Hard work for an economic recovery remains to be done

While making the recovery predicted by the International Monetary Fund sustainable is the first priority for global policymakers, the fair distribution of the benefits of higher gross domestic product is also important

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The roll-out of Covid-19 vaccines could boost economic activity in China in the second half of 2021. Photo: Xinhua

SCMP Editorial

Editorials represent the views of the South China Morning Post on the issues of the day.

Published: 9:27pm, 31 Jan 2021Updated: 11:17pm, 31 Jan 2021

Amid all the gloomy news about the toll of the pandemic on jobs and trade, the International Monetary Fund says the global economy will grow by more than previously forecast this year. In the latest update of its world economic outlook, the IMF revised its 2021 growth prediction upwards by 0.3 percentage points to 5.5 per cent, and revised the contraction last year downwards by 0.9 percentage points to 3.5 per cent. The 8.1 per cent growth projection for China, after a 2.3 per cent expansion last year on the back of 6.5 per cent in the last quarter, is second only to India. But in real terms the contribution to global growth is greater because India is recovering from a large contraction. As well as the strong economic rebound in China, growth will be boosted by policy support in large economies such as the United States and Japan. In addition, the roll-out of Covid-19 vaccines could boost economic activity in the second half.

While governments will feel relief at the forecast they should not allow themselves to be carried away. The hard work of economic recovery still lies ahead. Some of the support measures implemented by China to counter the pandemic amount to structural distortion of the economy. The country’s leaders need to be mindful that to maintain sustainable growth it still needs to apply the formula of opening up, encouraging the private sector and growing the domestic consumer market. The IMF concurs. “It is important [for China] to ensure that the rebalancing towards private consumption continues,” said Malhar Nabar, division chief at IMF’s research department. He added that structural reforms to deregulate key sectors to bring in more private investment would also help China to lift its growth in the medium term.

Reliance on infrastructure spending and strengthening of state-owned enterprises may be an effective strategy against a downturn during a pandemic. But there is a concern officials will be tempted by the positive results to repeat the same unsustainable formula when the external environment changes.

The global economy remains in a fragile state, having been saved from collapse by policy easing by central banks around the world. How to make the recovery predicted by the IMF sustainable is the first priority for global policymakers. But ultimately the fair distribution of the benefits of higher gross domestic product is also important. A wealth gap and a widespread feeling of economic exclusion and being left behind has already led to populist movements in the United States and some parts of Europe. Covid-19 can only widen the wealth gap, despite relief measures. There is a risk that focus on headline GDP growth could lead to many people not benefiting from real growth, sewing the seeds of political instability and, in turn, making growth unsustainable.