Besting the headwinds

The global economic recovery is continuing even as the pandemic resurges. Growth outturns for the first half of the year were broadly in line with the World Economic Outlook projection in July of 6 percent growth in 2021. This reflects better-than-expected growth in the first quarter, followed by a loss of momentum in the second quarter.

Looking ahead, risks remain, not least from the possibility of new virus variants arising. Faster than expected policy normalization in emerging economies could also trigger adverse spillovers.

Inflation is also on the rise, driven by a rise in commodity prices and disruptions that have prevented supply from keeping up with demand. For the most part, price pressures are expected to subside in 2022. But expectations of medium-term inflation remain anchored to policy targets in most economies.

On top of this, the pandemic has reversed some of the poverty alleviation gains the world had made. And vulnerabilities are increasing, with public and private debt levels rising substantially across economies. If not carefully managed, this will pose challenges to fiscal sustainability, investment and growth for some economies.

The good news for China is that its recovery is taking hold, with 8 percent growth being projected for 2021. The not-so-good news is that the growth momentum is slowing.

Because China is ahead of the curve in the recovery, it is not surprising that it is one of the first countries to normalize its macroeconomic policies. Yet, the speed and magnitude of China's fiscal contraction in the first half of this year was much faster and bigger than anticipated, contributing to the slowdown. Natural disasters, a string of policy tightening measures and sudden novel coronavirus flare-ups have also dragged on growth.

It is critical that effective vaccines continue to be developed, and developing countries have greater access to them. Moreover, macroeconomic policies should be carefully calibrated to the needs of the recovery. As China has already front loaded its consolidation efforts, a more neutral fiscal stance coupled with moderately supportive monetary policy will slow the drag on growth and secure the handoff to private demand.

An aging population, declining productivity growth at a time when globalization is under pressure, and pandemic-related setbacks in rebalancing toward high-quality growth are all headwinds to China's pursuit of balanced, inclusive and green growth.

So how can these headwinds be prevented from steering it off course?

Rebalancing the economy offers multiple benefits for high-quality growth. The shift from traditional investment to more consumption-led growth will decrease demand for heavy industrial goods and increase demand for consumer goods and services. This is good news for people's welfare, as a more service-oriented economy will be more reliant on labor than before and will likely lift the labor share of income. It is also good news for the climate as a reduction in high-energy consumption and carbon-intensive heavy industry will lead to a fall in CO2 emissions.

The rollout of the national emissions trading system could ultimately transform the power sector by efficiently and cost-effectively reducing China's CO2 emissions. To unlock the full potential of this market-based carbon pricing tool, however, market reforms in the power sector are needed to pass on the carbon price to downstream sectors and consumers.

The crux of the matter is how to sustain growth, especially in light of declining productivity and headwinds to globalization. To boost household consumption, China needs to strengthen its social protection program to reduce the need of households to insure against individual risks through precautionary savings. Expanding the coverage and adequacy of the social insurance program－especially unemployment insurance－will help in this regard. Ensuring that everybody can fall back on a reliable social safety net makes for more inclusive growth, which is squarely in line with China's "common prosperity" goal.

China also needs to re-accelerate reform of its State-owned enterprises, ensure competitive neutrality between all firms, and further open up its domestic market. A transparent and predictable way to enhance digital platform competition that preserves market efficiency and financial inclusion benefits would also be helpful.

China can apply the same fundamental insights that have made its manufacturing exports such a phenomenal success to achieve a world-class services sector. By weakening protection and encouraging entry, competitive pressure will help transform work practices across Chinese companies.

A more dynamic economy is facilitated by new market entrants in new industries, often where existing regulation is unclear or missing altogether. These new entrants must contribute positively to growth, to employment and to technological advancement. Policymakers should strive to provide clear and predictable regulatory frameworks, allow sufficient time for compliance and leave space for dialogues with a broad set of stakeholders.

China has much to give, such as broader access to its vaccines and debt relief to low-income countries. Experience tells us that resolving unsustainable debts is going to require the full commitment and expeditious action of all creditors, public and private. By helping to put countries on a sustainable debt trajectory, these creditors will help borrowers make larger contributions to global prosperity in the coming years.

China is also a key contributor to multilateral trade－including through World Trade Organization reform. While its leadership role in global climate efforts including the co-chairing of the G20 Sustainable Finance Study Group and cooperation with the European Union on green investment standards is also contributing to a greener recovery.

The International Monetary Fund is lending support in all of these endeavors. The new Special Drawing Right allocation supplements countries' reserves, using the collective strength of the fund's membership to make all 190 member countries a little stronger. It will provide liquidity support to many developing and low-income countries that are struggling, allowing them to pay for healthcare and support vulnerable people.

With the right combination of policies and the collective efforts of us all, global growth will be steered back on track and the future will look brighter.

The author is first deputy managing director of the International Monetary Fund. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn