NEW YORK: 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 between 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.
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STOP-AND-GO EPIDEMICS AND DEEP SCARS
While the coronavirus is still rampant in many countries, a key question is whether the emergence of new virulent strains will trigger repeated stop-and-go cycles, as we have seen in some cases where economies have reopened. too early.
Of particular concern is that more vaccine-resistant variants emerge, increasing the urgency of vaccination efforts that have so far been too slow in many areas.
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 show hysteresis (when long-term unemployment renders workers unemployable due to skills erosion).
Another question is to what extent there will be deleveraging among 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 their savings for 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 spending of those who remain.
Likewise, it remains to be seen whether the macro-policy stimulus measures (monetary, credit and fiscal) implemented so far will be sufficient, insufficient or really excessive, leading to a sharp rise in inflation and in expectations. inflation in some cases.
STRONGER RECOVERIES IN THE AMERICAN, CHINA AND ASIAN MARKETS
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 far-reaching effects of fiscal and monetary expansion will lead to a strong recovery this year.
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The main risk here is overheating. The recent rise in inflation may turn out 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 containing the virus early, and to the effects of macro-stimulation, all of which have enabled a reopening and recovery. fast food business. trust.
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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 escalating 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.
WEAK RECOVERY IN EUROPE
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 throughout 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 plans and various credit guarantees too soon could cause more permanent scarring and hysteresis.
Moreover, without the long-standing necessary 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 Eurosceptic populist parties seeking to exploit the crisis will constantly loom.
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SLOWER RECOVERY IN JAPAN
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 its potential growth and ultimately achieve fiscal consolidation.
And its massive public debt could eventually become unsustainable, despite persistent monetization by the Bank of Japan.
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FRAGILE PROSPECTS FOR DEVELOPING ECONOMIES
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 morale is depressed; tourism and remittance income dried up; debt ratios are already high and perhaps unsustainable; and financial conditions are tight, owing 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 policies.
Some of the most struggling economies to watch include India, Russia, Turkey, Brazil, South Africa, many parts of sub-Saharan Africa and the more fragile and oil-importing regions of the Middle East.
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Many countries are in a depression, not a recession. More than 200 million people are at risk of falling back into extreme poverty.
In addition to these inequalities, countries most vulnerable to hunger and disease also tend to face the greatest threat from climate change and will therefore remain potential sources of instability.
As global confidence recovers, some financial markets are irrationally exuberant, and there are a lot of underlying risks and uncertainties.
The COVID-19 crisis is likely to lead to increased inequalities within and between countries. The more vulnerable cohorts are left behind, the greater the risk of social, political and geopolitical instability in the future.
(Mental health groups have seen an increase in the number of calls since the COVID-19 hit. Who are the people who tirelessly serve these helplines? Read more at Heart of the Matter.)
Nouriel Roubini is Chairman of Roubini Macro Associates and host of the program NourielToday.com.