Economic downturn
Although 2020 witnessed a tumultuous contagion, the year is ending with a less scary view for global economies. Image Credit: Istock

Dubai: Although 2020 witnessed a tumultuous contagion, the year is ending with a less scary view for global economies, which are set to return to pre-pandemic levels of growth from the end of next year.

“The rapid deployment of effective vaccines and reopening of economies should gradually unleash a new wave of spending on travel and services, driving robust growth in the later part of 2021,” said Sara Johnson, executive director of global economics at IHS Markit, which surveys economic activity worldwide.

“After an (expected) 4.0 percent decline in 2020, the global economy is expected to expand 4.5 percent next year, with global output expected to reach a new peak.”

What will power the world economy to normal?

A few factors are coming together to power the world economy. First, the drag on global growth from the COVID-19 pandemic will end, producing a strong snap-back in demand.

Vaccines are being rolled out, improved drugs and clinical management are already reducing the seriousness of the illness and the increasing availability of cheap, fast and accurate testing allows for less stringent restrictions on economic activity.

The Organization for Economic Cooperation and Development (OECD) earlier this month said it currently expects the global economy to build momentum over the coming two years, with real gross domestic product (GDP) growth projected to reach pre-pandemic levels by the end of 2021.

Views of a strong rebound from recession

Releasing its latest forecasts for the world economy, the Paris-based international organisation predicted a strong rebound from this year’s historic global recession in 2021, but said that the world economy would not fully regain the lost output until the end of next year.

It expects the global economy to contract 4.2 per cent in 2020, an upward revision from an estimate made in September that pointed to a 4.5 per cent fall in real GDP. It also views real GDP growth to hit 4.2 per cent in 2021 — trimmed from a September forecast of 5 per cent — and 3.7 per cent in 2022.

The OECD, which monitors and advises its 37 member countries on economic policy, were optimistic about the worldwide economy gaining momentum through to 2022, citing scientific progress, pharmaceutical advances, and adjustments in the behaviour of people and firms, among others, as factors likely to help keep the virus in check, allowing restrictions on mobility to be lifted progressively.

Economic recoveries to be starkly uneven

However, economic forecasts from IHS Markit also showed that a return to economic growth would vary widely across regions. While Mainland China recovered in the second quarter of 2020, recoveries to pre-pandemic levels are forecast to take until 2023 or 2024 in Japan and several major European economies.

While unemployment rates are expected to fall in most regions in 2021 as output recovers, Western Europe is expected to see a rise in joblessness as public funding of furlough programs diminishes, analysts at IHS Markit revealed in its latest report.

“Policy rates in the United States, Eurozone, the United Kingdom and Japan are expected to remain near or below zero well beyond 2021. In emerging markets, where inflation is a more immediate concern, monetary easing is ending but policy rate increases will be rare in 2021,” forecasted IHS Markit.

Vaccines fuel cautious optimism

So while encouraging news about more effective anti-viral treatments and promising vaccines is fueling cautious optimism that at least the developed economies could tame the COVID-19 pandemic by the end of 2021, for now broad and robust relief remains essential.

As a second pandemic wave still cascades around the world, economists continue to reiterate that governments worldwide should allow public debt to rise further to mitigate the catastrophe, even if there are longer-term costs.

“In advanced economies, expansionary monetary policies are expected to keep term debt costs sharply lower,” noted IHS Markit. “More fiscally constrained emerging markets will rely heavily on forbearance measures to contain bank losses as the economic rebound takes hold.”

Debt baloons, global trade yet to rebound

“However, rising public and private debt burdens could lead to significant strains for banks that are heavily invested in local sovereign debt,” IHS Markit further noted.

Meanwhile, the volume of global trade is set to face the sharpest decline since the end of the global financial crisis, falling as much as 5.6 per cent this year, the UN Conference for Trade and Development (UNCTAD) predicts.

The figure, announced by the agency earlier this week, is more optimistic than its previous forecast, which expected global trade to contract by 9 per cent year-on-year. The previous largest decline was seen in 2009, when global merchandise trade took a 22-per cent nosedive.