Global economic recovery is losing steam after 2021 rebound

Economic mobility - Fair-Progress-Picture

Geneva, 17 Jan (Kanaga Raja) –  The global economic recovery hinges on a delicate balance amid new waves of COVID-19 infections, persistent labour market challenges, lingering supply-chain constraints as well as rising inflationary pressures, according to the United Nations.

In its World Economic Situation and Prospects 2022, the UN said that after a global contraction of 3.4 per cent in 2020 and following an expansion of 5.5 per cent in 2021, the highest rate of growth in more than four decades, the world economy is projected to grow by only 4 per cent in 2022 and 3.5 per cent in 2023.

Global recovery in output in 2021 was largely driven by robust consumer spending and some uptake in investment, it said.

Trade in goods bounced back, surpassing the pre-pandemic level. But growth momentum slowed considerably by the end of 2021 including in big economies like China, the European Union and the United States of America, as the effects of fiscal and monetary stimuli dissipated and major supply-chain disruptions emerged.

Growth impetus generally has been weaker in most developing countries and economies in transition, said the UN.

While higher commodity prices have helped commodity-exporting countries at large, rising food and energy prices have triggered rapid inflation, particularly in the Commonwealth of Independent States (CIS) and Latin America and the Caribbean.

Recovery has been especially slow in tourism-dependent economies, notably in the small island developing States, the UN report said.

“Without a coordinated and sustained global approach to contain COVID-19 that includes universal access to vaccines, the pandemic will continue to pose the greatest risk to an inclusive and sustainable recovery of the world economy,” said Liu Zhenmin, Under-Secretary-General of the United Nations Department of Economic and Social Affairs.

According to the UN report, the global economy grew by 5.5 per cent in 2021 – the highest growth rate since 1976 – after contracting by 3.4 per cent in 2020. World gross product in 2021 was 1.9 per cent higher than in 2019 but still 3.3 per cent below the level projected before COVID-19.

The recovery of output in 2021 largely represented the resumption of household spending and investment, which had come to a screeching halt in 2020 amid lockdown measures worldwide. The world economy is projected to grow by 4 per cent in 2022 and 3.5 per cent in 2023, converging towards its long-term trend of around 3 per cent per year between 2010 and 2019.

“But these aggregate figures mask strong divergence in growth prospects as a significant number of developing countries are struggling to recover from the pandemic,” said the report.

The growth momentum of the first three quarters of 2021 – especially in the United States, the European Union and China – slowed as the stimulating effects of fiscal and monetary measures began to dissipate and supply-side challenges emerged at the end of the year.

The easing of supply-side constraints and the taming of inflationary pressures will remain critical to keep the global economy on the projected near-term growth trajectory, said the UN.

However, growth prospects face significant risks and uncertainties, including new mutations of COVID-19, such as the Omicron variant that began spreading in late November 2021, it added.

Growth forecasts presented remain susceptible to potential lockdowns and other restrictive measures worldwide. In addition, as major central banks start to withdraw their extraordinary policy support, global financial conditions may tighten considerably, weighing on global recovery, the UN cautioned.

According to current forecasts, the gross domestic product (GDP) of 16 hard-hit developing countries – including many small island developing States – will be more than 5 per cent smaller in 2022 than in 2019, it said.

Well over a fifth of developing countries, 28 in total, will have to wait until 2022 to see GDP return to pre-crisis levels. Twenty or nearly a fifth of developing countries will still be below their 2019 output levels by the end of 2023.

On the other hand, by 2023, more than half of the world’s economies will exceed their 2019 output levels by at least 7 per cent.

In East and South Asia, average GDP in 2023 is projected to be 18.4 per cent above its 2019 level, compared to only 3.4 per cent in Latin America and the Caribbean.

“But this does not mean that countries will regain lost output. In fact, despite the robust recovery, East and South Asia’s GDP in 2023 is projected to be 1.7 per cent below the level forecast prior to the pandemic.”

The UN said that Africa and Latin America and the Caribbean are expected to see losses of 5.5 and 4.2 per cent, respectively, compared to pre-pandemic projections.

“A full economic recovery measured in terms of GDP per capita will remain elusive for developing countries in the near term,” it added.

In 2022, the per capita output of developing countries and economies in transition is projected to be more than 2 per cent below the level expected prior to the pandemic. The GDP per capita gap between what they will achieve and what they could have achieved without the pandemic will persist well into 2023.

On the other hand, the GDP per capita of the developed economies is projected to almost fully recover by 2023 relative to pre-pandemic projections.

“The uneven pace of recovery between developed and developing countries will widen income inequality across countries and make it all but impossible to reduce global inequality by 2030, as targeted in the global Sustainable Development Goals,” said the UN report.

Despite the roll-out of vaccines from early 2021, the COVID-19 pandemic is far from over. From 1 April through 1 December 2021, an average of 9,432 people died every day around the world, significantly higher than the 6,061 deaths per day recorded during the same period in 2020, it noted.

By early December 2021, COVID-19-related deaths since the start of the pandemic had reached 5.2 million. Yet the total number of deaths directly and indirectly attributable to the pandemic is much higher.

Excess deaths have been highest in some economies in transition and a number of Eastern European and Latin American countries.

Over 2021, the epicentre of the pandemic shifted multiple times. For much of the year, developing and transition countries saw a growing share of infections and deaths as they lagged in vaccination.

But in the fourth quarter of 2021, as colder temperatures in the Northern Hemisphere led to more indoor social activities, Europe and the United States began to experience new outbreaks, with severe cases mostly affecting the unvaccinated.

Countries in Europe with relatively lower vaccination rates have experienced stronger increases in cases. Moreover, the emergence in late November 2021 of the Omicron variant, which is likely to be more transmissible than earlier variants and with a better ability to evade vaccines, sounded new alarm bells across the world.

Governments from major developed countries, including in Europe, Japan and the United States, responded by introducing travel restrictions from Southern Africa where Omicron was first detected. A number of developing countries also swiftly imposed entry restrictions on travellers from Southern Africa.

New COVID-19 variants and the re-introduction of quarantine and mobility restrictions could significantly restrain economic activities, the UN cautioned.

It said although the actual impact is impossible to assess in advance, new variants could severely impair market confidence and derail economic recoveries.

The willingness to work in person could decline again, posing downside risks to an already slow recovery of labour markets and intensifying supply-chain disruptions. The long-awaited recovery of service industries, from hospitality to international travel and conferences, could also be further postponed.

“Efforts to push ahead with re-opening and attract tourists in tourism-dependent countries, particularly the small island developing States, could be easily reversed.”

Access to COVID-19 vaccines remains a challenge in many developing countries and transition economies, driven in many cases by fiscal constraints, said the report.

By the end of 2021, the number of doses per 100 people in the least developed countries stood at just 23.9, against 147.4 in the developed countries. In most developing countries, acute vaccine shortages – as opposed to vaccine hesitancy – continue to prevent higher vaccination coverage, leaving these countries highly vulnerable to renewed waves of infection.

Unsurprisingly, said the UN, the concentration of deaths due to COVID-19 shifted from developed to developing countries through much of 2021, yet a few major developed countries, such as the United States, still experienced among the highest numbers of deaths per 100,000 people.

Progress in vaccination was critical to resume economic activities and recover output in 2021. Countries with high vaccination rates managed to ease restrictions, allowing demand to surge and economic growth to come back more quickly.

On the other hand, low vaccination rates and recurring waves of infection in many developing countries demanded continued restrictions.

If they had achieved levels of vaccination similar to those in high-income countries, low-income countries could have raised output in 2021 by $38 billion or 8 per cent of their collective GDP, said the UN.

“Vaccination is clearly a necessary condition for reopening economies but not a sufficient condition for accelerating growth and recovery. Many other factors, including public and private investments to improve labour markets and create jobs, will also determine the size and pace of recovery.”

The report also said that global inflation largely remained restrained, often below central bank targets, in the past decade, despite massive increases in global liquidity after the 2008-2009 global financial crisis.

However, global headline inflation surged to an estimated 5.2 per cent in 2021, more than 2 percentage points above its trend rate in the past 10 years.

The report said the rise was particularly pronounced in the United States and the euro area, and in Latin America and the Caribbean.

Medium-term market-implied inflation expectations over a five-year period in the United States and the euro area increased slightly throughout 2021 but remained moderate, below 2.5 and 1.8 per cent, respectively.

“This would suggest that inflation expectations remain well anchored and should allow inflation to return to its pre- pandemic rates if labour shortages and supply-side bottlenecks dissipate and global food and energy prices stabilize in 2022.”

In 2022, some upward pressure on prices is expected to ease as central banks tighten monetary policy. However, the timing and sequencing of central bank responses to inflationary pressures will remain critical, said the UN.

The report said that if monetary policy stances are tightened too quickly, they will inevitably derail recovery.

On the other hand, if monetary tightening and normalization are delayed for too long, inflation expectations may become entrenched and self-fulfilling.

“Major central banks will need to coordinate and clearly communicate their responses to inflationary pressures to ensure financial market stability and support recovery.”

Under the baseline scenario, the global headline inflation rate is forecast to fall to 3.8 per cent in 2022 and 3.1 per cent in 2023, returning to its pre-pandemic trend, said the UN.

These forecasts are contingent on the dissipation of the supply-chain disruptions plaguing the global economy by the second half of 2022, it added.

“However, renewed restrictions due to new COVID-19 variants could translate into higher inflationary pressures.”

The report also said global employment has yet to fully recover from the unprecedented shock of the COVID-19 pandemic, despite the gradual lifting of lockdown restrictions, immense efforts to protect employment and support businesses, and the rebound in global output. While aggregate output in 2021 returned to pre-pandemic levels in most major economies, the recovery of employment lagged and even stalled in many parts of the world.

According to the International Labour Organization, by the third quarter of 2021, total working hours remained 4.7 per cent below pre-pandemic levels, equivalent to the loss of 137 million full-time jobs.

The UN said the sluggish speed of job creation cannot compensate for earlier employment losses particularly in sectors hit hardest by the pandemic.

New waves of infection, for example, in Europe and the Commonwealth of Independent States (CIS), are forcing the re-introduction of partial lockdowns and slowing job recovery, especially in the services sector.

The UN said that labour market conditions in developed economies are expected to improve but a full employment recovery is projected only in 2023, adding that for low-income countries, this may be as far out as 2024.

In Africa, Latin America and the Caribbean, and Western Asia in particular, lasting slack in labour markets calls for continued fiscal support and active labour market policies. However, the outlook is marred by uncertainties associated with the pandemic and the effectiveness of policies to revitalize job creation.

The COVID-19 pandemic has significantly increased poverty and inequality globally, causing a substantial reversal in progress towards sustainable development, said the UN report.

According to estimates by the United Nations Department of Economic and Social Affairs, progress in reducing extreme poverty has been set back by several years in most countries. Botswana, Kenya, Morocco and Samoa are among the countries that have lost up to a decade’s worth of poverty eradication efforts.

In contrast, developed countries were mostly able to support household incomes and even reduce the number of people in poverty through strong transfer and social protection programmes.

Even wider gaps in prosperity levels among world regions may be one of the lasting legacies of the crisis, said the UN.

An unprecedented 85 million more people entered extreme poverty in 2020 globally. The number is projected to remain well above pre-pandemic levels for the next several years, likely at record highs for the last decade, it said.

Only slight declines are expected in 2022, to about 876 million people. Fast-developing economies in East and South Asia as well as developed economies will likely see a reduction in poverty in the near term.

But it is anticipated to increase further in the world’s most vulnerable economies. In Africa, home to almost 70 per cent of the world’s extremely poor people, the absolute number of people in poverty is projected to rise through 2023.

The report said the COVID-19 pandemic is increasing inequalities between and within countries, amid disparities in unemployment rates and shares of labour income in developed and developing economies.

In the first two quarters of 2021, global labour income fell by 5.3 per cent. About 108 million workers are now extremely and moderately poor, a vast majority of them in developing countries.

Further, the pandemic has taken a harsher toll on those at the bottom of the income distribution. While average incomes of people in the bottom 40 per cent of the global income distribution were estimated to be 6.7 per cent lower in 2021 compared to 2019, those of people in the top 40 per cent were down only 2.8 per cent.

Divergent employment prospects between developed and developing countries will likely prevent major reductions in inequality across countries in the near term, said the UN.

World trade is expected to continue improving, fuelled by stronger demand as more countries reopen and restart productive activities, it noted.

The baseline scenario projects that global trade in goods and services will grow by 5.7 per cent in 2022 after an expansion of 11.0 per cent in 2021. However, risks to forecasts are still on the downside, it said.

“The pandemic remains the largest risk, particularly if more transmissible and deadly variants take hold and disrupt economic activities. Trade tensions, including unresolved ones between China and the United States, and between the European Union and the United Kingdom, could weigh on trade flows,” said the report.

CHANGING POLICY LANDSCAPE

The pandemic underscored the critical importance of fiscal policy for fighting a catastrophic crisis and supporting recovery, said the report.

Proactive fiscal policies or the lack thereof are playing decisive roles in how countries are managing the pandemic, mitigating its impacts and supporting recovery. Yet enormous fiscal asymmetries and financing gaps across countries are leading to profound differences in vaccination progress, financial support to firms and households, and economic recovery prospects, it added.

While developed countries have deployed large fiscal packages, developing countries, especially low-income countries, struggle with enormous fiscal challenges. Many are at risk of a sovereign debt crisis.

“This fiscal and financing divide is contributing to sharply divergent prospects for recovery and, at the same time, preventing effective containment of the pandemic and endangering economic recovery globally.”

In developed countries, massive fiscal stimulus packages have played a crucial role in containing the crisis and supporting ongoing recovery.

Loose monetary policy and expanded central bank balance sheets have allowed governments to borrow at low costs while reducing debt-servicing costs and roll-over risks.

The UN said that as the pandemic becomes more contained, priorities are shifting towards strengthening social protection and supporting long-term investments and productive capacities, such as in green energy and digital technologies, and enhanced research and development.

Examples include the Next Generation EU recovery plan in the European Union and the Infrastructure Investment and Jobs Act in the United States.

Policymakers need to resist the temptation of a premature fiscal consolidation as previous crises have proven such a step to be self-defeating, said the UN.

In developed countries, for example, fiscal consolidation after the global financial crisis had strong adverse effects on growth, resulting in even higher debt-to-GDP ratios.

Fiscal measures should continue to focus on essential pandemic-related expenditures, provide relief to the most vulnerable and support employment growth, with strategies broadly aligned towards supporting sustainable development, it said.

“The composition of fiscal outlays should take a strategic approach, such as by boosting public investments in physical and digital infrastructure that can crowd-in private investments, and through targeted fiscal incentives to promote decarbonization, renewable energy and innovation. Investments in human capital, education and public health care should remain priorities.”

Pressures for fiscal consolidation will intensify, especially in developing countries. Faster-than-expected monetary tightening in the United States would have severe implications for fiscal positions, especially as the recent rise in public debt has increased the vulnerability of fiscal policy to higher debt-servicing and roll-over costs, said the UN.

Countries will need to assess their fiscal rules and establish credible debt sustainability frameworks. In the medium- term, addressing debt sustainability will require a combination of fiscal restraint when appropriate, robust growth and moderate inflation, according to country-specific circumstances.

Countries with unsustainable external debt need fast and coordinated international support for debt relief, it added.

Many developing countries lack the fiscal space to effectively address the shock of the pandemic much less invest in sustainable development. Countries in Africa and Latin America entered the crisis with weak fiscal positions, which constrained their ability to pursue stimulus measures, roll out vaccination and expand social protection.

“Amid higher public debt, lower fiscal revenues and tightening global conditions, developing countries now face rising pressures for consolidation even as escalating debt-servicing costs are already diverting resources from public investments and the COVID-19 response.”

In addition, most developing countries lack fiscal capacities for dealing with mounting climate risks. Enlarging fiscal space, in the short term, will require further international support, including increased liquidity, debt relief and concessional financing.

In the medium term, greater fiscal space depends on strengthening tax revenues through progressive taxation and establishing a multilateral mechanism for debt restructuring, said the UN.

The fiscal and debt situation is extremely difficult in low-income developing countries. Nearly half are in debt distress or at risk of it. Elevated external debt burdens, additional borrowing during the pandemic and increasing debt-servicing costs have pushed a rising number of these countries to the brink of a debt crisis.

Global monetary policy responses to the COVID-19 crisis were extraordinary around the world. Central banks cut short-term interest rates, lowered reserve bank requirements, established new lending facilities, used forward guidance and changed their monetary policy frameworks, the report noted.

Major central banks such as the Federal Reserve, the European Central Bank and the Bank of Japan and some central banks in developing countries engaged in asset purchase programmes.

The Federal Reserve also temporarily expanded the number of countries that were offered swap lines from 5 to 14, including 4 developing countries. Such measures helped stabilize financial markets, reduce uncertainty and support the recovery.

The UN said as economic activity gathers pace and inflationary pressures gain momentum in the United States and many developing countries, exceptionally accommodative monetary policy stances are gradually shifting.

A few major central banks have announced plans for or started gradual normalization. The Federal Reserve, for example, initiated the tapering of its asset purchase programme by the end of November 2021 while the Bank of Canada scaled back its programme even earlier.

The shift in monetary policy support is a major challenge for the world economy amid a still raging pandemic, elevated levels of sovereign and private sector debt and record-high stock market valuations in developed countries.

The challenge that monetary policymakers face is exacerbated by the difficulty in assessing trade-offs between growth, employment and inflation, given the significant and simultaneous impacts of the crisis on labour markets, global supply chains and potential output, said the report.

In addition, the trajectory of inflation is surrounded by major uncertainties associated with the pandemic, the rapid spending of accumulated savings and changes in consumption patterns. Supply-chain problems seem to be intensifying inflationary pressures as supply has not kept up with the release of pent-up demand in many sectors.

In particular, the Federal Reserve faces the challenge of scaling down its asset purchase programme. It must ensure appropriate timing and pacing to maintain global financial stability and prevent premature fiscal consolidation.

The recent rise in inflation has raised serious concerns in the United States that this could become a longer-term phenomenon.

If that proves to be the case, faster-than-expected monetary tightening, with the Federal Reserve raising interest rates several times throughout 2022, could derail recovery at a time when the economy is still operating with 6 million fewer people in the labour market, said the report.

“It could also trigger global financial turmoil, including large corrections in asset prices. For many developing countries, a sudden rise in interest rates could trigger capital outflows and worsen their growth outlook and debt situation, especially those with elevated foreign-denominated external debt.”

In developing countries, monetary policy normalization needs to proceed with caution. Where economic activity is on a relatively robust trajectory and vaccination rates are elevated, central banks may act to tame rising inflationary pressures, said the report.

“Yet overly aggressive tightening could undermine the recovery of employment. Developing countries should also prepare for a faster-than-expected monetary adjustment in the United States, for example, by limiting maturity mismatches in their balance sheets.”

Foreign exchange interventions and temporary capital controls can help strengthen the capacity of monetary policy to respond to country-specific inflation and growth dynamics, said the UN.

- Third World Network