The world economy runs “dangerously divergent” even as growth grows

Photographer: Billy HC Kwok / Bloomberg

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The world economy is on the move the fastest growth in more than half a century this year, but differences and shortcomings could prevent it from reaching its pre-pandemic height soon.

The United States heads the post at this week’s International Monetary Fund’s virtual half-yearly virtual meeting, which expels billions of dollars of budget stimulus and resumes its role as guardian of the world economy following the defeat of President Joe Biden of “America First” President Donald Trump. Friday brought news of the biggest month to hire since August.

China is doing its part too, building on its success in the fight against coronavirus last year, even when it begins to withdraw some of its financial aid.

However, unlike the aftermath of the 2008 financial crisis, the recovery appears uneven, in part because vaccine deployment and tax support differ across borders. Among the laggards are most emerging markets and the euro area, where France and Italy are located extended restrictions on activity to contain the virus.

“It simply came to our notice then improved overall, the outlook diverges dangerously, ”IMF Managing Director Kristalina Georgieva said last week. “Vaccines are not yet available to everyone and everywhere. Too many people continue to face job losses and rising poverty. There are too many countries left behind. “

Brighter business prospects

The WTO predicts that trade will recover 8% in 2021 and 4% in 2022

Source: World Trade Organization

The result: it could take years for some parts of the world to join the United States and China to fully recover from the pandemic. In 2024, world production will still be 3% lower than expected before the pandemic, with countries more dependent on tourism and services, according to the IMF.

The disparity is captured by the new Bloomberg Economics group Nowcasts, which shows global growth of 1.3% quarter-on-quarter in the first three months of 2021. But as the United States bounces, France, Germany, Italy, the United Kingdom and Japan contract. In emerging markets, Brazil, Russia and India are clearly being overtaken by China.

For the full year, Bloomberg Economics expects growth of 6.9%, the fastest in records dating back to the 1960s. Behind the prosperous outlook: a declining virus threat, an expanding U.S. stimulus, and accumulated trillions of dollars in savings.

It will depend very much on how quickly countries can inoculate their populations with the risk that the longer it takes, the more likely the virus is to be an international threat, especially if new variants develop. Bloomberg’s Vaccine Tracker shows that while the United States has administered doses equivalent to nearly a quarter of its population, the European Union has not yet reached 10% and rates in Mexico, Russia and Brazil are below 6%.

“The lesson here is that there is no compromise between growth and containment,” 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 World Bank to argue that now is not the time for countries to withdraw from assistance. to their economies.

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

The United States will have two things to do, Sheets said: A the strengthening of the national economy and an internationally respected leader of his delegation to Treasury Secretary Janet Yellen, unknown to IMF meetings since his time as Fed chairman.

But the world’s largest economy could find itself on the defensive when it comes to it distribution of vaccines after accumulating massive supplies by itself. “We will hear a nuance and tears during these meetings to gain more equal access to vaccines,” said Sheets, who is now the head of global economic research at PGIM Fixed Income.

And while the booming U.S. economy will certainly act as a driving the rest of the world into absorbing imports, there could also be some rumors about higher market borrowing costs leading to rapid growth, especially from economies that are not so healthy.

“The Biden stimulus is a double-edged sword,” said IMF chief economist Maury Obstfeld, who is now a senior member of Washington’s Peterson Institute for International Economics. Rising U.S. long-term interest rates “harden global financial conditions. This has implications for debt sustainability for countries that went deep into debt to fight the pandemic. “

JPMorgan Chase & Co. chief economist Bruce Kasman said he has not seen such a wide gap in 20 to 25 years in the expected performance of the US and other developed countries compared to emerging markets. This is due in part to differences in vaccine distribution. But it also depends on the economic policy decisions made by various countries.

Having mainly cut interest rates and started asset purchase programs last year, central banks are splitting into some of the emerging markets. raise interest rates due to accelerating inflation or to prevent capital outflows. Turkey, Russia and Brazil raised debt costs last month, while the Fed and the European Central Bank say they will not do so for long.

Decisions of type 2021

Turkey, Russia and Brazil raised debt costs last month

Rob Subbaraman, Head of Global Market Research at Nomura Holdings Inc. in Singapore, he believes that Brazil, Colombia, Hungary, India, Mexico, Poland, the Philippines and South Africa are at risk of pursuing too loose policies.

“With major developed market central banks experimenting on what power they can save before inflation becomes a problem, emerging market central banks will have to be very careful not to fall behind the curve and will probably have to to lead, rather than follow, its market counterparts developed into the following type hiking cycle, ”Subbaraman said.

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