finance. Opening up avenues for support from institutional investors and investment funds could help to this end.

Policy rotation toward adjustment will be essential to reverse the rise in public debt ratios and allow fiscal buffers to be rebuilt, but rotation should only come when the private sector begins to durably lead the recovery. Fiscal consolidation should be gradual when this stage arrives. But there are advantages in beginning to consider the difficult choices soon, including to cement expectations that public investment will be protected, thereby enhancing its impact now. Re-launching a full spending review in 2021 would help identify space in the budget. And there are equity reasons to re-examine the expensive pension triple lock. However, with limits to expenditure compression given reductions already made over the past decade, some adjustment of both tax bases and major rates appears inevitable.

Monetary policy should remain accommodative as rotation occurs—to counter fiscal headwinds that would otherwise depress inflation—and a continued commitment to appropriate forward guidance will be a critical component of this.

To support macroeconomic adjustment, impediments to structural changes in the economy will need to be tackled. The pandemic and Brexit, in their specific ways, will likely cause some industries to shrink and others to expand. During this transition, unemployment might rise persistently, especially among the low skilled, and corporate financial distress will likely increase. The UK economy is relatively flexible by international standards but some adjustments to policies could prove helpful.

•             Measures to strengthen the social safety net and invest in human capital are key. Changes introduced since March, which temporarily raised universal credit and other benefits and expanded active labor market policies (ALMPs) are welcome. Given the risk of persistently higher unemployment, and low ALMP spending relative to other OECD countries, enhancements to the safety net and even-higher funding for ALMPs should be considered, subject to preserving appropriate incentives for labor force re-entry. This could be funded within the additional fiscal push recommended above.

•             On the corporate side, the insolvency framework has recently been modified to provide more flexible restructurings, although it still requires significant court involvement. Additional efforts should be considered to allow for a more streamlined and standardized out-of-court approach and ensure a constructive role for the government as a creditor in restructurings.

Policies should remain anchored by strong institutional frameworks, which may necessitate some adaptations in light of the current crisis. The authorities’ forceful response to the pandemic has been possible thanks to the robust and credible policy frameworks and the strong institutions that support them. Potential adaptations should be considered to ensure that frameworks continue to function effectively:

•             Fiscal framework. Over more than 20 years, fiscal rules have generally steered policies in the right direction, albeit with more frequent revisions to targets of late. Rules are under review, and a new medium-term anchor and annual targets are needed to support fiscal sustainability. A good medium-term anchor should focus on an indicator of debt pressure (e.g. net debt, as at present, but perhaps informed by gross financing needs or debt service to revenues), while a good year-to-year target should be tightly controllable and capable of delivering the medium-term anchor (e.g. a rule for public expenditure). The impact of asset sales and contingent liabilities also need to be taken into account (e.g. via an indicative benchmark on public (financial) net worth). Year-to-year targets should enter into force only when the recovery from the pandemic is firmly in place and fiscal consolidation begins.

•             Monetary framework. The inflation targeting regime has provided stability and kept inflation close to target and expectations well anchored. Going forward, low-for-longer interest rates could constrain monetary space. Whether the current framework may need adjustment to address this merits consideration. Introducing a calendar-based schedule of framework reviews, in line with the practice in some peers, might be helpful in this regard, while avoiding sending unwanted signals about intentions.

•             Financial. The UK bank regulatory framework was strengthened substantially after 2008, but as in other jurisdictions pandemic-related financial stresses brought to the fore weaknesses in the non-bank financial system. The initial pandemic stages and ongoing response will also offer insights into the effectiveness of bank buffers and the degree to which they will continue to prove usable (i.e. to allow banks to provide credit for the recovery). It will be important for the authorities to use the ongoing Financial Stability Board review of non-banks and IMF financial sector surveillance in 2021 (under the FSAP program), to consider these and other issues in more depth.

Finally, we encourage the UK and EU authorities to make every effort to reach a post- Brexit trade agreement and finalize preparations for implementation. Progress on a range of issues has been made over the past year and there is room for a compromise beneficial to both sides. A solution would remove important downside risks to the outlook. In the absence of an agreement, a stronger policy response would be needed to address a deteriorated outlook. Regardless of the outcome, it will be important to prepare. The government will need to deliver on its plans for investment in border infrastructure, staff, and technology, as well as on the customs intermediary sector. Whereas financial firms have broadly prepared for systemic transition issues, non-financial corporations appear to be lagging. Stronger communications and direct assistance for SMEs would help expedite progress.

Here starts the piece of resistance:

G-20 Report on Strong, Sustainable, Balances, and inclusive Growth

Executive Summary

The COVID-19 pandemic has caused great devastation and has dramatically changed the global economic landscape.1 Since the 2019 assessment of the G-20’s progress toward strong, sustainable, balanced, and inclusive growth, the COVID-19 pandemic has spread across the world, leading to loss of lives and a deep recession in 2020. The recovery is likely to be partial and uneven, with some sectors and countries picking up faster than others. While there are tentative signs that the worst is over, uncertainty remains high as infections continue to spread. A sudden tightening of financial conditions—for instance due to adverse news on the disease front—or geopolitical and social tensions could also disrupt growth. Premature withdrawal of policy support would be costly in this environment.

The wounds inflicted by the pandemic are likely leaving deep scars, compounding underlying challenges. The pandemic has been a severe blow to people with low- and medium-skill jobs, many of which are women and youth. Sustained, strong, and inclusive growth is unlikely until the pandemic is stifled with medical solutions. Moreover, while much is still to be learned about the post-pandemic world, the transition could entail a wave of bankruptcies and a reallocation of resources between sectors, with the skills needed for the expanding activities possibly different than those possessed by the jobless. To avoid elevated structural unemployment and a loss in productivity, a reskilling of workers and efficient debt workouts will likely be required. Climate change, in the absence of strong adaptation and mitigation efforts, is likely to continue to disrupt growth, in particular in small disaster- prone economies.

Policymakers must focus on ending the crisis and begin to heal the wounds. The utmost priority is to quickly end the health crisis, support economies and people through it, and set the stage for a recovery that is not only strong and durable, but that benefits all people. This requires tackling the legacies of the crisis and addressing long-standing reform needs.

•             Continue to provide support through the crisis and bolster growth. Containing the virus requires efforts to ensure widespread testing, contact tracing, social distancing, and use of masks. Monetary and financial-sector policies should remain accommodative and help support financial stability. Fiscal authorities will need to ensure that policy support is not withdrawn prematurely as some discretionary measures—to help households, workers, and firms—expire. It will be critical to identify well-targeted measures that can replace expiring ones and that can be introduced quickly if growth threatens to fall below baseline projections.

•             Ensure a durable recovery. Public investment in healthcare, education, and physical and digital infrastructure will help promote the recovery. Structural reforms are also needed, not only to address pre-pandemic gaps, such as product market reforms to further competition, but also to enable a positive transformation and limit scarring. Notably, the crisis has revealed the need for greater digitization, especially of government services; and reforms to insolvency regimes and debt resolution systems. Strengthening childcare and active labor market policies and reskilling can also help ensure a faster return to full employment. Once the crisis is clearly abated, focus will need also to turn toward putting debt levels on a downward path to ensure longer-term debt sustainability and restore buffers.

•             Enhance access to opportunities. Decisive actions are crucial to durably reverse the rise in poverty and income inequality. This would require wider social safety nets and expanded access to essential goods and services. Enhancing access for all to health care, high-quality education, financial services, and technology would not only help prevent a crisis-driven rise in inequality from becoming permanent, it would also lift aggregate demand as economies recover.

Getting to strong and durable growth requires collaboration.

•             A global virus must be tackled with collaborative action. The G-20 policy agenda must include a collaborative global solution to ensure the development, production, and distribution of effective medical treatments and vaccines. The availability of adequate health supplies and medical solutions must be assured in all countries. This not only helps smaller and poorer economies, it would also bring the world back to normalcy more quickly, helping activity also in larger economies. Export restrictions on critical supplies should be lifted without hesitation as they limit the flow of goods at potentially great humanitarian cost.

•             The richest economies must stay committed to continued support for the poorest ones. As the crisis continues to unfold, the financing needs of developing economies continue to grow. The G-20 has already helped provide valuable debt service relief. But more needs to be done to help governments meet the needs of their populations at this time of crisis, including in the form of concessional financing, debt relief, and grants.

•             Global leaders should undertake a concerted effort to ensure the recovery is green and sustainable. The upward trajectory of global temperatures and carbon emissions must be put to an end to limit the large human and economic costs that inaction would entail. The world economy cannot afford a setback in addressing climate change as the window for limiting greenhouse gas emissions and global temperature increases to safe levels is rapidly closing. Instead, recovery from the crisis represents an opportunity to promote green investment and jobs—strengthening the economy and starting a transition away from dirty energy.

•             Other pre-pandemic challenges will also need to be tackled. These relate to international taxation to address base erosion and profit shifting and the digital taxation framework; improving debt transparency; and completing and implementing the international financial regulatory reform agenda.


1 In support of the G-20, this report discusses the G-20’s progress during the past year toward the goal of strong, sustainable, balanced, and inclusive growth and provides policy recommendations to help reach this goal.


The global landscape has changed dramatically during the past year. The spread of COVID-19 has led to widespread loss of lives and an economic crisis. The projected recovery is subject to sizable adverse risks, and the losses of human capital, combined with rising poverty and inequality and increasing debt levels, are set to leave deep scars.

1.           Since the 2019 G-20 Report on Strong, Sustainable, Balanced, and Inclusive Growth, twin health and economic crises have devastated the global economy. 2020 will forever be remembered as a year of loss, prompted by the COVID-19 pandemic. Essential strict containment measures helped reduce the rates of infection and

save lives. However, they also contributed to a sharp contraction of economic activity and the worst global downturn since the Great Depression. Many people have lost their lives or continue to struggle with illness. Scores of people have lost their jobs, pushing millions into poverty and leading to worsening income inequality. Debt levels have soared amid the need for essential health care spending and support for individuals and firms to help protect livelihoods. Moreover, the future remains uncertain, with risks on the downside, not least as the search continues for effective treatments and vaccines that can cover the global population (Figure 1, Annexes I and II). Getting to strong, sustainable, balanced, and inclusive growth is more important than ever, but it  is  a goal that can  only be  reached if everyone joins efforts and together puts the health of all people, across the world, as a priority.

A.           Tentative Signs That the Worst Is Over

2.           COVID-19 infections continue to spread. While some economies managed to mitigate the spread of the virus after its initial global outbreak in the early spring, new outbreaks continue to occur, and while the number of new infections appears to be declining again in some economies, infection rates remain persistently high in many parts of the world. As a result, reopening efforts have been paused or reversed in several countries in order to stop the spread of the virus and save lives.

3.           As mobility picked up from its very low trough, economic activity regained pace, with a strong recovery in the third quarter, but momentum has recently slowed. After a broad-based adverse demand shock, compounded by supply disruptions early in the year, activity started to recover in many G-20 economies in late spring. Global financial conditions have also eased considerably since the sharp tightening at the onset of the crisis. Nonetheless, despite a pickup in industrial production and trade, momentum has recently weakened on the back of continued need for social distancing. Overall, global output is expected to contract by 4.4 %  in 2020.

•                           In advanced economies, a gradual recovery is under way. PMI indicators have generally returned to expansionary territory (Figure 2). However, improvements have been uneven in some economies, with services indicators lagging those in manufacturing, and the pick-up in PMIs appears to have stalled in recent months. While trade in advanced economies has picked up, it remains below its pre-crisis level.

•             In emerging market economies, economic activity remains mostly subdued. Larger-than-expected contractions in some economies in the second quarter prompted a downgrade of growth projections for the year as a whole (e.g., India). With the exception of China, where most economic indicators returned to expansionary territory by May, most G-20 emerging market economies continue to struggle, including amid persistent outbreaks of infections (e.g., Brazil, Mexico) or the confluence of the pandemic with depressed export prices (Saudi Arabia). While portfolio capital has returned to many economies (following outflows and currency depreciations comparable to those seen during the Global Financial Crisis), volatility remains. Driven by the strong turnaround in China, trade volumes in emerging market economies have strengthened markedly.

4.           Weak labour markets and depressed demand have contributed to downward pressure on headline inflation, while food experienced some increase in prices (Figures 3 and 4). Despite improvements in the labor market, unemployment rates in many economies remain high. In turn, weak aggregate demand and a decline in commodity prices have  contributed to weaker headline inflation, despite a decline in supply from lockdown restrictions and disruptions to international trade. Yet, a rise in prices for food, health care, and shelter in several economies has particularly impacted the poorest segments of the population that are spending a larger share of their income on essential items.

5.           The drop in demand has led to a marked rise in the household saving rate in advanced economies. All advanced G-20 economies with available data have seen a strong increase in household saving rates in the first part of this year (Figure 5). This points to precautionary savings arising from heightened uncertainty about job security and health-related expenditures as well as forced savings from the impact of mobility restrictions on consumption, often in the context of income support measures.

B.           Debt Has Increased Dramatically

6.           Public- and private-sector debt have risen.

•             Advanced economies. As a result of the crisis and resulting need for policy action, in 2020 alone, public debt is expected to shift upward by about 20 % age points of GDP on average in G-20 advanced economies relative to last year, representing the highest level of debt since World War II (Figure 6). This reflects the combined effect of large fiscal deficits and the unprecedented decline in activity. Private-sector debt has also picked up, driven in particular by financial and non-financial corporates and to a lesser extent by some households, who, together with firms, have attempted to smooth consumption over the downturn and may also have taken advantage of low borrowing costs.

•             Emerging market economies. Public debt in many G-20 emerging market economies is projected to rise by around 10 %  of GDP this year from last, with the more moderate increase relative to advanced economies partly reflecting more limited fiscal space prior to the pandemic. However, currency depreciations combined with sharp declines in output have led to rising foreign currency-denominated debt-to-GDP ratios in some economies  (Mexico,  Turkey)  (Figure 7).

7.           Current account imbalances have narrowed slightly but stock imbalances remain large. Current account deficits can help boost investment and smooth consumption in fast- growing markets, and surpluses help accumulate savings in economies with aging populations. However, excess imbalances may signal inefficiencies or risks, as they may reflect underlying internal imbalances (e.g., too restrictive or expansionary fiscal policy, structural policy distortions, or misallocation of  capital).  At 1.2 %  of GDP (reflecting about 40 %  of overall current account surpluses and deficits), global excess current account imbalances in 2019 were only slightly smaller than in 2018. In this respect,  excess  current  account  surpluses were substantial only in a few economies (e.g., Germany). Excess deficits occurred in Argentina, Saudi Arabia, and the United Kingdom.1 In 2020, actual current account surpluses and deficits are projected to narrow amid weak demand (Figure 8). At the same time, stock positions of external assets and liabilities have remained at around historic highs. An update of the G-20 Indicative Guidelines identifies 11 G-20 economies as having macroeconomic imbalances (Annex IV).

C.           The Poorest Have Become Poorer in an Increasingly Unequal World

8.           The pandemic and the economic fallout have had very uneven effects on different groups of people, often deepening pre- existing inequalities. Low- and medium-skilled workers have been particularly impacted by rising unemployment (Figure 9). In this respect, the crisis has been especially challenging  for the poor, as they  often hold  low-paying jobs that have been  -4 disproportionately affected—partly as these jobs frequently are also less amenable to remote-work (e.g., retail, tourism, hospitality). Poorer segments of the population are also more often employed in the informal sector where employment relationships   are  more  easily   broken.   In turn, millions of job losses have adversely impacted living standards, and poverty rates are rising sharply across the globe.2

9.           Women and youth have been particularly impacted. Not only do many women work in hard-hit sectors that require face-to-face interactions (e.g., tourism, retail), their labour force participation has also fallen in several economies. This has occurred amid reduced opportunities for work, but also as additional family responsibilities may prevent job search (e.g., Brazil, Italy, Japan, Korea). There are many challenges on this front for working mothers who often bear the brunt of family care responsibilities such as caring for the sick and home schooling in the context of school closures (Figure 10). Likewise, young workers have seen a sizable rise in unemployment, likely translating into human capital depreciation and a permanent income loss.

10.         Widespread school closures are adversely affecting the human capital of younger generations. Many students in primary and secondary education have been unable to access in-person learning as schools were closed or shifted to remote learning to contain the spread of the disease. According to UNICEF, at the height of nationwide and local lockdowns, nearly

1.5 billion children were affected by school closures (Figure 11). Almost 500 million children could be reached by remote learning programs. In addition, children may drop out of school for financial or family reasons, with long-term consequences for earnings and inequality.

11.         Uneven access to opportunities is compounding the effects. Children in poorer households are more exposed to damages from school closures due to a lack of internet access for distance learning opportunities and reliance on school meals. Uneven access to health care is adding to the challenges amid already stretched health systems. In addition, people in the informal sector (which in emerging market and developing economies continues to account for a large share of activity) are left with little or no access to social protection. Going forward, absent decisive policy actions to strengthen inclusion, losses in income and opportunities could be passed down through generations.


2 The COVID-19 crisis may push 90 million people into extreme poverty this year (IMF, 2020, Fiscal Monitor, October).

D.           Achieving Sustained Strong Growth Has Become More Challenging

12.         Near-term prospects are subdued. The forecast is predicated on the assumption that social distancing will persist into 2021 but will then decline   over   time   as   therapies   and  vaccine coverage improve. While global growth is expected to pick up to 5.2 %  in 2021, the exceptionally deep recession this year will still leave the level of output in 2021 below the average level in 2019 in many advanced and emerging market economies (excluding China) (Figure 12). Contributing to the shallow recovery is also a drag from the hard-hit service sector, which continues to struggle as many activities that require in-person interactions are held back by the lingering  need  for  social  distancing.  This is in sharp contrast to a typical economic cycle, where the consumption of services does not display large swings. Despite unprecedented policy measures to support firms’ liquidity, bankruptcies and corporate default risks have risen and banks have increased their loan loss provisions.

13.         Further ahead, output is projected to remain below the pre-crisis trend, and medium-term growth prospects are unsatisfactory. While global growth over the next two years is expected to be high, it is projected to make up only a fraction of lost output during 2020—a pattern often observed during recoveries (Figure 13). Currently, global output in 2023 is projected at around 5 %  below pre- pandemic projections, pointing to the need for significant structural changes to modes of production, distribution, and consumption to allow economies to operate in ways compatible with social distancing until effective therapies and vaccine(s) are widely available.

14.         Uncertainty around the global forecast is larger than usual. Notably, uncertainty is high regarding the path of the pandemic, which depends importantly on the speed and effectiveness of therapies and vaccines and behaviors (e.g., testing, contact tracing, social distancing, and mask wearing) that can impact how well people will be able to revive economic activities amidst continued infection risk. In the absence of effective vaccines, social distancing (including avoiding large gatherings) remains key to keeping the pandemic under control. Uncertainty also remains regarding the extent to which economic policy support measures will be extended as well as their effectiveness.

15.         Over the near term, the path of the pandemic, among other factors, could materially alter the path of the global recovery. On  the  upside,  if  vaccines  and  therapies  are developed and produced rapidly, and distributed to allow for a quicker normalization of mobility and a more rapid resumption of contact-intensive activities, a stronger-than-projected recovery could materialize (Figure 14). Moreover, such a scenario  would  likely  imply  a  lower  degree or scarring, as bankruptcies would be fewer and unemployment spells shorter. Conversely, delays in  treatments or a renewed pickup  in  the rate of infections would slow the recovery and deepen the scars.  In addition,  risks  arise from a  sudden tightening of financial conditions, for example triggered by disappointments regarding vaccine developments, which could amplify the effect of any adverse shocks. Rising protectionism—including with regards to the distribution of vaccines and therapeutics—a re-escalation of trade tensions, or rising social or geopolitical tensions could also hold back growth. On the policy side, extensions of fiscal measures beyond what is already incorporated into the baseline would help strengthen the recovery, while a failure to enact announced extensions or a low take-up of support would weaken it.

16.         Over the longer term, the extent of scarring—damage to potential output—will depend critically on the duration of the acute phase of the crisis and effectiveness of policy responses. If the spread of the disease prolongs the acute phase of the crisis, job creation will be held back, and scars on medium-term growth will be deeper. This will be particularly relevant if policy actions are insufficient or ineffective in countering these damages. While successful digitization of economies could boost productivity, including from improvements in production, distribution, and payment systems, a materialisation of downside risks could worsen productivity trends. For example, a prolonged reallocation process from shrinking to expanding sectors could entail high structural unemployment amid skill mismatches, in part because hard-hit sectors such as restaurants, hotels, and recreation employ a particularly high share of low-skilled workers. These workers may face challenges in finding jobs in those sectors where employment has been growing during the pandemic, which may require a higher-skilled labor force. Reduced labor force participation and weaker human capital would also ensue, as would additional bankruptcies as income prospects are reduced for firms that are not able to restructure their production technologies. In this respect, potential growth may also be weighed down by losses in organizational knowledge and know-how as business fail or as capital is allocated inefficiently, for example in the context of unduly long bankruptcy procedures. In such a scenario, public debt burdens will likely be higher, inflation expectations may become de- anchored, and monetary policy may become less effective amid persistently low interest rates. As the most vulnerable are likely to continue to be hurt the most, this would further worsen inequality.

17.         Climate change is adding to challenges as it will likely continue to disrupt growth in many economies, particularly small and vulnerable ones. Climate change is already leading to more frequent and more severe natural disasters around the world. Though the window for limiting greenhouse gas emissions and global temperature increases to safe levels is rapidly closing, the need to urgently stop the pandemic may lessen focus on mitigating climate change. The temporary reduction in emissions on account of the lockdowns earlier this year correspond to a negligible fraction of the accumulated stock of emissions driving global warming. Unless bold actions are taken, emissions are expected to return to the pre-pandemic trend as mobility picks up and the recovery takes hold. The result of accumulating greenhouse gas emissions will be even more frequent disruptions from natural disasters.


To secure a strong global economy, policymakers must urgently focus on bringing the health crisis to an end. Until the crisis is behind us, continued economic support will be necessary. Policymakers will need to be agile in responding to the needs, but also use the opportunity of recovery policies to build a better future and foster medium-term goals. Strong, inclusive growth requires facilitating a reallocation of resources towards viable activities and ensuring enhanced access to opportunities for all, including to high-quality education and reskilling. To minimize scars, it will be key to implement strong structural reforms to lift the growth potential, strengthen fiscal balance sheets, and bolster resilience by mitigating and adapting to climate change. Moreover, such actions can reinforce each other, as reforms to make growth more inclusive can also help strengthen demand.

A.           Most Economies Have Provided Sizable Macroeconomic Support

18.         At the onset of the crisis, swift and substantial monetary and financial sector actions in many economies provided support and helped safeguard financial stability. To ease the rapidly tightening financial conditions, many G-20 economies quickly lowered policy interest rates and provided substantial liquidity through government and corporate asset purchases in primary and secondary markets, as well as used other unconventional tools (e.g., expanded repo operations and direct lending to banks and firms). Five out of the six central banks among G-20 advanced economies now have policy interest rates at or below 0.25 %  (Figure 15), and while there is further conventional space in G-20 emerging market economies, policy interest rates are at their lowest levels since before the Global Financial Crisis. In emerging market economies, some authorities also employed unconventional tools (Turkey, India, Indonesia, South Africa)—primarily in the form of asset purchases. Some economies engaged in exchange rate intervention (Brazil, Indonesia, Turkey). Central banks in two G-20 emerging market economies (Mexico, Brazil) were among the nine central banks that had renewed access to the U.S. Federal Reserve’s temporary bilateral central bank foreign currency swap lines, which helped ease short-term dollar funding pressures in domestic markets. Alongside, regulators used the inherent flexibility of the regulatory framework and encouraged the use of capital, liquidity, and macroprudential buffers, which supported lending and helped maintain financial stability.

19.         Sizable fiscal support in most economies helped raise health care capacity and contain the severity of the economic fallout. Fiscal support in the G-20 during the pandemic has amounted to around USD 11 trillion,

and provided needed support to the health sector, individuals, and firms (Figure 17). In turn, sizable expansions of both discretionary spending and automatic stabilizers in most economies led to record high fiscal deficits and public-sector debt levels. However, governments are benefiting from historically low borrowing costs, which help to contain the rise in debt service burdens. Notably, the sizable fiscal support helped avoid even worse outcomes.

•             An important share of support was directed at the health care sector. Health-related spending amounted to 1.1 %  of GDP in G-20 advanced economies and 0.3 %  of GDP in G-20 emerging market economies (Figure 16). Such spending helped boost capacity amid a surge in hospitalisations.

Those economies that allocated more fiscal support to the health sector during the crisis also tended to be those that had higher levels of health expenditure prior to the crisis.

•             Support for individuals and households was provided through a range of measures. In addition to the impact of automatic stabilizers, support for households amounted to 2.5 %  of GDP among G-20 advanced economies and 0.6 %  of GDP in G-20 emerging market economies. In addition, indirect support was prevalent, including through wage subsidies to help preserve employment relationships with firms, (e.g., Job Keeper Payment in Australia; employment protection in Brazil; Employment Adjustment Subsidy in Japan; SANED in Saudi Arabia; and Paycheck Protection Program and Employee Retention Tax Credit in the United States) and short-term work schemes (e.g., Kurzarbeit in Germany; Activité partielle in France; Cassa Integrazione Guadagni in Italy; Expedientes de Regulación Temporal de Empleo in Spain.).

•             Support for businesses covered a wide set of firms but was often targeted toward small and medium- sized enterprises. Direct and indirect support for firms provided notable temporary relief (e.g., Australia, Brazil, Canada, China, France, Germany, India, Italy, Japan, Korea, Saudi Arabia, South Africa, Spain, Turkey, United Kingdom). Support took the form of both above-the-line measures (e.g., revenue and spending measures), which on average amounted to 2.0 %  of GDP in G-20 advanced economies and 0.8 %  of GDP in G-20 emerging market economies, and below-the-line support and contingent liabilities (e.g., equity injections, loans, and guarantees), which on average amounted to about 12 %  of GDP in G-20 advanced economies and 2.8 %  of GDP in G-20 emerging market economies.

B.           Policy Support Must Continue till the Health Crisis Is Behind Us

20.         Going forward, the immediate priority remains to control the virus with the least economic harm. A safe reopening of economies requires the adoption of widespread rapid and affordable testing, contact tracing, some degree of social distancing, hand washing, and use of masks. However, for the pandemic to be over, effective medical solutions are needed. These solutions will require close multilateral collaboration (see below). Alongside, minimizing long-lasting economic harm can only be achieved through continued support to individuals, jobs, firms, and hard-hit localities, through the crisis.

21.         Monetary and financial sector policy will need to continue providing accommodation across most of the G-20 and safeguard stability.

•             Monetary policy should generally remain accommodative. With the recovery yet to take hold, inflation generally below targets, and employment to remain weak until at least end-2021, monetary policy is expected to remain helpfully accommodative in almost all G-20 economies (Figure 18). In some economies, further easing, either through lower interest rates or increasing asset purchases, would be beneficial already at this stage (e.g., Korea, Mexico, United States). Amid increasingly limited conventional monetary policy space, all tools should remain available to act as needed, though some emerging market economies (e.g., Argentina, Turkey) would need to withdraw some support to counter inflationary pressures.

•             Financial sector policy must continue to target stability. As financial conditions could tighten suddenly, authorities should remain vigilant to guard against such conditions and continue to stand ready to support stability and the functioning of markets. It will also be important to expand the macroprudential policy toolkit and improve the effectiveness of existing tools to mitigate growing vulnerabilities outside the banking sector (United States), introduce income-based macroprudential instruments such as a cap on debt-service-to-income and debt- to-income ratios (Germany), strengthen supervision and banking sector competition (Argentina), remove implicit guarantees to state-owned enterprises and improve credit allocation (China), and ensure resolution frameworks for financial institutions in line with international best practices (e.g., China, South Africa).

22.         Fiscal policy will need to continue to provide targeted support to vulnerable households and firms. To the extent that automatic stabilizers are not providing sufficient safety nets during this deep and unique crisis, well-targeted support for vulnerable households should remain in place until individuals can return to the workforce. In addition, well-targeted support to viable firms to maintain employment relationships and organizational know-how is warranted. In this context, additional support this year would be appropriate in some economies (e.g., India, Mexico, Russia, Saudi Arabia, Turkey, United States). However, as some sectors will likely face a prolonged decline, a reallocation of workers from shrinking to expanding sectors and firms will be unavoidable but challenging as it will require training and reskilling of workers in addition to unemployment compensation. In this respect, fiscal support for firms should not hinder the transfer of resources from sectors that may permanently shrink to those sectors that will be expanding; and there will be an increasing need to distinguish between illiquid but solvent firms and those that are insolvent.

23.         While a somewhat tighter fiscal stance may be appropriate next year in several economies as economies partially recover, where fiscal space allows, caution is warranted in withdrawing support. Based on implemented policy settings and announced budgets, and in the context of a projected partial recovery in output, fiscal balances are projected to rise markedly in most G-20 economies next year (Figure 19). Notably, in economies where fiscal balances dropped by more than 10 %  of GDP this year, they are expected to improve by more than 5 %  of GDP next year. To some extent, this change is automatic, reflecting higher revenues as activity recovers and lower unemployment spending as people find jobs in an improving economy. Yet, the largest contributors to improvements in fiscal balances relate to reduced discretionary support. Larger support than currently projected is desirable next year in some economies  (e.g.,  Brazil,  Mexico, United Kingdom,United  States)  in  view of the large drops  in  the level of employment in these economies and large projected fiscal contractions. In economies where fiscal space is a constraint, a reprioritization of spending may be warranted. For all economies, it will be important to carefully monitor economic and public health developments to ensure that fiscal support is not withdrawn too quickly but maintained through the crisis.

24.         Policymakers should prepare now for downside scenarios where economic activity falls below baseline projections. This would require the identification of discretionary measures that could be swiftly implemented to complement automatic stabilizers. For example, if economies with the largest initial fiscal space were to provide 3 %  of GDP in additional support next year and those with fiscal space at risk were to provide 1 %  of GDP in additional support in the context of supportive monetary policy, this could help lift global output by more than 1½ %  (Figure 20). Moreover, this would be beneficial beyond the individual economies that are providing support. Positive spillovers would also help support demand—including in economies with no fiscal space. In contrast, a too hasty withdrawal of support would not only hurt growth today but would also result in longer-term economic scarring.

25.         Complementarities between policy tools can further strengthen their impact. Expansionary fiscal and monetary policy support can amplify each other, especially where policy space is limited. In advanced economies with little conventional monetary policy space remaining, unconventional monetary policy can support expansionary fiscal policy by keeping borrowing costs low and markets liquid. Moreover, non-monetary measures (e.g., halting mortgage payments to help prevent foreclosures during the crisis) can provide temporary support for individuals, thereby supporting demand. Ensuring that fiscal support is properly targeted can help avoid a delay in needed reallocation of resources. Supporting viable firms would help prevent unnecessary capital destruction and loss of productivity from bankruptcies and at the same time support jobs and, thus, demand. Strengthening governance and transparency in public procurement will help maximize both the efficiency and effectiveness of the support, including during the crisis.

C.           Reforms Are Vital to Minimize Scars and Lift Potential Growth

26.         A number of reforms should be urgently implemented in the context of very weak growth and the need to limit economic scarring, though specific priorities vary across countries (Figure 21).

•             Bankruptcies of viable but illiquid firms should be avoided and efficient bankruptcy procedures ensured. As bankruptcies are set to rise, fiscal support, where warranted, can help limit bankruptcies of viable, but illiquid, firms. At the same time, efficient bankruptcy procedures are also needed to facilitate the reallocation of resources toward those sectors that are expanding and to minimize adjustment costs. In this respect, reforming the insolvency regime or debt resolution system in some economies (e.g., China, Indonesia, Italy, Spain, Turkey) is necessary to help reduce the presence of zombie firms and speed up the reallocation of capital and labour—and thus quicken the pace of the recovery.

•             Reforms should be implemented to prevent high unemployment from becoming persistent. Amid high unemployment in a number of economies and a risk that some sectors will fall into prolonged decline, it is vital to complement unemployment insurance with support to the reallocation of workers to expanding sectors, including through access to reskilling. In this respect, the reskilling of workers would not only help prevent cyclically high unemployment from becoming structural, it would also have the added benefit of supporting fiscal strength and demand. In addition, some reforms (e.g., reduction in the labor tax wedge and strengthening childcare) can strongly improve employment prospects even in the short term and can thus reduce labor market scarring in the long run, including for women and youth. Certain other reforms—like those that reduce employment protection for regular workers—provide the most benefits when undertaken during supporting economic conditions. Product market reforms that encourage competition can help support the entry of new firms as demand picks up and thereby also support employment.

•             Human capital must be strengthened, not lost. With widespread and long-lasting disruptions to education, learners inevitably are at risk of a loss of human capital—in particular where access to the internet is limited and remote-learning is more challenging. Hence, reforms to bolster the digital economy are increasingly in need. And such reforms can also have a beneficial impact elsewhere: beyond facilitating online learning, adoption of information technology can facilitate teleworking and mitigate the reliance on mobility for employment and reskilling in many sectors.

27.         The consensus IMF-OECD assessment of overall structural reform needs also highlights a number of key reform areas that it will be important to press ahead with. For example, while progress on the reform agenda has continued, some reforms (such as easing product market regulations or reforming the tax structure) are priorities in almost all G-20 economies (Figure 22). But several other reforms are also of the essence.

•             In most advanced economies, further labor market reforms are needed. For example, boosting female labor force participation, including through childcare spending, and strengthening active labor market policies are important reform areas. In addition, easing employment protection legislation is a priority to raise the dynamism of job markets in Korea and Spain, while reducing the labor tax wedge is especially important in Germany and Italy.

•             In emerging market economies, structural reform priorities include trade, labor market, and tax structure reforms. Trade liberalization, easing of employment protection, and tax structure reforms are high on the list of recommended reforms in most emerging economies. Furthermore, active labor market policies should be reformed in Saudi Arabia and Turkey, while supporting childcare in Saudi Arabia. In Russia, a reduction in social security contributions for SMEs has been adopted, though a further reduction of the labor tax wedge would be beneficial.

28.         Implementing the recommended structural reforms would set the stage for stronger growth in the future. A gradual implementation of pre-announced structural reforms, in particular in product and labor markets and through tax reform, would boost investment and steadily help lift growth and consumption— over the long run raising output in the G-20 by more than 4 %  above the baseline (Figure 23, Annex III). As stronger activity in individual economies boosts trade and encourages demand across countries, positive spillovers account for a notable share of this boost.

D.           For Durable Growth, Vulnerabilities Must Be Reduced

29.         Amid high levels of public-sector debt, once the recovery has firmly taken hold, it will be essential to ensure that debt levels are put on a downward path in many economies. Past 5 episodes with  high  debt  levels have  often beenassociated with periods of lower growth (Figure 24). While the direction of causality is inherently uncertain, several concerns arise related to high debt levels. For example, a growing debt burden may trigger mounting risk premia and can lead to higher overall interest rates with negative implications for investment. Increasing debt service may also leave economies vulnerable to rollover risk amid a sudden tightening of credit conditions,  and  government  debt  can  soak up available funds and crowd out private investment. Therefore, once the pandemic is arrested, the threat to lives and livelihoods alleviated, and economic activity on a firmer footing, fiscal consolidation efforts should be carried out in most G-20 economies—with a need for further adjustment beyond what is currently projected in several economies (e.g., France, Italy, Japan, Mexico, Spain, Turkey, United Kingdom, United States). In contrast, in Germany, additional fiscal support to help lift productivity growth (e.g., through infrastructure investment) is warranted once the temporary crisis measures expire. Until that time, an extension of fiscal support in those countries with fiscal space is likely to help boost the recovery. Economies with unfavorable borrowing costs may need to initiate fiscal consolidation sooner.

30.         Moreover, policies will need to address remaining excess imbalances both in surplus and deficit economies. While the immediate focus should be on fighting the pandemic and protecting lives and livelihoods, distortions that affected external positions before the COVID-19 crisis may persist, continuing to create vulnerabilities and implying the need for comprehensive reform.

•             Where excess current account surpluses are present, the priority should generally be on reforms that encourage investment and discourage excessive private saving. Greater public sector investment in areas such as digitization, infrastructure, and climate change mitigation and adaptation would help stimulate private investment and promote potential growth (e.g., Germany).

•             For excess deficit countries, fiscal consolidation, while safeguarding potential output and maintaining strong social safety nets, would promote debt sustainability and reduce imbalances. This is relevant for several economies (Argentina, Canada, France, South Africa, United Kingdom, and United States). Reforms to increase export competitiveness and further diversification, in case of commodity exporters, are also essential (Brazil, Saudi Arabia).

•             Where external positions are near balance, efforts should continue to target domestic imbalances, which could also help minimize scars from the pandemic. Depending on the country, policy actions include medium-term fiscal consolidation, opening markets to competition, strengthening the social safety net, or ensuring wage-productivity alignment (Australia, China, India, Indonesia, Italy, Japan, Korea, Mexico, Russia, Spain).

31.         Complementarities between fiscal policy and structural reforms can help the reduction in imbalances while supporting growth. For example, fiscal policies targeted to alleviate scarring, including public investment programs and digitalization upgrades, can contribute to narrowing excess surpluses through higher public spending but also by stimulating private investment in a stronger infrastructure environment over the medium term. Improving fiscal balances would also tend to strengthen external balances by narrowing excess deficits. Post-crisis labor market reforms to reap benefits from new approaches to home-based work can help increase competitiveness and help address excess deficits. To this end, implementing the recommended structural reform package would also help strengthen fiscal buffers, as the boost to activity helps reduce public debt relative to GDP.

E.           Scars on the Most Vulnerable People Must Be Eliminated

32.         Ensuring adequate support is of crucial importance to protect the most vulnerable in society. In addition to ensuring continued support from macroeconomic policies to limit the impact of the crisis on unemployment, strong safety nets should also be ensured. As such, better targeted social transfers and/or a wider coverage of social protection spending (e.g., Argentina, Brazil, Russia, Saudi Arabia, Turkey) would help safeguard vulnerable groups. Conditional cash transfers and well- targeted food aid could also be extended through the recovery period (e.g., Indonesia). In general, if the fallout from the crisis lingers, access to essential goods and services (e.g., food distribution, health, and housing) would need to be expanded, not least amidst rising poverty rates. Food aid to the most vulnerable people can also help supplement cash transfers and protect beneficiaries against higher food prices. Public works programs can provide income and work experience to low-income workers, having the dual benefits of supporting individuals as well as aggregate demand. Reliable safety nets can also help households weather the crisis without curtailing their investments in children’s education. Alongside, non-monetary measures can be helpful such as (i) suspending reporting to credit bureaus where consumers fail to pay their financial obligations because of the pandemic (as done in the United States); (ii) ensuring utility contracts are not terminated for lack of payment during the pandemic (as done in France, Japan, and Spain); and (iii) adding moratoriums on debt enforcement, foreclosures, and evictions (as done in Australia, Germany, Spain, and Turkey).

33.         To durably reverse the rise in poverty and income inequality and prevent it from becoming permanent, decisive actions to enhance access to opportunities are essential.

•             Enhancing access to health care and other essential services is now urgent. The pandemic has laid bare and aggravated existing inequalities in access to health care, highlighting the need to put increased focus on the need to ensure that all individuals have access to essential care (e.g., in Brazil, China, India, Indonesia, Italy, Mexico, Russia, South Africa, United States). Equally important is an assurance of access to adequate nutrition, clean water, and sanitation, not least as inadequate health conditions early in life can have long-lasting consequences and result in less- favorable outcomes in adulthood.

•             In addition to limiting scarring to human capital from school closures, ensuring access to quality education more broadly is essential. High-quality education is vital for enhancing long-term individual outcomes and should be made accessible to children of all socioeconomic backgrounds. In this respect, higher public spending on education is positively associated with education outcomes in terms of learning-adjusted years of schooling. Yet, focus should not only be on the level but also on the efficiency of spending. In this respect, in a number of economies, attention to the level and/or efficiency of spending is warranted (e.g., Argentina, Brazil, France, India, Indonesia, Italy, Russia, Turkey, Saudi Arabia, South Africa, United Kingdom, United States),3 as is focus on enhancing foundational skills, developing human capital, and reducing skill gaps. Ensuring access to health care and clean water and sanitation can also help enhance the individual child’s ability to learn.

•             Harnessing the power of technology can greatly enhance inclusion. Furthering the digitization of economies through public investment in digital infrastructure would facilitate access to broadband and internet in low-income areas as well as to several services (e.g., Argentina, Brazil, Canada, China, France, Germany, Indonesia, Italy, Japan, Mexico, Russia, South Africa, Spain, United States). For example, the digital distribution of emergency cash transfers—akin to those provided in response to the pandemic—enables funds to quickly reach those in need. Facilitating digital payments can also help encourage formalization.

•             Expanding access to financial services is relevant for people as well as for firms. Financial inclusion— access to saving vehicles, credit, insurance, and digital payments—is crucial for promoting inclusive growth and can partly be expanded through existing tools. For example, leveraging the prevalence of mobile phones can help expand access to financial services in the face of gaps in bank account ownership. But more needs to be done. Shifting towards electronic government payments and receipts would encourage individuals and firms to obtain accounts at financial institutions. Credit bureaus, movable collateral registries, and effective insolvency regimes can help improve access to credit by SMEs—with gains in employment and economic growth.


3 IMF/World Bank, 2020, G-20 Background Note on Enhancing Access to Opportunities, June.


An interconnected crisis requires a global response. Much has already been done through debt service relief for the poorest countries and an expansion of the global financial safety net. However, as the crisis is still ongoing, important additional steps need to be taken. Now is the time for the G-20 to stand united around the common goal of ending the crisis through a collaborate effort for vaccine development, production, and distribution and of securing a sustainable future.

A.           The Crisis Prompted Important Multilateral Action

34.         Supported by the G-20, critically important multilateral actions have lessened debt service burdens for poorer nations. The IMF has modified its Catastrophe Containment and Relief Trust (CCRT) to provide immediate debt service relief to its poorest members. In addition, the IMF’s and World Bank’s call for a temporary debt service suspension by bilateral official creditors was headed by the G-20 in creating the Debt Service Suspension Initiative (DSSI), which grants debt- service suspension to the most vulnerable countries. These initiatives are helping the poorest countries to redirect resources from servicing debt to mitigating the severe impact of the pandemic.

35.         The global financial safety net has also been strengthened. This year, the IMF approved a doubling of resources available through the New Arrangements to Borrow (NAB) and a framework for a new round of bilateral borrowing agreements (BBA)—helping to maintain the IMF’s lending capacity of around USUSD 1 trillion for the coming years. The process of securing creditors’ consents is under way. As an immediate response to the global pandemic, the IMF also temporarily doubled access limits for its emergency lending instruments—the concessional Rapid Credit Facility (RCF) and the non- concessional Rapid Financing Instrument (RFI)—and subsequently approved a temporary increase in the annual limits for access to Fund resources under its other instruments. Moreover, a new Short- Term Liquidity Line (SLL)—a special facility designed as a revolving and renewable backstop for members with very strong fundamentals and policy track records—was established. The facility complements the already active bilateral swap lines between major central banks that have helped to avert a squeeze in dollar funding in international markets during the crisis. Access under the Flexible Credit Line was extended to additional economies.

B.           Ending the Pandemic Requires Joint Action

36.         Collective efforts by the G-20 are crucial to end the health crisis and reignite the global economy. Until an effective vaccine is found, the COVID-19 pandemic will continue to pose significant health and economic risks—resulting in further loss of lives and reversing hard-won progress on poverty reduction. Close collaboration and resolute actions are needed to stop the spread of the virus, revive economic activity safely, and contain the impact on poverty and inequality.

•             The availability of adequate health supplies and medical solutions must be assured in all countries. Allowing for a fast and safe lifting of mitigation measures depends crucially on global collaboration on a clear strategy for the development, production, purchase, and distribution of testing kits, therapeutics, and vaccines. If authorities in all countries work together, funding such an approach today would allow much larger amounts to be saved later, as additional therapeutic drugs and vaccines and their widespread distribution would help save lives and allow for a quicker return to normal economic activity. According to GAVI, global investments of USD US 18 billion would allow for the production of 2 billion doses of vaccines beyond what is already agreed through bilateral deals. Investing in the logistics and transportation of large amounts of vaccines to low-income countries will require up front investments as well.

•             Trade restrictions on essential goods must be immediately lifted and trade tensions deescalated. A number of new trade interventions, including export restrictions on critical supplies, were prompted by the pandemic and should be lifted without hesitation (Figure 25). Given the high degree of specialization in global value chains for the production of many health-related products, trade restrictions limit the flow of goods at potentially great humanitarian cost. This is especially the case for poor, import- dependent countries. For instance, the World Trade Organization (WTO) has reported that 80 countries and separate customs territories introduced export prohibitions or restrictions on items such as face and eye projection, protective garments, sanitizers, and disinfectants as a result of the COVID-19 pandemic.4 More broadly, global trade tensions should be deescalated.

37.         As the crisis continues to unfold, strong commitment of international resources remains essential to support poorer economies. Multilateral cooperation in debt crisis resolution is required, especially for poorer countries whose financing needs continue to grow. The uncertainty surrounding the evolution of the pandemic combined with the risks to the recovery and the financial system require that the international community continue to extend and possibly expand the exceptional measures undertaken so far to support poorer nations. These could include enhanced use of the IMF’s existing special drawing rights (SDRs). While the DSSI has provided important debt service relief, more support will be needed in the form of concessional financing, debt relief, and grants.


4 See

38.         For a sustainable future, global leaders should undertake a concerted effort to curtail carbon emissions. To prevent large human and economic costs down the road, the crisis represents an opportunity to mobilize public and private resources to forcefully promote green investment— designing climate policy in a way to support the recovery and longer-term resilience. In this respect, a number of countries have already taken advantage of the stimulus during the crisis to support a more sustainable future (e.g., China, European Union, France, Germany, Korea, Saudi Arabia, Spain, United Kingdom). But more needs to be done. This includes more ambitious efforts at adaptation as well as mitigation. Well-designed and sequenced climate mitigation policies can help boost growth after the crisis without burdening placing a large burden on fiscal finances. The estimated impacts of such policies show a boost to growth and employment in the first decade or so, a manageable drag on growth in the medium term (to 2050), and output that could be up to 10 %  higher than it otherwise would be in the very long term (2100), due to avoided damages from climate change.5 Alongside, it will be important to collaborate to address other multilateral challenges such as related to base erosion and profit shifting (BEPS); the digital taxation framework; debt transparency; and the international financial regulatory reform agenda.


World Economic Outlook, October 2020, Chapter 3.

Annex I. Concepts, Definitions, and Measurement

1.           This annex presents concepts, definitions, and measurement relevant for the assessment of the quality of growth and policies. Detailed charts for the four dimensions of strong, sustainable, balanced, and inclusive growth (SSBIG) are presented in Annex II.

A.           Strong, Sustainable, Balanced, and Inclusive Growth

2.           This section describes how strong, sustainable, balanced, and inclusive growth is operationalized across the four dimensions. While indicators for each of the four individual aspects of growth are listed below, as discussed in the main text, there are important areas of overlap across these four dimensions. For example, the sustainability of growth ultimately depends on growth also being balanced, and vice versa.

•             Strong growth. This dimension refers to short-term, cyclical growth. Indicators include GDP growth, the output gap, and inflation (in levels and in deviations from inflation targets, where applicable).

•             Sustainable growth. This dimension refers to medium- and long-term growth. Indicators include potential growth, total factor productivity growth, and labor productivity growth.

•             Balanced growth. This dimension refers to the composition of growth (e.g., domestic versus external demand) and whether there is a build-up of external and domestic imbalances. External excess imbalances are derived from the IMF’s External Sector Report, which provides estimates of the extent to which current accounts and real effective exchange rates differ from those warranted by fundamentals and desired policies, while taking into account reserve coverage and international investment position indicators. Indicators of domestic private imbalances include (non-financial) private sector debt, the debt service ratio for the private non-financial sector, and asset quality ratios. Domestic public imbalances are measured by the level of general government gross debt.

•             Inclusive growth. This dimension refers to the degree of inequality in outcomes and in opportunities. Indicators of inequality in outcomes include the Gini coefficient and the ratio of the bottom income decile to the top income decile (i.e., the average income of the lowest 10 %  of earners relative to the average income of the top 10 %  of earners). The Gini coefficient captures inequality of outcomes in the broadest sense but is highly sensitive to changes in the middle of the income distribution and is less sensitive to changes in the tails of the distribution. The second measure can capture changes in the extreme ends of the income distribution. Indicators of inequality in opportunities include measures of access to education and health (e.g., public expenditure on education and health can be an indicative measure of quality and access).

B.           Policies

3.           This section presents the indicators used for assessing the policy stances across the fiscal, monetary, and structural reform policy areas.

•             Fiscal policy. The fiscal policy stance is measured as the change in the cyclically-adjusted primary balance (CAPB), where the balance is computed in %  of potential GDP. A contractionary (expansionary) fiscal policy stance reflects a positive (negative) change in the CAPB. The current and projected fiscal policy stance reflects the WEO baseline projections.

•             Monetary policy. The monetary policy stance is measured as the difference between the actual real policy interest rate and approximations/estimates of the (unobservable) natural real interest rate. A contractionary (expansionary) or tight (accommodative) monetary policy stance reflects an actual real policy interest rate above (below) the natural rate.

•             Structural reforms. The structural reform policy areas considered are those for which there are quantifiable indicators of structural reforms. These include (i) product market regulation; (ii) trade liberalization; (iii) employment protection legislation; (iv) tax structure reform (direct vs. indirect taxes); (v) Research and Development (R&D) spending; (vi) labor tax wedge; (vii) childcare spending (or other reforms to increase female labor force participation); (viii) active labor market policies; and (ix) unemployment benefit replacement rates. While this set of indicators captures key structural reform needs, it does not necessarily provide a complete description of the structural reform agenda for every country. Structural reform recommendations reflect consensus assessments of the IMF and the OECD and are expressed in terms of reform priorities (“high”, “medium”, or “low”).1

1 IMF and OECD recommendations are based on priorities for additional reforms (relative to reforms already incorporated in the baseline), aggregated based on a simple rule. For example, a “high” priority rating requires that both IMF and OECD staff found reforms in a certain area to be very urgent.

Annex II. Supplementary Charts

  1. This annex presents statistics on Strong, Sustainable, Balanced, and Inclusive Growth (SSBIG). The indicators for SSBIG correspond to those described in Annex I: (i) strong growth; (ii) sustainable growth; (iii) balanced growth; and (iv) inclusive growth. Data are mainly from the October WEO database, complemented with other sources where needed and as specified in footnotes to the charts. Aggregates include the European Union, unless otherwise specified.


1 IMF and OECD recommendations are based on priorities for additional reforms (relative to reforms already incorporated in the baseline), aggregated based on a simple rule. For example, a “high” priority rating requires that both IMF and OECD staff found reforms in a certain area to be very urgent.

Annex III Simmulation impact of reform recommendations

Annex IVG 20 Indicative Guidelines

1.           This Annex presents the update of the G-20 Indicative Guidelines, following the methodology agreed by the G-20 in April 2011. The G-20 methodology assesses a set of indicators mechanically, without normative implications, against reference values.1 This assessment is then used to identify members with large imbalances that would require further analysis under the sustainability updates of the G-20 Mutual Assessment Process (MAP). In light of the current crisis, outcomes of the assessment can be challenging to interpret.

2.           The Indicative Guidelines use indicators across three broad areas to evaluate “imbalances,” defined as deviations of indicators from their reference values (see below). These indicators include (i) the external position, comprising the trade balance, net investment income flows, and transfers; (ii) public debt and fiscal deficits; and (iii) private saving and private debt. The indicators are based on average projected values for 2022–24 from the IMF’s June 2020 WEO Update, except for private debt, where the latest available data are used.

3.           Reference values, against which the indicators are compared, are derived from four approaches. The four approaches cover (i) a structural approach based on economic frameworks to calculate “norms” (e.g., for the external position, the norm is based on staff’s ESR methodology); (ii) a time series approach to provide historical trends; (iii) a cross-section approach to identify benchmarks based on averages of countries at similar development stages; and (iv) a quartile analysis to provide median values for the full G-20 distribution.

4.           Selection criteria are used for determining countries with relatively large deviations. Members are selected if at least 2 of the 4 approaches show “large” deviations of indicators from their reference values in 2 out of 3 sectors (external, public, and private). For “systemic” economies (i.e., those whose share in total G-20 GDP is 5 %  or more), a “moderate” deviation is used for selection to account for their systemically important roles.

5.           The methodology identifies 11 economies as having relatively large deviations, which would have warranted an in-depth analysis under the G-20 MAP sustainability updates (Figure AIV.1). Relative to the 9 countries identified last year, Canada and South Africa are now also flagged. The main sectoral sources of deviations for the various economies are Canada (external, public debt, and private imbalances); China (external, fiscal deficits, public debt, and private imbalances); euro area (external, public debt, and private imbalances); India (external, fiscal deficits, public debt, and private saving imbalances); Japan (external, fiscal deficits, public debt, and private saving imbalances); South Africa (external, fiscal deficits, public debt, and private saving imbalances); United Kingdom (external, fiscal deficits, public debt, and private imbalances); United States (external, fiscal deficits, public debt,, and private saving imbalances); France (external, fiscal deficits, public debt,, private debt imbalances);

Annex V. Growth in and Around a Typical Recession

1.           This Annex provides details on the construction of a “typical” recession cycle. The dataset is constructed from the OECD Historical Quarterly National Accounts database. All variables are expressed in real terms (national currency, volume estimates) and are seasonally adjusted.

2.           For each country, we identify cyclical peaks and troughs using a Bry-Boschan Quarterly (BBQ) algorithm. The minimum length of the cycle is set to 5 quarters. For each recession episodes, only observations that range from 8 quarters before the peak to 11 quarters after the trough are retained. Growth rates are calculated as quarterly log-changes in the variable, expressed in % . Pre-recession GDP (expenditure side) trend growth rates are defined as average GDP growth rates over the first four quarters of the retained observations. For each episode, growth rates of all variables are computed as deviations from this episode-specific GDP trend growth.

3.           The average peak-to-trough duration of the episodes is 4 quarters. This implies that, on average, the peak of a cycle occurs during quarter -4 relatively to the trough (quarter 0). The (detrended) growth rate of a variable over a peak-to-trough period longer or shorter than 4 quarters is transformed to make it fit exactly a four-quarter window. For instance, if the peak to-trough duration of an episode is 8 quarters, then cumulative growth rates are calculated, respectively, over the post- peak quarters 1 and 2, 3 and 4, 5 and 6, 7 and 8. The resulting four cumulative growth rates are then artificially assigned to quarters -3, -2, -1 and 0 respectively. If instead the peak to-trough duration of an episode is 2 quarters, then the growth rate during the first post-peak quarter is divided by two and is artificially assigned to quarters -3 and -2. Similarly, the second post-peak quarter is divided by two and assigned to quarters -1 and 0. In the same spirit, a specific algorithm (available upon requests) treats the cases where the peak-to-trough duration is not an exact multiple or fraction of 4.

4.           All episodes are then pooled and “quarterly” averages and standard deviations are calculated for each quarter. Each episode has the same number of quarters (8 quarters before the peak, 4 recession quarters, 11 quarters after the trough). To abstract from cyclical patterns during the Global Financial Crisis (see discussion below), only episodes with GDP peak before 2007Q1 are considered. This leaves us with 138 recession episodes starting in the ’60 and spanning 37 countries.

5.           Three features of a typical recession emerge.

•             Hysteresis. A recession causes permanent output losses (integral of the line in the figure).

•             No super-hysteresis. Growth rates eventually go back to their pre-recession trend.

•             No significant pre-crisis “boom” or post-crisis “pent-up demand”. Only during the peak quarter (-

4) do we observe some above-trend growth. Similarly, only during the first two post-trough quarters (+1 and +2) do we observe some above-trend growth, which however is attributed to the external sector and is due to a sharp post-trough improvement in export growth combined with a delayed pick-up in import growth.

6.           These findings are robust to including the post-2007 recession episodes in the sample. However, when we focus on recessions with peaks between 2007Q1 and 2009 Q4 (charts are available upon request), one specific feature emerges: Global Financial Crisis recessions were accompanied by super-hysteresis, as post-trough growth rates were persistently below pre-crisis trends.

The accompanying Blog: The Crisis is Not Over, Keep Spending (Wisely)

Caption courtesy by IMF International Monetary Fund

By guest authors Oya Celasun, Lone Christiansen, and Margaux MacDonald.

Oya Celasun heads the Multilateral Surveillance Division in the Research Department. She was previously chief of the World Economic Studies Division of the IMF’s Research Department (2015-2019), the IMF’s Mission Chief to Uruguay (2013-14), and Economist and Deputy Chief on the United States and Canada desks (2008-12). She has published numerous academic and policy papers on public debt sustainability, sovereign risk and corporate debt, inflation in emerging market economies, and the costs of unpredictable aid flows in low-income countries.

Lone Christiansen is a Deputy Division Chief in the Multilateral Surveillance Division of the IMF’s Research Department. Previously, she has worked as an economist in the IMF’s Strategy, Policy, and Review Department and in the European Department. She has worked on a range of issues, including related to Fund lending, inequality, gender, and structural reforms. She holds a Ph.D. in Economics from the University of California, San Diego.

Margaux MacDonald is an Economist in the Research Department of the IMF where she works in the Multilateral Surveillance Division. Previously, she worked in the African Department on IMF program countries and external sector issues. Her research interests include international macroeconomics and finance, and her recent work focuses on cross-country spillovers from monetary policy, banking, and trade. She holds a Ph.D. in Economics from Queen’s University.

The pandemic-induced economic crisis is set to leave deep scars. Human capital erosion from prolonged high unemployment and school closures, value destruction from bankruptcies, and constraints on future fiscal policy from elevated public debt top the list. Groups that were already poor and vulnerable are set to see the largest setbacks.

Swift and unprecedented action by policymakers, including among the Group of Twenty (G20) advanced and emerging market economies, helped avert an even worse economic crisis in the wake of COVID-19 than what has been witnessed. The G20 has provided around USD 11 trillion in necessary support to individuals, businesses, and the health care sector since the start of the pandemic.

3.           This section presents the indicators used for assessing th

Swift and unprecedented action by policymakers, including among the Group of Twenty (G20) advanced and emerging market economies, helped avert an even worse economic crisis in the wake of COVID-19 than what has been witnessed. The G20 has provided around USD 11 trillion in necessary support to individuals, businesses, and the health care sector since the start of the pandemic.

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