After the most severe global recession in decades, private and official forecasters are increasingly optimistic about a strong recovery in global production this year and beyond. But the coming expansion will be unevenly distributed, both across and within economies. Whether the recovery is V-shaped (a strong return to above-potential growth), U-shaped (a more anemic version of the V), or W-shaped (a double-dip recession) will depend on several factors in different economies and regions.
With the coronavirus still endemic in many countries, a key question is whether the emergence of new virulent strains will trigger repeated cycles of stop and start, as we have seen in some cases where economies have reopened too early. Of particular concern is the emergence of more vaccine-resistant variants, heightening the urgency of vaccination efforts that have so far been too slow in many regions.
Beyond the virus, there are a number of related economic risks to consider. A slow or insufficiently robust recovery could lead to permanent scars if too many companies go bankrupt and labor markets start to exhibit hysteresis (when long-term unemployment renders workers unemployable due to skills erosion). Another question is what will be the degree of deleveraging of businesses (small and large) and heavily indebted households, and whether this effect will be fully offset by the release of pent-up demand as consumers spend less on savings at home. time of the pandemic.
Another area of concern is socio-political: will rising inequalities become an even more important source of instability and decline in aggregate demand? Much will depend on the scale, scope and inclusiveness of policies to support the incomes and expenses of those left behind. Likewise, it remains to be seen whether the macro-policy stimulus (monetary, credit and budgetary) implemented so far will be sufficient, insufficient or really excessive, leading in some cases to a sharp rise in inflation expectations and inflation.
Given all of these uncertainties, the recovery currently looks stronger in the United States, China, and emerging Asian markets that are part of China’s global supply chains. In the United States, a drop in new infections, high vaccination rates, increased consumer and business confidence, and the sizable effects of fiscal and monetary expansion will lead to a robust recovery this year.
The main risk here is overheating. The recent rise in inflation may prove to be more persistent than the US Federal Reserve predicted, and today’s foamy financial markets may correct, weakening confidence.
In China and the economies closely related to it, the recovery owes much of its strength to the authorities’ success in controlling the virus early and the effects of macro-stimulation, all of which have enabled a rapid reopening and recovery of the virus. business confidence. But high levels of indebtedness and leverage in parts of China’s private and public sectors will pose risks as China tries to maintain stronger growth while curbing excess credit. More broadly, the prospect of growing rivalry – a colder war – between the United States and China will threaten Chinese and global growth, especially if it leads to more complete economic decoupling and renewed protectionism.
Europe is worse off, having suffered a double-dip recession in the last quarter of 2020 and the first quarter of 2021, due to a new wave of infections and lockdowns. Its recovery will remain weak in the second quarter, but growth could accelerate in the second half if vaccination rates continue to rise and macroeconomic policy remains accommodative. But phasing out leave programs and various credit guarantees too soon could lead to more permanent scarring and hysteresis.
In addition, without long-needed structural reforms, parts of the euro area will continue to experience low potential growth and high public debt ratios. As long as the European Central Bank continues to buy assets, sovereign spreads (i.e. the difference between German and Italian bond yields) may remain low. But monetary support will eventually have to be phased out and deficits will have to be reduced. And the specter of populist Eurosceptic parties seeking to exploit the crisis is constantly looming.
Japan also experienced a much slower restart. After a lockdown to control a new wave of infections, it experienced negative growth in the first quarter of this year and is now struggling to keep the Summer Olympics in Tokyo on track. Japan, too, is in desperate need of structural reforms to increase potential growth and allow for eventual fiscal consolidation. And its massive public debt could end up becoming unsustainable, despite the Bank of Japan’s persistent monetization.
Finally, the outlook is more fragile for many emerging and developing economies, where high population density, weaker health systems and lower vaccination rates will continue to allow the virus to spread. In many of these countries business and consumer confidence is depressed; tourism income and remittances have dried up; debt ratios are already high and perhaps unsustainable; and financial conditions are tight, due to higher borrowing costs and weaker currencies. In addition, there is only limited space for policy loosening and in some cases the credibility of policies could be undermined by populist politics.
Nouriel Roubini is professor of economics at the Stern School of Business at New York University. He has worked for the IMF, the US Federal Reserve and the World Bank.
© Project Syndicate