Beyond the Covid-19 crisis, forecasts may be too optimistic

The Covid-19 crisis is one year old, and already, on the economic front at least, optimism is gaining ground.

The International Monetary Fund (IMF) economic growth projections, released last week, point to a strong rebound: the world economy is forecast to expand by 6% this year, led by emerging and developing Asia, which is expected to grow by 8.6%.

Developing economies in general are forecast to expand by 6.7%, while advanced economies are set to post a healthy 5.1% expansion.

The eurozone’s economic growth is projected at 4%, slower than that of the US at 6.4% which in turn is likely to lag China’s 8.4% surge.

However, as the IMF warns in its report, this recovery like no other also risks deepening inequality, both between countries and within them.

If the crisis caused by Covid-19 has been called “unprecedented”, so have been the efforts to mitigate its effects.

Trillions of dollars in fiscal stimulus have been directed to preserving jobs and businesses, while central banks have kept interest rates at or below zero and have bought trillions worth of assets to maintain lending conditions stimulative.

A lot of this money ended up in real estate and the financial markets, boosting the wealth of those who already had property and stock and bond market investments.

Because of this, the enthusiasm shown by economic forecasters and stock market investors could be a little exaggerated.

World map IMF growth forecasts
Source: IMF World Economic Outlook 2021

The economic recovery is unlikely to be strong enough if inequality goes up. A growing class of have-nots cannot be good for the global economy.

And yet, this is exactly what is happening. According to the IMF, “close to 95 million more people are estimated to have fallen below the threshold of extreme poverty in 2020 compared with pre-pandemic projections.”

Young people, women and those with lower education have been the hardest hit by the effects of the pandemic.

“Moreover, learning losses have been more severe in low-income and developing countries, which have found it harder to cope with school closures, and especially for girls and students from low-income households.”

“Unequal setbacks to schooling could further amplify income inequality,” according to the IMF’s World Economic Outlook.

Beyond Covid-19: rising taxes

Looking beyond the Covid-19 pandemic, the IMF called for policies to retrain and reskill workers, as well as income support and subsidies to encourage hiring and job creation.

Money will also need to be invested in education to ensure additional resources are allocated to helping children recoup the learning losses caused by the Covid-19 lockdowns.

All this will have to be paid for somehow. And most governments are already drowning in debt, so the alternative will be increased taxation.

“Building on recent advances in international tax policy, efforts should continue to focus on limiting cross-border profit shifting, tax avoidance, and tax evasion,” the IMF’s report said.

Proposals by US President Joe Biden to agree international tax rates for sales of big multinationals in the countries where their sales take place would, if implemented, be a big step in that direction.

Left without “refuge” from higher taxes, big corporations and successful medium-size companies from all walks of life would be forced to pay an increased contribution to reducing inequality.

But higher taxes usually come with reduced spending by companies in investment elsewhere. Economic growth could still be hit, even if the increase in taxation seeks to address the effects of the Covid-19 pandemic.