The world economy risks “dangerously diverging”, even if growth increases

Photographer: Billy HC Kwok / Bloomberg

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The world economy is about to register the fastest growth in over half a century this year, but differences and shortcomings could prevent it from reaching its pre-pandemic heights soon.

The United States is leading the charge at this week’s virtual meeting of the International Monetary Fund, pumping billions of dollars of budget stimulus and resuming its role as guardian of the global economy after the defeat of President Joe Biden of President “America First” Donald Atu. Friday brought news about the largest month for employment in August.

China is also playing its part, building on its success in fighting the coronavirus last year, even as it begins to withdraw some of its economic aid.

However, unlike the post-financial crisis period of 2008, the recovery seems uncertain, in part due to the fact that vaccine launches and tax support differ across borders. Among the laggards are most emerging markets and the euro area, where France and Italy have extended restrictions on activity to contain the virus.

“While the prospects have In general, the outlook diverges dangerously, “said IMF Managing Director Kristalina Georgieva last week. “Vaccines are not yet available to everyone and everywhere. Too many people continue to face job losses and rising poverty. Too many countries lag behind. ”

Brighter business prospects

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

Source: World Trade Organization

The result: it could take years for parts of the world to join the United States and China to fully recover from the pandemic. By 2024, world production will remain 3% lower than expected before the pandemic, with tourism and services-dependent countries suffering the most, according to the IMF.

The disparity is captured by the new Bloomberg Economics set nowcasts, which show an overall growth of about 1.3% quarterly in the first three months of 2021. But as the US returns, France, Germany, Italy, the UK and Japan contract. In emerging markets, Brazil, Russia and India are clearly overtaken by China.

For the full year, Bloomberg Economics estimates growth of 6.9%, the fastest record since the 1960s. Behind the lively outlook: a threat of a virus decline, the expansion of the US stimulus and trillions of dollars in accumulated savings.

Much will depend on how quickly countries can inoculate their populations with the risk that the longer it lasts, 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 US has administered doses equivalent to almost a quarter of its population, the European Union has not yet reached 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 isolation,” said Mansoor Mohi-uddin, chief economist at Bank of Singapore Ltd.

Former Federal Reserve official Nathan Sheets said he expects the United States to use this week’s virtual meetings of the IMF and the World Bank to argue that now is not the time for countries to give up supporting their economies.

It is an argument that will be largely addressed Europe, especially Germany, with its long history of fiscal austerity. The EU’s € 750 billion ($ 885 billion) EU recovery fund will not start until the second half of the year.

The US will have two things to work on, Sheets said: A strengthening the domestic economy and an internationally respected leader of his delegation to Treasury Secretary Janet Yellen, a stranger to IMF meetings when she was president of the Fed.

But the world’s largest economy may be on the defensive when it comes distribution of the vaccine after the accumulation of massive supplies for itself. “We will hear a nuance and a cry that will emerge during these meetings for more equal access to vaccinations,” said Sheets, who is now head of global economic research at PGIM Fixed Income.

And while America’s booming economy will no doubt act as a engine for the rest of the world by absorbing imports, there could also be some murmurs about the higher costs of loans that rapid growth brings, especially from economies that are not as healthy.

“The Biden stimulus is a double-edged sword,” said former IMF chief economist Maury Obstfeld, who is now a senior senior at the Peterson Institute for International Economics in Washington. Rising US long-term interest rates “tighten global financial conditions. This has implications for debt sustainability for countries that have sunk into debt to combat the pandemic. ”

JPMorgan Chase & Co. chief economist Bruce Kasman said he has not seen such a large gap in the past 20-25 years in terms of the expected performance of the US and other developed countries compared to emerging markets. This is partly due to differences in vaccine distribution. But it also comes down to the economic policy choices that different countries make.

With interest rates falling mainly and asset purchase programs starting last year, central banks are splitting with some in emerging markets since raising interest rates either due to accelerated inflation or to prevent capital flight. Turkey, Russia and Brazil raised all borrowing costs last month, while the Fed and the European Central Bank say they will not do so for long.

2021 Tariff decisions

Turkey, Russia and Brazil all increased borrowing costs last month

Rob Subbaraman, head of global market research at Nomura Holdings Inc. in Singapore, believes that Brazil, Colombia, Hungary, India, Mexico, Poland, the Philippines and South Africa are at risk of having excessively free policies.

“With major developed market central banks experiencing how hot economies can drive before inflation becomes a problem, emerging market central banks will have to be extremely careful not to fall behind the curve and will likely have to drive , rather than following, market counterparts developed in the next rate hiking the cycle, ”said Subbaraman.

In an April 1 video for clients, Kasman summed up the global economic outlook in this way: “Boomy-type conditions with fairly wide divergences.”

– With the assistance of Eric Martin