Vasiliauskas: Stimulus proved to be an effective remedy for the global economy but it should be used responsibly
Substantial fiscal packages and monetary policy accommodation have mitigated the worst global economic downturn in almost a century, triggered by the COVID-19 pandemic. However, with the still fragile and uneven recovery, it is necessary to find ways to ensure that the global economy returns to a growth path in a sustainable and coordinated manner. These issues will be addressed by Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania, during the virtual annual meetings of the International Monetary Fund (IMF) and the World Bank Group.
“Even though the latest forecasts are less gloomy than at the onset of the pandemic, the path to recovery will be a long and bumpy one. It is therefore important not to withdraw stimulus measures too early. However, funds should be channelled responsibly and oriented towards measures that will contribute to sustainable long-term growth, such as the digitisation and greening of the economy,” said Vitas Vasiliauskas.
According to him, a substantial share of stimulus financing – i.e. the borrowed funds to be repaid – will weigh on the shoulders of future generations. Hence policymakers responsible for the economic stimulus as well as international institutions and national agencies should mobilise their efforts to make sure that this money is not just spent on relieving short term economic pain but is also invested in healthy long-term growth.
Having revised the June projection up by 0.8 percentage point, in its latest forecasts the IMF expects the global GDP to contract by 4.4% in 2020. The upward revision of global forecasts was underpinned by better-than-expected performance of advanced economies in the second quarter as well as the rapid recovery in China, which is the only major economy projected to see an increase in GDP (of 1.9%) already in 2020. The IMF also estimates that the global growth in 2021 should reach 5.2%.
The forecast for the euro area – Lithuania’s main export market – has been revised up by 1.9 percentage points to -8.3%. As regards the euro area major economies, the smallest downturn this year is projected to be observed in Germany (-6.0%). However, more Southern countries, where the fallout from the pandemic has been more severe, are set to suffer larger declines. For instance, the economic contraction in France is projected to stand at 9.8%, while in Italy and Spain – at 10.6% and 12.8% respectively. Next year, the euro area economy should record an increase of 5.2%.
The IMF projects Lithuania’s GDP to contract by 1.8% this year, which is the smallest decline not only within the EU, but also across the entire Europe. In 2021, the country’s economic growth is expected to reach 4.1%. For comparison, the previous IMF forecasts projected a downturn of 8.1% in 2020, to be followed by an 8.2% increase next year.
“Despite one of the mildest economic contractions projected for Lithuania, it is crucial that the funds geared towards economic stimulus are spent properly and efficiently, as well as contribute to the long term economic growth and competitiveness. In the longer run, this will enable a return to the sustainable management of public finances, which will in turn allow reducing the public debt piled up during the crisis,” said Mr Vasiliauskas.
According to the Chairman of the Board of the Bank of Lithuania, a focus on building a foundation for long-term sustainable growth should be the key goal of the Lithuanian Plan for the DNA of the Future Economy as well as the National Recovery and Resilience Plan. It is crucial to channel resources into the digitisation of the national economy and its public sector as well as into a swifter transition towards a climate-neutral economic model.
Looking ahead, the uncertainty mainly stems from the future path of the pandemic and its potential economic fallout. Additional risks also result from the growing burden of sovereign and corporate debts, and the uncertainty in international trade due to the tensions between the US and China, as well as the ongoing EU-UK post-Brexit negotiations. Meanwhile, a sooner than expected development of a vaccine against COVID-19 could contribute to an upward revision of the current projections.
The general government debt of euro area countries will shoot above 100% of GDP this year and reach 101.1%, which will imply a year-on-year increase of 17.1 percentage points. The rise in the US debt will be even more prominent, reaching 22.5 percentage points, to stand at 131.2% of GDP.
Notwithstanding the high debt levels in many countries, which have been pushed even higher by the COVID-19 pandemic, economic support should not be withdrawn prematurely, given that the recovery of both the global and Lithuania’s economies remains rather fragile. It is crucial in order to mitigate the long-term damage to the economic structure stemming from increased unemployment and corporate bankruptcies, particularly across small and medium-sized enterprises.