The events that shook the global economy to its core last year—policy errors and a pandemic occurring at the end of a decade-long business cycle—finally appear to be bottoming out.
The rapid response by the scientific community and by policymakers has created the basis for a public health and economic recovery.
Although those events are still running their course, the rapid response by the scientific community and by policymakers has created the basis for a public health and economic recovery.
We expect the global economy to expand by roughly 6% this year with some risk of a slower pace of growth because of challenges in vaccine distribution in Europe, India and South America.
The success of the vaccination programs in developing economies and the political willingness of those nations to support COVAX’s delivery of vaccines to the rest of the world will largely determine the pace of global economic output this year and next.
Should vaccines outrun the ability of the virus to mutate and the hesitancy of some people to accept those vaccines, we expect the United States to be first among the major Western economies to emerge from the global recession.
The U.S. would be followed by Canada and the U.K., which leads major countries in vaccinations, but has had multiple shutdowns. We expect the euro area’s economy to languish a bit longer, given recent stumbles in its vaccination efforts, with emerging markets and the frontier economies of Africa to follow in recovery in 2022 and 2023.
The Organization for Economic Cooperation and Development expects the U.S. economy—whose output declined by 3.5% last year—to grow by 6.5% this year, an increase of 10 percentage points. That pace of recovery is roughly the same among the developed economies.
For example, the euro area’s economy contracted by 6.8% last year and is predicted by the OECD to grow by 3.9% this year, a 10.6 percentage point increase in output. The U.K., which suffered from multiple shutdowns during the pandemic and whose economy declined by 9.9% last year, is expected to grow by 5.1% this year, an increase of 15 percentage points in only one year.
Still, it’s important to keep in mind that last year’s economic problems did not suddenly appear. They had been building for decades and will not disappear as soon as people in individual countries have been vaccinated.
What a difference a year makes – a prequel
In January 2019, the International Monetary Fund was once again cutting its growth forecast for 2019-20. At that time, Managing Director Christine Lagarde (now president of the European Central Bank) said that “after two years of strong expansion, the world economy is growing more slowly than expected and risks are rising.” She said those risks were “partly because of the negative effects of rising trade barriers.”
In what turned out to be prescient remarks, Lagarde warned of a need to address “remaining vulnerabilities and be ready if a serious slowdown were to materialize.” For most countries, she said, “this means harnessing the existing growth momentum to create more policy room to act. The goal is to make economies more resilient and more inclusive, and to increase collaboration.”
Consider Lagarde’s three goals:
- Resilience – This included free-floating exchange rates (to act as economic shock absorbers), furtherance of financial sector stability and reduced government debt (at a time when U.S. revenues were being depleted by the largest tax cut in its history). Finally, Lagarde said, “this also remains the time for economic reforms to lift growth, especially in labor markets and infrastructure investment.”
- Inclusiveness – “If we are to deliver on the promise of the digital revolution—in terms of productivity, employment, and long-term growth—then we must make sure it delivers for people,” Lagarde said. “This includes helping workers displaced by automation, and creating new and better opportunities for women and young people.”
- Collaboration – “Effective international cooperation comes down to fairness, flexibility and a commitment to the common good,” she said. “So let us redouble our efforts to resolve shared problems—from fixing the global trade system, to fighting corruption and tax evasion, to addressing the existential threat of climate change.”
Lagarde continued, “The goal is for us to be in a better position for a downturn, which history suggests is somewhere over the horizon, but also for unexpected developments.”
By January 2020, the novel coronavirus was spreading through Western Europe. Just a few months later, a health crisis would become a supply shock as Asian economies closed down. That soon became a severe demand shock as a shutdown of normal life took hold worldwide, leading to a 3.3% contraction of the global economy by IMF estimates.
Overcoming the virus
By April, the virus had spread to 143 million people worldwide and caused more than 3 million deaths. But as economies reopen and vaccines are distributed, the IMF is “now projecting a stronger recovery in 2021 and 2022 for the global economy compared to our previous [October 2020] forecast, with growth projected to be 6% in 2021 and 4.4% in 2022,” according to the IMF World Economic Outlook.
The IMF sees the global economy recovering more quickly than after the 2008-09 financial crisis.
The IMF analysis points to a quicker recovery than after the 2008-09 financial crisis, but there is the “potential for persistent economic damage.” In addition, the overriding issue of inequality will have been exacerbated by a decidedly unequal pandemic.
In the IMF report, Gina Gopinath, the IMF economic counselor and director of research, cautioned, “The outlook presents daunting challenges related to divergences in the speed of recovery both across and within countries.” The variance within those global forecasts will be “linked to stark differences in the pace of vaccine rollout, the extent of economic policy support, and structural factors.”
She added: “The United States is expected to surpass its pre-COVID GDP level this year, while many others in the group will return to their pre-COVID levels only in 2022. Similarly, among emerging market and developing economies, China had already returned to pre-COVID GDP in 2020, whereas many others are not expected to do so until well into 2023.”
The 11% to 20% loss of income among developed and developing economies during the pandemic will have widened the gap in living standards and “reversed gains in poverty reduction, with an additional 95 million people expected to have entered the ranks of the extreme poor in 2020, and 80 million more undernourished than before,” Gopinath added.
Overcoming economic and societal deficiencies
Because income is a determinant of nourishment, undernourishment is likely to be more prevalent in the post-pandemic economy. Education losses will have been greater in low-income nations—conforming to the struggles of low-income U.S. households—resulting in diminished human capital and loss of competitiveness.
We need to enter the recovery with eyes wide open. Those who work in low-paying jobs will have unrecoverable losses of income unless compensated by government subsidies. And there is the potential for losses of employment opportunity because of automation and restructuring unless there is provision for retraining and worker mobility.
Although employment in the financial and manufacturing sectors is nearly back to normal, the economic effects of the virus are likely to linger in the service sector until the public is confident in the vaccines—for both adults and children—and their universal distribution.
Here is a brief sketch of some of the major challenges facing a select number of economies:
Canada – We expect Canada to experience a robust economic recovery, with better than 6% growth this year followed by a strong expansion of 4% next year. As the global economy gets off the mat, demand for commodities may expand, so there is some risk of a faster pace of growth.
At the same time, the post-pandemic economy will present a host of challenges for Canadian officials.
- Can Canada adapt to the evolution of the fossil fuel industry? As we saw in the commodity price collapse of 2014-16, the role of the resource extraction sector can add a significant dose of volatility to the Canadian labor market and in the value of Canadian domestic output.
- Should the government promote information-age industries? This is not a zero-sum game that sacrifices the fossil fuel industry, but instead can be an effort to provide balanced and consistent growth and an employment buffer against the volatility of the commodity markets.
- Can trade tensions with the United States be eased? Ottawa will need to pursue a deft economic diplomacy with the U.S. to persuade Washington to reduce existing trade frictions—like eliminating the 9% tariff on Canadian softwood lumber—to further stimulate its economy and continue American-Canadian economic integration.
Mexico and Central America – Mexico stands at the center of many pressing questions for Central America. Can Mexico withstand the coming changes in the fossil fuel industry? And can it take on the geopolitical role as leader of a Central American revival and its full integration into a North American agri-tech and advanced industrial zone?
Moreover, can Mexico address the growing public safety problem linked to the drug cartels that operate freely in too many parts of the country?
The crisis at the U.S. southern border has been decades in the making, and the social and economic consequences of policies that left millions impoverished throughout Central America cannot be ignored.
If Canada, the U.S. and Mexico can operate as integrated partners, there is no reason why Central America cannot be part of a greater prosperity. The relationship between Canada and the U.S. is one of mutual dependence, and a prosperous Central America would likewise benefit all parties.
Argentina – Argentina has been characterized as running in place, with progress followed by a crisis. Real GDP growth has been in general decline since the 2008 global financial crisis and has been oscillating between positive and negative since 2012. Foreign direct investment has been lackluster and in general decline over roughly the same period, showing the effect of a lack of stability and a lack of confidence in the economic and political framework.
Brazil – Brazil’s economy, despite all of its resources, has been in general decline over much of the same period, with its five-year average of real GDP growth just above water, at 0.4% per year. And because of Brazil’s reliance on resources, GDP growth was negative from 2014 to 2016 when commodity prices collapsed.
Net foreign direct investment inflows in U.S. dollar terms have been in decline after peaking in 2011, according to the World Bank.
Brazil’s most pressing problem is the spread of the coronavirus and the refusal of the government to acknowledge the health crisis and its effect on the economy. Until the public health crisis is fundamentally addressed and the political risks associated with its governing sector solved, it will be difficult for Brazil to return to the growth it had during the first decade of this century.
U.K. – We expect strong growth as the release of pent-up demand and fixed business investment support a growth rate of 6% this year and in excess of 7% next year. Efforts to rebalance the British economy and the improvement of the national infrastructure expect to loom large in the coming years.
The “Britain First” sentiments of the Brexit referendum have damaged the U.K.’s external sector.
That said, Brexit-induced disruptions to the economy and to the nation’s social and political life are still to be determined. We are unsure that the Johnson government either can or is willing to address those issues.
The “Britain First” sentiments in the Brexit referendum have damaged the U.K.’s external sector, although this damage can ostensibly be repaired. But the social barriers that were seemingly ameliorated by being part of greater Europe are once again in plain sight. Renewed sectarian violence in Ireland and the potential of secession by Scotland are bound to further challenge the very nature of what the U.K. means.
Just as the world wars marked the end of the British Empire and the dominance of the pound, Brexit could very well lead to a diminished role of London as a global financial center.
Euro area – If something positive is to come out of the pandemic and Brexit, it’s likely to be a unified response to the health crisis and the acknowledgment that going it alone might not be in anyone’s best interests. The euro area is a common market with a single monetary authority but without a common fiscal authority. The singular focus of defeating the virus might be the catalyst for rethinking the importance and perhaps the advantages of a more unified political structure.
The euro area was growing as high as 3% per year in 2017 before U.S.-inspired trade frictions pushed the global manufacturing sector into recession. By the end of 2019, euro area growth had fallen to 1.4% just before the pandemic and economic shutdown.
Unified government spending would encourage significant and widespread increases in growth and employment. Widespread prosperity would go a long way toward short-circuiting economic uncertainty and any accompanying extreme political behavior.
China is a trading partner, but it is one with the potential to be a national security rival should it use its economic power to assert political or military dominance. We do not anticipate an abatement of trade or geopolitical tensions between Washington and Beijing anytime soon. In fact, these tensions might expand should the U.S. re-enter the Trans-Pacific Partnership in the near to medium term.
Remarkably, China has been an economic powerhouse for a short time—less than 25 years. And it has been able to grow without the umbrella of liberal democracy that Westerners consider essential for economic growth and without a free-floating currency that economists say allows for the efficient flow of goods across borders.
It is clear that the trade and security tensions have spilled over into a broader set of challenges. Whether it is China’s boycott of a Norwegian company after the Nobel Prize was given to a Chinese dissident or China’s building of coal plants last year while simultaneously agreeing to reduce carbon emissions, a reduction of tensions is not likely in the near term, all of which pose some risk to global growth.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.