World — Public investment to fuel recovery amid low interest rates
World Risk Developments October 2020
The COVID-19 pandemic has induced exceptional fiscal support measures of US$12 trillion globally (about 14% of global GDP). The IMF is now urging governments to increase public investment to foster economic recovery. The IMF finds that public investment can potentially generate, directly, between 2 and 8 jobs for every one million US dollars spent on traditional infrastructure, and between 5 and 14 jobs for every million US dollars spent on research and development, green electricity, and efficient building (Chart). The International Labour Organisation estimates the equivalent of 495 million full-time jobs were lost during the second quarter of 2020.
The case to ramp up public investment is particularly strong given very low interest rates and increased unemployment. Before the pandemic, public-investment-to-GDP ratios had been declining, and infrastructure needs remain large in most emerging economies. The ADB estimates that infrastructure needs in developing Asia and the Pacific will exceed US$26 trillion (roughly double the size of China’s economy) through 2030. The IMF notes greater investment is needed in sectors critical to controlling the pandemic, such as health care, schools, social housing, transportation, and digital infrastructure. But infrastructure investment is also costly. Amid lower revenue and higher spending, the IMF says global public debt will hit an all-time high of about 100% of GDP in 2020-21. Yet servicing such high debt will be manageable for many governments as long as interest rates remain very low, a likely prospect for many years ahead.
Recent announcements of large fiscal stimulus measures around the world, particularly related to infrastructure investment, will bolster future demand for Australia’s resources and construction and engineering services. Enhanced infrastructure can improve access to markets and make it easier for countries to do business, facilitating greater export opportunities between nations.