A construction site in Saudi Arabia. GCC’s largest economy Saudi Arabia is expected to record a 2.6 per cent growth in 2021 compared to an estimated 3.9 per cent contraction in its 2020 GDP growth according to the IMF. Image Credit: Gulf News Archive

Dubai: GCC’s largest economy Saudi Arabia is expected to record a 2.6 per cent growth in 2021 compared to an estimated 3.9 per cent contraction in its 2020 GDP growth and move to a faster growth of 4 per cent in 2022, according to the International Monetary Fund (IMF).

The latest update of the World Economic Outlook report of the IMF has significantly revised the 2020 growth outlook of Saudi economy upwards from the October projection of 5.4 per cent. However, the IMF has revised its growth outlook for 2021 downwards from the earlier forecast of 3.1 per cent.

The latest update has not included forecasts on the UAE and other GCC countries. However, the October WEO had forecast 1.3 per cent GDP growth for the UAE in 2021 compared to a 6.6 per cent contraction in 2020.

Improving global outlook

In its latest WEO update, the IMF has projected the Global economic growth an estimated 3.5 per cent contraction in 2020, the global economy is projected to grow 5.5 per cent in 2021 and 4.2 per cent in 2022. The latest forecasts are clearly shows an improved outlook compared to the October 2020 forecast of 4.4 per cent contraction for 2020 and a 5.2 per cent growth forecast for 2021.

The 2021 forecast is revised up 0.3 percentage point relative to the previous forecast, reflecting expectations of a vaccine-powered strengthening of activity later in the year and additional policy support in a few large economies.

The global growth contraction for 2020 is estimated at -3.5 per cent, 0.9 percentage point higher than projected in the previous forecast reflecting stronger-than-expected momentum in the second half of 2020.

The strength of the recovery is projected to vary significantly across countries, depending on access to medical interventions, effectiveness of policy support, exposure to cross-country spillovers, and structural characteristics entering the crisis.

Role of fiscal support

The IMF said additional fiscal policy support set to boost activity in some countries, but most are expected to experience lower deficits in 2021. The sizable fiscal support announced for 2021 in some countries, including most recently in the US and Japan, together with the unlocking of Next Generation EU funds, will help lift economic activity among advanced economies with favorable spillovers to trading partners. However, as noted in the January 2021 Fiscal Monitor Update, fiscal deficits in most countries are projected to decline in 2021 as revenues rise and expenditures decline automatically with the recovery.

Supportive financial conditions.

Major central banks are assumed to maintain their current policy rate settings throughout the forecast horizon to the end of 2022. As a result, financial conditions are expected to remain broadly at current levels for advanced economies while gradually improving for emerging market and developing economies. Within this latter group, differentiation between investment-grade sovereigns (who have been able to issue external debt in large amounts in 2020) and high-yield borrowers (many of whom are constrained in their ability to take on additional debt and until recently have not accessed international markets during the pandemic) is expected to subside as the recovery takes hold. As noted in the January 2021 Global Financial Stability Report Update, markets remain upbeat about prospects for 2021, banking on continued policy support.

Subdued inflation

Consistent with recovery in global activity, global trade volumes are forecast to grow about 8 per cent in 2021, before moderating to 6 per cent in 2022. Even with the anticipated recovery in 2021–22, output gaps are not expected to close until after 2022. Consistent with persistent negative output gaps, inflation is expected to remain subdued during 2021–22. In advanced economies it is projected to remain generally below central bank targets at 1.5 per cent.

Diverging trajectory

The IMF expects the recovery path of both advanced and emerging market and developing economies to trace diverging recovery paths.

Among the emerging markets, considerable differentiation is expected between China—where effective containment measures, a forceful public investment response, and central bank liquidity support have facilitated a strong recovery—and other economies.

Oil exporters and tourism-based economies within the group face particularly difficult prospects considering the expected slow normalization of cross-border travel and the subdued outlook for oil prices. The pandemic is expected to reverse the progress made in poverty reduction across the past two decades. Close to 90 million people are likely to fall below the extreme poverty threshold during 2020–21.