The US is leading the charges in this week’s International Monetary Fund semi-annual virtual meeting, issuing trillions of dollars in budget incentives and resuming its role as protector of the global economy following the defeat of President Joe Bidens to US President Donald Trump. Friday brought news of the biggest month for employment since August. China is also doing its part, relying on its success in fighting the coronavirus last year even as it begins to withdraw some of its economic aid.
However, unlike the aftermath of the 2008 financial crisis, the recovery looks the other way around, in part because vaccine coverage and fiscal support vary across borders. Among the delays are emerging markets and the eurozone, where France and Italy have extended restrictions on activity to contain the virus.
While the outlook has generally improved, the outlook is changing dangerously, IMF Managing Director Kristalina Georgieva said last week. Vaccines are not yet available to everyone and everywhere. Many people continue to face job losses and rising poverty. Many countries are falling behind.
The result: It may take years for parts of the world to join the US and China in fully recovering from the pandemic. By 2024 world production will still be 3% lower than predicted before the pandemic, with countries dependent on tourism and services suffering the most, according to the IMF.
Inequality has been captured by the new Bloomberg Economics project group that shows global growth of about 1.3% in the first quarter to the first three months of 2021. But as the US jumps, so do France, Germany, Italy, the UK and Japan is contracting. In emerging markets, Brazil, Russia and India are clearly overtaken by China.
For the year as a whole, Bloomberg Economics forecasts growth of 6.9%, the fastest in records dating back to the 1960s. After the weak outlook: a threat of virus shrinkage, expanding US stimulus and trillions of dollars in closed savings.
Much will depend on how quickly countries can inoculate their population with the risk that the longer it lasts the greater the chance that the virus remains an international threat, especially if new variants are developed. Bloombergs Vaccine Tracker shows while the US has administered doses equivalent to almost a quarter of its people, the European Union has yet to reach 10% and rates in Mexico, Russia and Brazil are less than 6%.
The lesson here is that there is no exchange between growth and control, said Mansoor Mohi-uddin, chief economist at Bank of Singapore Ltd.
Former Federal Reserve official Nathan Sheets said he expects the U.S. to use virtual meetings of the IMF and World Bank this week to argue that now is not the time for countries to back down to help their economies.
It is an argument that will be directed mainly at Europe, especially Germany, with its long history of fiscal austerity. The EU’s 750 billion-euro ($ 885 billion) joint recovery fund will not start until the second half of the year.
The U.S. will have two things to do on its issue, Sheets said: A strengthening domestic economy and an internationally respected leader of her delegation to Treasury Secretary Janet Yellen, not a foreigner at IMF meetings from her time as Fed Chair.
But the world’s largest economy may find itself on the defensive when it comes to distributing vaccines as it has amassed massive supplies for itself. We will hear a nuance and calls emerge during these meetings for more equal access to vaccines, said Sheets, who is now head of global economic research at PGIM Fixed Income.
And while America’s booming economy will undoubtedly act as a driver for the rest of the world by absorbing imports, there may also be some complaints about the higher borrowing costs in the market brought about by rapid growth, especially from economies which are not so healthy.
Biden’s stimulus is a double-edged sword, said former IMF chief economist Maury Obstfeld, who is now a senior fellow at the Peterson Institute for International Economics in Washington. Rising long-term US interest rates tighten global financial conditions. This has implications for debt sustainability for countries that went deeper into debt to combat the pandemic.
Chief Economist of JPMorgan Chase & Co. Bruce Kasman said he has not seen such a wide gap in 20 to 25 years in the expected performance of the US and other developed countries when compared to emerging markets. This is partly due to changes in the distribution of the vaccine. But it also depends on the economic policy choices that different countries are making.
By mainly lowering interest rates and launching asset-buying programs last year, central banks are splitting with some in emerging markets by starting to raise interest rates either to accelerate inflation or to prevent capital outflows. Turkey, Russia and Brazil raised all borrowing costs last month, while the Fed and the European Central Bank say they will not do so for a long time yet.
Rob Subbaraman, head of global market research at Nomura Holdings Inc. in Singapore, counts Brazil, Colombia, Hungary, India, Mexico, Poland, the Philippines and South Africa all risk running too loose policies.
With major emerging market banks experimenting with how hot they can run economies before inflation becomes a problem, emerging market central banks will have to be extra careful not to fall behind the curve, and are likely to market counterparts should lead, rather than follow, their development in the next cycle of rate hike, Subbaraman said.
In an April 1 video for customers, Kasman summed up the global economic outlook this way: Boom-type terms with fairly wide divergences.
–With help from Eric Martin.
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