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Global economy risks ‘Dangerously Diverging’ as growth booms in COVID times

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The world economy is on course for its fastest growth in more than a half-century this year, yet differences and deficiencies could hold it back from attaining its pre-pandemic heights any time soon

The U.S. is leading the charge into this week’s semi-annual virtual meeting of the International Monetary Fund, pumping out trillions of dollars of budgetary stimulus and resuming its role as guardian of the global economy following President Joe Biden’s defeat of “America First” President Donald Trump.

Friday brought news of the biggest month for hiring since August.

China is doing its part too, building on its success in countering the coronavirus last year even as it starts to pull back on some of its economic aid. Yet unlike in the aftermath of the 2008 financial crisis, the recovery looks lopsided, in part because the rollout of vaccines and fiscal support differ across borders.

Among the laggards are most emerging markets and the euro area, where France and Italy have extended restrictions on activity to contain the virus.

Looking at this scenario, it could take years for swathes of the world to join the U.S. and China in fully recovering from the pandemic.

By 2024 world output will still be 3% lower than was projected before the pandemic, with countries reliant on tourism and services suffering the most, according to the IMF.

But while the U.S. is bouncing, France, Germany, Italy, the U.K., and Japan are contracting. In the emerging markets, Brazil, Russia, and India are all being clearly outpaced by China.

For the year as a whole, experts forecast growth of 6.9%, the quickest in records dating back to the 1960s. Behind the buoyant outlook: a shrinking virus threat, expanding U.S. stimulus, and trillions of dollars in pent-up savings.

Much will depend on how fast countries can inoculate their populations with the risk that the longer it takes the greater the chance the virus remains an international threat especially if new variants develop.

Former Federal Reserve official Nathan Sheets said he expects the U.S. to use this week’s virtual meetings of the IMF and World Bank to argue that now is not the time for countries to pull back on assisting their economies.

It’s an argument that will be mostly directed at Europe, particularly Germany, with its long history of fiscal stringency. The EU’s 750 billion-euro ($885 billion) joint recovery fund won’t start until the second half of the year.

And while America’s booming economy will undoubtedly act as a driver for the rest of the world by sucking in imports, there could also be some grumbling about the higher market borrowing costs that the rapid growth brings, especially from economies that aren’t as healthy.

“The Biden stimulus is a two-edged sword,” said former IMF chief economist Maury Obstfeld, who is a now senior fellow at the Peterson Institute for International Economics in Washington. Rising U.S. long-term interest rates “tighten global financial conditions. That has implications for debt sustainability for countries that went deeper into debt to fight the pandemic.”

 

 

 

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