By John Manning, International Banker
According to the World Bank, the global economy is expected to expand by 5.6 percent in 2021, the fastest post-recession pace in 80 years. The strong rebound is being largely attributed to pronounced recoveries materialising among a few economically advanced countries. But while those developed economies are undoubtedly leading the global recovery, much of the developing world remains left behind as the COVID-19 pandemic continues to severely restrict economic activity in many of the world’s poorest countries, where vaccination rates have been astonishingly low. With such a clear divide evident between developed and developing nations, much of the world is now, understandably, decrying the distinctly “two-tiered” nature of this global economic recovery.
The United States, in particular, is emerging as the leader among the world’s major economies, particularly on the back of the massive $1.8-trillion fiscal stimulus package approved in March. Indeed, the World Bank projects US growth at 6.8 percent this year, which would be the fastest pace recorded for the world’s biggest economy since 1984, before cooling to 4.2 percent in 2022 as the fiscal support’s impact fades.
China and the European Union (EU) are also expected to recover relatively quickly, at 8.5 percent and 4.2 percent in 2021, respectively. China’s recovery appears to be cooling to some degree, however. While its annual gross domestic product (GDP) growth rate was reported at an unprecedented 18.3 percent in the first quarter, this was more than halved in the second quarter to 7.9 percent, which, although still impressive, is a sharp deceleration nonetheless. The country’s central bank also surprised the world on July 9 when it cut the reserve requirement—or the amount of cash domestic lenders must hold in reserve—as a measure to boost lending, particularly to ailing small and medium-sized businesses. And while it has since stated that the move is a liquidity measure rather than a change in policy direction, it has certainly raised concerns over China’s likely growth path during the next few quarters.
“There is no doubt that the impact of a slowing China on the global economy will be bigger than it was five years ago,” Rob Subbaraman, head of global markets research at Nomura Holdings, explained to Al Jazeera news outlet on July 12. “China’s ‘first-in, first-out’ status from Covid-19 could also influence market expectations that if China’s economy is cooling now, others will soon follow.” That said, the US and China are each expected to contribute about one-quarter of global growth in 2021, according to World Bank estimates.
The International Monetary Fund (IMF), meanwhile, sees the global economy growing at 6.0 percent in 2021 and 4.9 percent next year and, similar to the World Bank, has also emphasised the yawning chasm between the likely growth rates of advanced economies and developing countries. Indeed, the IMF revised its growth prospects for advanced economies upwards in July by 0.5 percent compared with its April projections, whilst also downgrading its outlook for emerging markets and developing economies. The 4.9-percent estimate is 0.5 percent higher than its previous forecast, which, according to the Fund, derives largely from the forecast upgrade for advanced economies, particularly the US—as anticipation for further fiscal legislation being enacted in the second half of 2021 grows as well as the likely continued easing of pandemic restrictions, which reflects the significantly improved health metrics across the population.
∞∞∞∞∞
But again, the IMF continues to stress that the recovery is very much a tale of two blocs progressing at two markedly different speeds, with the developing world lagging badly, particularly the Emerging Asia region. Indeed, it was not too long ago that the world was looking at much of this region as a likely growth engine to drive the recovery. But it has since moved further back in the queue, thanks in no small part to the Delta variant of the virus, which continues to produce elevated case numbers and prompt governments in the region to keep their national lockdowns in place.
And while developed economies have made considerable progress in vaccinating significant shares of their respective populations—and thus raising hopes of expedited economic recoveries this year and next—the new variants continue to decimate large swathes of the developing world. “Vaccine access has emerged as the principal fault line along which the global recovery splits into two blocs: those that can look forward to further normalization of activity later this year (almost all advanced economies) and those that will still face resurgent infections and rising COVID death tolls,” the IMF asserted in its July Outlook.
Surges in diagnosed cases have emerged in recent months across much of the African continent, Southeast Asia, Brazil and India, thus prompting renewed calls for lockdowns and curfews and ultimately stymieing expectations of the global economy returning to pre-pandemic levels as a whole anytime soon. “In some low- and middle-income countries, less than 1 per cent of the population is vaccinated—this is contributing to a two-track recovery from the COVID-19 pandemic,” Achim Steiner, the United Nations’ development programme administrator, recently remarked.
Across Africa, for instance, COVID-19 deaths have spiked over the past month. According to the World Health Organization’s (WHO) director-general, Tedros Adhanom Ghebreyesus, this worsening death toll and infection rate are “being driven by the highly transmissible Delta variant”, which is now regarded as being more deadly than the original strain of the coronavirus. Phionah Atuhebwe, the WHO’s vaccine introduction officer for Africa, reported recently that the continent saw its highest weekly coronavirus death rate (6,343) for the week starting July 19, 2021. “Deaths increased by 89 percent, from 13,242 to 24,987, in the last 28 days, when compared against statistics for the previous 28 days,” Atuhebwe told CNN on August 3, which is a startling 80-percent surge during the four-week period.
Developing economies also do not typically have as much financial room in their budgets to enact massive stimulus programmes in the same mould as the US; nor have they been able to vaccinate their populations as quickly or as effectively as advanced economies. With a myriad of complex factors explaining this gaping divergence in vaccination rates—many of which are very much out of the control of the developing countries themselves—firm restrictions will continue to remain in place while the bulk of such populations remain unvaccinated. In turn, this will keep a ceiling on economic growth in the interim.
The WHO published a damning indictment of the grossly uneven nature of the global economic recovery on July 22. Discussing low and lower-middle-income countries, the Organization noted that an acceleration in scaling up manufacturing and sharing of vaccine doses with low-income countries could have added a sizeable $38 billion to their GDP forecasts for 2021—if they’d had similar vaccination rates as high-income countries. “At a time when richer countries have paid trillions in stimulus to prop up flagging economies, now is the moment to ensure vaccine doses are shared quickly, all barriers to increasing vaccine manufacturing are removed and financing support is secured so vaccines are distributed equitably and a truly global economic recovery can take place.”
And, of course, that’s not to forget the devastating impact the virus has already inflicted across the world, with mostly the poorest communities facing the most severe permanent damage from the crisis. “The human costs in terms of lives lost will permanently affect global economic growth in addition to the cost of elevated levels of poverty, lives upended, careers derailed, and increased social unrest,” the Congressional Research Service, which is the US Congress’s public-policy research institute, reported on July 9. “Some estimates indicate that 95 million people may have entered into extreme poverty in 2020 with 80 million more undernourished compared to pre-pandemic levels. In addition, some estimates indicate that global trade could fall by an annual amount of 9.0 percent or slightly less in 2020 as a result of the global economic downturn, exacting an especially heavy economic toll on trade-dependent developing and emerging economies.”
“While there are welcome signs of global recovery, the pandemic continues to inflict poverty and inequality on people in developing countries around the world,” World Bank Group’s president, David Malpass, observed in June. “Globally coordinated efforts are essential to accelerate vaccine distribution and debt relief, particularly for low-income countries. As the health crisis eases, policymakers will need to address the pandemic’s lasting effects and take steps to spur green, resilient, and inclusive growth while safeguarding macroeconomic stability.”
∞∞∞∞∞
Could the accelerating inflation observed across much of the world in recent months prove to be an additional thorn in the side of the recovery? There has certainly been growing speculation that central banks such as the US Federal Reserve (the Fed) and the European Central Bank (ECB) may end up tightening interest rates and/or easing their asset-purchase programmes, which could have significant repercussions for economic growth.
For the time being, it would seem that the majority of policymakers and analysts believe that accelerating price growth is only transitory in nature at present. “Recent price pressures for the most part reflect unusual pandemic-related developments and transitory supply-demand mismatches,” the IMF stated in its World Economic Outlook for July. The Fund also affirmed that it expected inflation to return to pre-pandemic ranges in most countries in 2022 once such disturbances work their way through prices, although it admitted that uncertainty remains high and that elevated inflation due to high food prices is likely to remain in some emerging markets and developing economies.
As such, it recommended that central banks hold off on any monetary tightening for the time being and instead wait until there is more clarity on underlying price dynamics. “Clear communication from central banks on the outlook for monetary policy will be key to shaping inflation expectations and safeguarding against premature tightening of financial conditions,” the Fund advised. “There is, however, a risk that transitory pressures could become more persistent and central banks may need to take pre-emptive action.”
There are also likely to be longstanding fundamental changes to the global labour force as a result of the pandemic and the ensuing disruptions it has inflicted across both advanced and developing economies. Some analysts anticipate fewer jobs being created even after the pandemic ends and economic activity is back to pre-COVID levels, as firms continue to make permanent adjustments that involve operating without as much reliance on manpower. Indeed, a Pew Research Center survey of unemployed US workers in January 2021 found that half of the respondents were pessimistic about finding another job in the near future, and two-thirds had considered changing occupations.
According to McKinsey, moreover, the pandemic is likely to impact the structural organisation of work in three main ways:
- By promoting a greater amount of permanent telework, such as telemedicine, which could account for 20 to 25 percent of workers in developed economies and 20 percent in developing economies working from home three to five times per week. In turn, this could reduce demand for public transportation, restaurants and retail shopping.
- By expanding e-commerce, which disrupts jobs in travel and leisure and low-wage jobs in brick-and-mortar stores but increases employment in distribution centres.
- By accelerating the adoption of artificial intelligence (AI) and robotics.
∞∞∞∞∞
Given the unpredictable and persistent nature of the coronavirus over the last 18 months, it must be stressed that current economic predictions are far from being assured. There remains a very real and distinct likelihood that along with pertinent economic issues such as mounting global debt and accelerating inflation, further waves of COVID-19 will continue to weigh heavily on the global economy over the next year or two, perhaps even longer. And with the more recent Delta strain still managing to infect those who have been vaccinated, containing the damage from the pandemic may take some time yet, even for advanced economies.
With such concerns in mind, the IMF has, nonetheless, provided two highly likely downside scenarios that could arise.
The first is that new variants induce further waves of the pandemic throughout emerging-market and developing economies in the second half of 2021. With vaccine supplies assumed to increase only gradually, mandatory restrictions will slow activity through the rest of the year and early 2022. What’s more, inflation in advanced economies will force central banks to reverse stimulus policies and begin monetary normalisation ahead of schedule. Under this scenario, global growth will be 0.75 percent lower this year and more than 1.5 percent lower in 2022 than the IMF’s baseline forecasts. And although output will start to recover beyond 2022, slower growth and tighter financial conditions for emerging markets and developing economies will lead to more bankruptcies. Global output will be about 1 percent lower than baseline by 2025, with the cumulative cost in lost global output at roughly $4.5 trillion, of which emerging markets and developing economies will bear the brunt—roughly $3.5 trillion.
The second scenario predicts more infectious variants will cause problems to those countries with low vaccination rates and many advanced economies in which vaccine hesitancy could continue to slow the pace of vaccinations. As such, 0.8 percent will be taken off the baseline scenario for 2021 and 2022, and again the global economy will lose $4.5 trillion of output by 2025.
Indeed, with a resurgence of the virus being observed more recently in parts of the world that seemed to be recovering, the IMF’s second scenario could well transpire. Weekly coronavirus-related deaths in the United Kingdom, for instance, recently hit a five-month high, with overall mortalities in England and Wales some 12 percent above the five-year average in the week to July 30. Hospitals in England and Wales reported 325 COVID-related deaths that week, which is the highest since the week ending March 28, according to the Office for National Statistics (ONS).
Such changing fortunes between countries are partially reflected in an early-August Ipsos survey for the World Economic Forum (WEF). The survey found that, on average, about three in four adults across 29 countries believed it would take at least two more years for their countries’ economies to recover from the pandemic, while only 7 percent felt their countries’ economies had already recovered, and a further 19 percent expected a full recovery in a year.