Risks of the world economy ‘Divergent Divergent’, even with the expansion of growth

Photographer: Billy HC Kwok / Bloomberg

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The world economy is moving towards its faster growth in more than half a century this year, but differences and shortcomings may prevent it from reaching its pre-pandemic levels soon.

The United States is leading the attack on this week’s half-yearly virtual meeting of the International Monetary Fund, injecting trillions of dollars of budgetary stimulus and resuming its role as guardian of the global economy after the defeat of President Joe Biden of “America First” President Donald Trump. Friday brought news from the biggest month for hiring since August.

China is doing his part too, building on his success in fighting the coronavirus last year, even when he starts to withdraw some of his financial aid.

However, unlike the aftermath of the 2008 financial crisis, the recovery seems unbalanced, in part because the vaccine distribution and fiscal support differ across borders. Arrears include most emerging markets and the euro area, where France and Italy extended restrictions on activity to contain the virus.

“Although the prospect has it has generally improved, the prospects are diverging dangerously, ”said IMF managing director Kristalina Georgieva last week. “Vaccines are not yet available to everyone and everywhere. Many people continue to face job losses and rising poverty. Many countries are lagging behind. “

Brighter Trade Outlook

The WTO expects trade to recover 8% in 2021 and 4% in 2022

Source: World Trade Organization

The result: it may take years for parts of the world to join the United States and China in total recovery from the pandemic. In 2024, world production will still be 3% less than projected before the pandemic, with countries that depend on tourism and services suffering more, according to the IMF.

The disparity is captured by the new set of now, which shows global growth of around 1.3% quarter-on-quarter in the first three months of 2021. But while the US is recovering, France, Germany, Italy, the United Kingdom and Japan are contracting. In emerging markets, Brazil, Russia and India are all clearly being overtaken by China.

For the year as a whole, Bloomberg Economics projects growth of 6.9%, the fastest in records dating from the 1960s. Behind the optimistic outlook: a shrinking virus threat, expanding US stimulus and trillions of dollars in repressed savings.

Much will depend on how quickly countries can inoculate their populations, with the risk that the longer it takes, the greater the chance that the virus will remain an international threat, especially if new variants develop. Bloomberg’s Vaccine Tracker shows that while the United States has administered doses equivalent to almost a quarter of its population, the European Union has yet to reach 10% and rates in Mexico, Russia and Brazil are less than 6%.

“The lesson here is that there is no trade-off between growth and containment,” said Mansoor Mohi-uddin, chief economist at Bank of Singapore Ltd.

Former Federal Reserve official Nathan Sheets said he hoped the US would use this week’s virtual meetings of the IMF and World Bank to argue that now is not the time for countries to step back in helping their economies.

It is an argument that will be mainly directed to Europe, especially Germany, with its long history of fiscal rigor. The EU’s 750 billion euro ($ 885 billion) joint recovery fund will not start until the second half of the year.

The United States will have two things going for it when it presents its case, Sheets said: strengthening the domestic economy and an internationally respected leader of his delegation at the Treasury secretary, Janet Yellen, familiar with IMF meetings since his time as Fed chairman.

But the biggest economy in the world can be on the defensive when it comes to distribution of the vaccine after accumulating massive supplies for itself. “We will hear screams and calls during these meetings for more equal access to vaccines,” said Sheets, who is now the head of global economic research at PGIM Fixed Income.

And although America’s booming economy undoubtedly acts as a driver for the rest of the world in absorbing imports, there may also be some complaints about the higher market borrowing costs that rapid growth entails, especially for economies that are not so healthy.

“The Biden stimulus is a double-edged sword,” said former IMF chief economist Maury Obstfeld, who is now a senior member of the Peterson Institute for International Economics in Washington. The rise in long-term interest rates in the USA “tightens global financial conditions. This has implications for the debt sustainability of countries that have become increasingly indebted to fight the pandemic ”.

JPMorgan Chase & Co. Chief Economist Bruce Kasman said he has not seen such a gap in 20 to 25 years in the expected outperformed performance of the US and other developed countries compared to emerging markets. This is partly due to differences in the distribution of the vaccine. But it also depends on the economic policy choices that several countries are making.

Having mainly lowered interest rates and started asset-buying programs last year, central banks are splitting up with some in emerging markets beginning to increase interest rates because of accelerated inflation or to prevent capital outflow. Turkey, Russia and Brazil increased borrowing costs last month, while the Fed and the European Central Bank say they won’t be doing that for long.

2021 Rate Decisions

Turkey, Russia and Brazil increased borrowing costs last month

Rob Subbaraman, head of global markets research at Nomura Holdings Inc. in Singapore, assesses that Brazil, Colombia, Hungary, India, Mexico, Poland, the Philippines and South Africa are at risk of applying overly flexible policies.

“With leading central banks in developed markets experiencing how heated they can manage economies before inflation becomes a problem, emerging market central banks will need to be extremely careful not to fall behind the curve, and will likely need to lead, in instead of following, its developed market counterparts at the next rate walking cycle, ”said Subbaraman.

In an April 1 video for clients, Kasman summed up the global economic landscape as follows: “Boomy conditions with very wide divergences”.

– With the help of Eric Martin