Global growth to hit 5.3% in 2021, but uncertainty remains

Economic mobility - Fair-Progress-Picture.

Geneva, 15 Sep (Kanaga Raja) – Global growth is expected to hit 5.3 per cent this year, following a fall of 3.5 per cent in 2020, the UN Conference on Trade and Development (UNCTAD) has said.

In its Trade and Development Report (TDR) 2021, released on 15 September, UNCTAD said that this represents the fastest growth in almost half a century, with some countries restoring (or even surpassing) their output level of 2019 by the end of 2021.

However, UNCTAD pointed out that the global picture beyond 2021 remains shrouded in uncertainty. It said next year will see a deceleration in global growth but for how long and by how much will depend on policy decisions, particularly in the leading economies.

“Even assuming no further shocks, a return to the pre-pandemic income trend could, under reasonable assumptions, still take until 2030 – a trend that, it should be remembered, itself reflected the weakest growth rate since the end of the Second World War.”

The recent decision by the IMF Executive Board to allow a $650 billion issue of special drawing rights (SDRs), the largest in its history, offers a glimmer of hope but the international community has still to acknowledge the scale of the challenge facing many developing countries, said UNCTAD.

Whether or not the world builds back better from the pandemic will not, however, depend on the actions of a single country but on concerted efforts to re-balance the global economy. Hurdling the barriers to greater prosperity will depend on improved coordination of the policy choices made in leading economies over the coming years as they push to maintain the momentum of recovery and build resilience against future shocks.

UNCTAD said the reluctance of other advanced economies to follow the lead of the United States on the vaccine waiver is a worrying sign and a costly one; on one recent estimate, the cumulative cost (in terms of lost income) of delayed vaccination will, by 2025, amount to $2.3 trillion with the developing world shouldering the bulk of that cost.

GROWTH TRENDS AND PROSPECTS

According to the UNCTAD report, the global economy is set for a strong recovery in 2021, albeit with a good deal of uncertainty clouding the details at the regional and country levels over the second half of the year. As in the past, policy makers continue to pay undue attention to financial markets, whose horizon rarely stretches beyond quarterly macroeconomic and earnings data and whose sentiment appears jittery even in the face of small changes in leading indicators.

After a 3.5 per cent fall in 2020, UNCTAD said it expects world output to grow 5.3 per cent this year, partially recovering the ground lost in 2020.

However, considering the average annual global growth rate of 3 per cent in 2017-2019, world income will still be 3.7 per cent below where its pre-COVID-19 pandemic trend would have put it by 2022. Based on the nominal gross domestic product (GDP) estimates for this year, the expected shortfall represents a cumulative income loss of about USD 10 trillion in 2020-21.

Looking ahead, UNCTAD said it expects world output to grow 3.6 per cent in 2022.

Despite this two-year boost to the global economy, it will take several years for world income to recover the loss from the Covid-19 shock. Assuming, for example, an annual growth rate of 3.5 per cent from 2023 onwards (an optimistic assumption), global output will only revert to its 2016-2019 trend by 2030.

Since the pre-Covid-19 trend was unsatisfactory – average annual global growth in the decade after the 2009-10 financial crisis was the slowest since the end of the Second World War – this is a prospect that should raise alarm in policy circles, said the TDR.

Such an environment would not get the 2030 Agenda for Sustainable Development back on track and would hinder efforts to mobilize the additional resources needed to address the climate challenge. Moreover, if unanticipated shocks – whether of an epidemiological, financial or climatic nature – hit again, or policy efforts to sustain the current recovery begin to falter, the negative economic impact of Covid-19 would last longer.

This is an outcome that cannot be dismissed lightly, given what happened in the aftermath of the global financial crisis (GFC) and the current, broken state of international policy coordination, said UNCTAD.

The recovery has to date been unbalanced reflecting fault lines that were present before the pandemic. There have been substantial differences in GDP growth between regions and countries, with many developing countries falling behind; a sectoral divide between the recovery in services and goods production but also within the service sector between booming financial and digital services and the depressed hospitality and entertainment sectors; and a sharp divergence in income (and wealth) gains amongst social groups.

So far, the world economy appears to be building back separately, said UNCTAD.

In most regions, but particularly in the developing world, the damage from the Covid-19 crisis has been much greater than after the GFC, notably in Africa and South Asia.

Geographically, as of mid-2021, post-lockdown growth accelerations were concentrated mostly in North America, with close regional trade linkages reinforcing a strong fiscal stimulus and monetary accommodation in the United States, and in East Asia, where an infrastructure investment drive (through state-owned enterprises) in China has helped growth ripple across the region.

In this context, the report highlighted the differences in the speed of recovery by examining expected cumulative GDP growth between 2019 and 2021 in countries in the Group of Twenty (G20).

The standout performances, on this measure, have taken place in the two G20 countries that avoided a recession in 2020: China and Turkey.

In the case of China, an early lockdown policy, combined with massive testing and related public health measures, followed by a rapid vaccine roll-out from the middle of 2021, helped to contain the spread of the virus and allow for a relatively swift rebound of activity.

On the demand side, the maintenance of domestic investment projects and the post-lockdown surge in the foreign demand for industrial goods have helped maintain the pace of recovery, although concerns remain about the financial position of some highly indebted state-owned enterprises and the danger of new virus variants.

Turkey did see a sharp contraction in the second quarter of 2020, but this was followed by strong growth in the third quarter, largely thanks to accommodative monetary policy and the ensuing credit boom.

Despite a resurgence in infections during the second quarter of 2021, growth has been driven by the country’s industrial sector and budgetary support to businesses from the government. Rising prices and pressures on the lira are, however, clouding growth prospects for the second half of 2021, raising concerns about its sustainability.

India suffered a contraction of 7 per cent in 2020 and is expected to grow 7.2 per cent in 2021, while Indonesia had a milder contraction of 2.1 per cent in 2020 and is expected to grow 3.6 per cent in 2021, which is fairly weak given its growth rates in recent years.

UNCTAD said in the Americas, the fast recovery in the United States is expected to raise GDP to 2 per cent above its pre-Covid-19 level. This should help Canada to approach its 2019 level. In contrast, despite the pull of demand of the United States, Mexico will fall short of its pre-Covid-19 income in 2021 because of its relatively deeper recession and small domestic fiscal relief in 2020.

Argentina is in a similar situation due to tight financial constraints, resulting in large part from its heavy pre- pandemic external borrowing. Brazil should grow slightly above its 2019 GDP this year, thanks to the positive effect of higher commodity exports and a relatively larger and well-targeted fiscal stimulus than in Mexico and Argentina.

Europe is experiencing a disappointing growth recovery, despite a very accommodative monetary policy stance adopted by the European Central Bank (ECB). The policies agreed by euro-zone governments have been too little and too late. In numbers, despite the recovery in its net exports, the German GDP in 2021 is expected to be almost 3 per cent below its 2019 level.

The recovery tends to be even weaker in France, Italy and the United Kingdom, where Brexit disruptions have counteracted the effects of fiscal expansion and rapid vaccine roll-out. Europe’s historical coordination problem will be felt hardest in Spain and Italy, where the 2021 GDP is expected to be 5.6 and 3.8 per cent below their pre-pandemic level, respectively.

The initial economic impact of Covid-19 were the deep recession and lower inflation. However, since the second half of 2020, due to a combination of the quick recovery of global aggregate demand and some adverse supply shocks, prices have been accelerating in the world’s advanced economies, said UNCTAD.

Globally, the rise in commodity prices has pushed the cost of basic inputs higher. Since mid-2020, metal and oil prices have been on the rise and, in May of 2021, annual food inflation reached almost 40 per cent, its highest value in ten years according to the FAO food price index.

The increase in food prices has contributed to the rise in the world hunger index since the pandemic, with the greatest harm in developing countries. The pandemic has caused bottlenecks in global value chains, especially in sectors that depend heavily on semiconductors, which, in turn, has raised the price of capital goods and durable consumer goods around the world, with a stronger impact in advanced economies.

In developed countries the aggressive spread of the virus prompted a set of equally aggressive measures to counter its paralyzing consequences. In contrast, most of the developing world faced the same financial, structural and political constraints that had hampered their ability to intervene in the economy over previous decades, resulting – in most cases – in an exacerbation of domestic and international inequities.

However, even in countries with fiscal space, there is a risk of premature withdrawal of fiscal (as well as monetary) stimulus. While a consensus has emerged about the need for significant public sector intervention, there is no clear agreement yet about its composition or duration. If, as in previous recessions, state intervention is confined to absorbing the immediate shock, it is likely that the deep sources of instability will not be addressed.

If that becomes the case, the much-heralded post-pandemic paradigm shift in policymaking would prove to be more a matter of rhetoric than reality, said the TDR.

The lesson from previous crises and recovery experiences strongly suggests that the political space created by the pandemic should be used to re-assess the role of fiscal policy in the global economy, as well as the practices which have widened inequalities.

At the onset of the pandemic, most governments were quick to announce large spending packages, as recommended by international organizations.

Yet, in the absence of an internationally coordinated effort, the global stimulus was not as effective as it could have been. In many cases, actual measures were insufficient and considerably smaller than initial announcements, said UNCTAD.

According to IMF data, 41 developing countries actually reduced their total expenditures in 2020, 33 of which nonetheless saw their public debt-to-GDP ratios increase. A similar divergence is evident also within the group of developed economies. Developed countries were able to increase their total primary outlays, relative to the past, significantly more than developing countries with similar or lower public debt ratios in 2019.

Agreement on practical solutions to reduce fiscal constraints has proven elusive. Actions taken over the past months to lessen foreign exchange constraints on developing economies have been narrow in scope and temporary in nature: the G20 granted a suspension of the debt servicing of bilateral loans to a small number of countries, and the IMF and the World Bank offered emergency credit.

No significant action was taken regarding private financial claims, or to address the urgent need of direct assistance (in cash, services or equipment, let alone waivers on patents) to combat the health crisis.

Thus, said UNCTAD, while massive amounts of public money were used by the major Central Banks to keep private credit institutions afloat, governments in developing countries continued to experience severe constraints both on servicing their external debt and supporting production, exports, income and employment throughout the pandemic.

The overriding concern continues to be avoiding domestic actions that could trigger financial turmoil or anticipating when the major Central Banks will decide to withdraw their massive liquidity injections or raise their interest rates. Moreover, fear of upsetting private creditors has prevented many eligible countries from taking advantage of the G20 Debt Service Suspension Initiative (DSSI): only 46 of 73 eligible countries have participated.

Hence, whilst the pandemic has brought back the shock-absorbing dimension of fiscal policy into the mainstream of counter-cyclical demand management, it is clear that additional steps are necessary to guarantee that all countries can employ even those minimal fiscal measures in line with their own domestic circumstances and to the benefit of global recovery and financial stability, said UNCTAD.

According to the TDR, since the beginning of the pandemic a consensus seems to have materialized in favour of maintaining fiscal and monetary support beyond the immediate recovery. However, the question remains whether fiscal policy will remain a counter-cyclical tool for macroeconomic emergencies, or if it merits a more structural role to promote development and sustained job creation, especially in developing economies where leaving structural change to market forces has, invariably, ended in disappointment.

A fiscal policy that withdraws stimulus at the earliest possible point in the cycle, even if extended to prevent possible damage to long-term growth from skill obsolescence or debt deflation, cannot play its necessary structural role. The current approach, despite giving fiscal policy a relatively longer span of action, continues to imply that governments cannot actively prevent or preemptively reduce the size of downturns, which simply occur from time to time despite demand-management policy.

The function of fiscal policy then should be solely counter-cyclical, mostly prompted in the downward part of the cycle. More ambitiously, measures such as guaranteed minimum income schemes and progressive taxation can provide a floor to the fall in disposable income.

Even though spiraling sovereign debt crises were avoided in 2020, developing countries’ external debt sustainability further deteriorated, revealing growing pressures on external solvency in addition to immediate international liquidity constraints. Growing optimism about financial resilience in developing countries is premature, said UNCTAD.

The external debt stocks of developing countries reached $11.3 trillion in 2020, 4.6 per cent above the figure for 2019 and 2.5 times that for 2009 ($4.5 trillion). The slower growth of these stocks in 2020 compared to average annual growth rates between 2009 and 2020 (7.7 per cent) reflects a combination of more limited access to international financial markets, increased reliance on concessional financing sources and the temporary impact of partial debt service payment suspensions through the G20 DSSI for low-income economies.

Rising commodity prices from around the 2020 Q2 helped to alleviate balance of payment constraints in developing country commodity-exporters, but also were a contributory factor to inflationary pressures and to rising food insecurity in commodity-importing developing countries, while the recovery of remittances has been very gradual and tourism revenues have remained subdued. But these rebounds, as well as the gradual return of global investors to some developing countries, have been insufficient to compensate the impact of their drastic collapse in the first half of the year on the ability of developing countries to service their external debt obligations.

At the same time, substantive debt relief has not materialized. The only lasting multilateral relief is being provided by the IMF through the cancellation of debt service obligations in 29 countries due to it, amounting to $727 million between April 2020 and October 2021.

UNCTAD suggested that more concerted and bolder international action is urgently needed to reduce the debt overhang in developing countries through substantive debt relief and outright cancellation.

It said the alternative to addressing structural solvency constraints and putting developing countries’ external debt burdens on a more sustainable, long-term footing is another lost decade for development marked by developing countries struggling under unsustainable debt burdens rather than investing in more promising approaches after the pandemic and achieving the 2030 Agenda.

TOWARDS A NEW ECONOMIC SETTLEMENT

According to UNCTAD, the pandemic has seen governments in the North abandon parts of the 40-year long neo-liberal policy dogma to protect lives and livelihoods amidst the Covid-19 pandemic and an unprecedented economic contraction.

But without a more thorough revision of multilateral rules and norms, inequality will persist, the world will squander financial resources and fail to meet the challenge of the climate crisis, even as growth returns, it said.

The world needs more effective multilateral coordination, without which recovery efforts in advanced countries will damage development prospects in the South and amplify existing inequalities, it added.

Through 2025 developing countries will be $12 trillion poorer because of the pandemic; the failure to roll out vaccines could knock another $1.5 trillion from incomes across the South, said UNCTAD.

According to the TDR, speculating on the future direction of economic policy after Covid-19 is complicated by the extemporaneous nature of the response to the pandemic in many countries, as well as the high degree of uncertainty at the current juncture.

Moreover, the global financial crisis stands as a warning that directions taken under the pressures of a particularly stressful moment may not persist once those pressures ease.

Under the circumstances, it is perhaps not surprising that a good deal of attention has been given to the actions and pronouncements of the new Administration in the United States with some already anticipating “the dawn of a new economic era” and others a “new variant” of capitalism.

According to the TDR, a nascent break with past policy prescriptions – and the emergence of a new consensus – is detectable in the multilateral financial institutions, with their endorsement of big spending programmes, taxing the rich and curtailing the market power of big business, their acknowledgment that capital flows need to be more effectively managed including, under some circumstances, through capital controls and their endorsement of a strongly interventionist policy agenda to backstop a green investment push.

Another bastion of neo-liberal policy thinking, the OECD, has also encouraged its members to spend big and protect jobs and has recognized that socially inclusive and cohesive outcomes will require “a fundamental reappraisal of the relationship between state, society, the economy and the environment”.

Others, however, have warned that the death of neo-liberalism is exaggerated, stressing its adaptability to changing circumstances and pointing to new strains that will extend the power and influence of under-regulated financial markets. Some have also pointed to the policy continuities attached to the lending programmes of multilateral financial institutions during the pandemic and by the call from G7 trade ministers for deeper liberalization and a further narrowing of policy space.

If there is to be a genuine break with the past 40 years, governments must not only confront the vested interests that have built up considerable economic and political capital from the skewed distribution patterns under hyperglobalization but also acknowledge the deep structural constraints and vulnerabilities that have continued to obstruct sustainable growth and development prospects, said UNCTAD.

Doing so will have to allow for greater flexibilities in the setting of policy priorities by developing countries and ensure sufficient policy space for the measures needed to manage ambitious goals and resulting trade-offs, along with differential treatment in support of their efforts to mobilize the resources needed to pursue the 2030 Agenda.

That said, the Covid-19 crisis has already opened the door to taboo breaking approaches to policy making that could help countries, at all levels of development, navigate towards a better future, said UNCTAD.

According to the TDR, these would include a recognition that:

1. Governments are not households. The Covid-19 crisis has not only seen advanced country governments spend on an unprecedented scale it has forced them to abandon the idea that budgets should always be balanced and instead to embrace, whether implicitly or explicitly, a functional approach to government finance which allows governments to spend first and tax later, and under certain conditions to spend solely with state-issued money. Recognizing this opens up a discussion on the determinants of fiscal space, particularly in developing countries, where external factors have a much greater influence on the spending capacity of governments and where reforms to the multilateral financial institutions, as well to the domestic tax system, can help provide greater room for both counter-cyclical and social expenditures.

2. Revisiting Central Bank independence. Central banks have, since the last crisis, moved away from a singular focus on inflation targeting into economic fire-fighting through their balance sheet operations. This approach has continued in the current crisis including, in some cases, direct lending to the private sector. Accepting that Central Banks are the lynchpin of a credit making machine, necessarily extends their regulatory authority, including over the shadow banking system, taming boom-bust credit cycles and more broadly extends their risk horizon to include wider threats to financial stability, such as from climate change and rising inequality. Given such wider responsibilities, greater democratic oversight is appropriate.

3. Resilience is a public good. The idea that “no one is safe until everyone is safe” clearly extends to challenges beyond the immediate health crisis and while some elites appear desperate to find ways to isolate themselves from economic, health and environmental shocks, Covid-19 has reinforced the idea that resilience is a public good, in the sense that it is both non-excludable and non-rivalrous, and one with global dimensions. Countries need universal systems of basic services and social protection, but this imperative also raises specific challenges for developing countries over how to adapt the goals of a developmental state to the challenges, including financial challenges, posed by protecting citizens against shocks. In this respect, funding world-wide resilience will require new and ambitious thinking on the mobilization and dispersion of financial resources.

4. Finance is too important to be left to markets. Wall Street, and its counterparts elsewhere, has not been good at providing long-term, affordable finance even as its indulgence of speculative excess has undermined resilience at country and community levels; rates of capital formation have been too low in many countries and at all levels of development. Equally, the willingness to allow parts of the financial system to operate in the shadows, beyond regulatory oversight, has proved damaging, along with the discredited idea that they are disposed to regulate themselves. A financial system that accords a more significant role to public banks, breaks up and guards against the emergence of mega-banks, and exercises stronger regulatory oversight is less likely to generate speculative excesses and more likely to deliver a healthier investment climate.

5. Minimizing wages is bad for business. The idea, grounded in micro-economic logic, that wages are no more than a cost of production has underpinned the drive to make labour markets as flexible as possible. But not only are wages a critical source of demand, their growth can stimulate productivity. Moreover, decent wages are a key component of a strong social contract. Consequently, healthy labour markets require that wages are embedded in robust arrangements of voice and representation and supported through minimum wage and related labour legislation that provides appropriate protection against abusive practices.

6. Diversification matters. No country has made the difficult journey from rural underdevelopment to post- industrial prosperity without employing targeted and selective government policies that seek to shift the production structure towards new sources of growth. The stalled industrial transition in much of the developing world, or worse still “premature de-industrialization”, has reinforced their peripheral position in the international division of labour, left them more vulnerable to external shocks and perpetuated high levels of informality. Industrial policies are even more urgent where meeting the climate and digital challenges imply structural and technological leaps and a just transition requires the effective management of stranded activities that ensures new jobs are created in the right locations.

7. A caring society is a more stable society. The question of care work is becoming an integral part of any policy agenda for recovering better including transforming paid care work into decent work with the wage levels, benefits and security typically associated with industrial jobs in the core sector of the labour market. But more generally, the design of proactive transformational social policy must go beyond offering simply a residual category of safety nets or floors designed to stop those left behind from falling further.

- Third World Network