Global economy
The year 2020 witnessed the global economy contracting by 3.5%, the worst peacetime performance after the great depression. IMF has recently forecasted a “strong” (5.5%) revival in 2021 and “normalization” (4.2%) in 2022. Which essentially means the global economy would be growing at less than 1% CAGR over two years (2020-2021). This rather long pause in global growth means serious setback to the development goals of poverty elimination, climate change and inclusion. The fact that this “pause” in growth could only be achieved with trillions of dollars in fiscal and monetary stimulus, highlights that the legacy of global financial crisis (GFC) and subsequent quantitative easing might have materially weakened the growth drivers of the global economy in past few decades, e.g., development of human capital, globalization of trade and commerce, poverty alleviation, productivity growth, etc.
The new global survey of 295 economists from 79 countries, commissioned by Oxfam, reveals that 87 per cent of respondents, including Jeffrey Sachs, Jayati Ghosh and Gabriel Zucman, expect an "increase" or a "major increase" in income inequality in their country as a result of the pandemic. (see here)
In Indian context, IMF is now forecasting a contraction of 8.5% for FY21 and a growth of 11.5% for FY22. This implies, like global economy, Indian economy would also be growing at less than 1% CAGR over two years (2020-2021). This “pause” in growth over two years comes at the expense significant fiscal leverage (rs30trn stimulus), and massive liquidity infusion.
The latest Oxfam report highlights that the pandemic induced lockdown may resulted in massive rise in socio-economic inequality. While the formal sector workers mostly escaped unscathed or with small salary cuts; the job losses in informal sector were massive. “Out of a total 122million people who lost their jobs, 75%, which accounts for 92million jobs, were lost in the informal sector. The disruption in school schedules may result in massive rise in school dropout young population, further widening the socio-economic abyss.
As per Oxfam, "Only 4% of rural households had a computer and less than 15% rural households had an internet connection. Only 6% of the poorest 20% has access to non-shared sources of improved sanitation, compared to 93.4% of the top 20%.
Global Trade
IMF sees global trade rising by 8.1% in 2021, after an estimated 9.6% decline in 2020. The rebound is much weaker, as compared to post global financial crisis (GFC) rebound in 2010-2011. The recovery would look even insipid if we factor in poor trade growth during 8yrs preceding the pandemic (2012-2019).
In a recent update, ING Bank highlighted—
“With freight rates signaling capacity constraints in world trade, it’s likely that trade volumes won’t be able to rise much further – even to serve catch-up demand – when countries emerge from the second wave of lockdowns. Capacity may only come back on stream slowly as shipping liners wait until the global recovery is more firmly underway before bringing back inactive ships. Even then, containers being unavailable where they are needed will drag on volumes for some time. Capacity constraints mean that trade volumes won’t be able to rise much further even when countries come out of lockdowns
In the near term, limits to global trade growth are likely to be a modest headwind for GDP compared to the far more disruptive domestic lockdowns. More important will be higher freight rates and import prices building inflationary pressures over the course of the year.”
The present state of global economy and trade is therefore far from Blue Sky; even though the dark clouds may have dispersed for now. A bullish bet on sustainable global recovery to beyond “Pre Covid sub optimal levels” might be premature as of this morning, in my view.
A sharp rise in inflation, as presently anticipated by a section of global economists and investors, forcing monetary tightening; could however lead even the recovery to Pre Covid level, halting in its strides.
