Multiple Challenges Facing Global Economic Recovery in 2021

By Gu Baozhi

Following the sudden outbreak of COVID-19 which raged across the world, the global economy shrank tremendously in 2020. But with vaccine approvals in many countries at the end of 2020, there has been raised hope for a turnaround in the pandemic by the second half of 2021. The possibility of an easing pandemic, the relatively low level of growth in 2020 to begin with, and the roll-out of stimulus plans by major economies have all offered reasons for expectation of a global economic recovery in 2021.

I.Major international organizations forecast a global economic recovery in 2021.

According to the latest World Economic Outlook released by the International Monetary Fund (IMF) on 25 January 2021, “the global economy is projected to grow 5.5 percent in 2021 and 4.2 percent in 2022”.“The 2021 forecast is revised up 0.3 percentage point relative to the previous forecast, reflecting expectations of a vaccine-powered strengthening of activity later in the year and additional policy support in a few large economies”. The IMF believes that “the strength of the recovery is projected to vary significantly across countries”, depending on pandemic control performance, access to medical interventions, effectiveness of policy support, and structural characteristics entering the crisis, etc. Among major economies, IMF 2021 growth projections are 5.1% for the United States, 3.1% for Japan, 5.5% for France, 4.5% for the United Kingdom, 3.5% for Germany, 3.6% for Brazil and 2.8% for South Africa. Being the only major economy that achieved economic growth in 2020, China is projected to grow 8.1% in 2021, keeping its lead among major economies.   

According to the World Bank in its Global Economic Prospectsin January 2021, although global economic output is emerging from the recession triggered by the pandemic, it will remain below its pre-pandemic trend for a long time. TheGlobal Economic Prospectsprojects a 4% growth in world economy in 2021, specifically, 3.5% GDP growth in the United States, 3.6% in the Euro zone, and 2.5% in Japan. “Growth in emerging market and developing economies (EMDEs) is envisioned to firm to 5 percent in 2021”, among which, China is expected to grow 7.9%. The World Bank suggests that there are still downside risks in global economic recovery. Limiting the spread of the virus, providing relief for vulnerable populations, and overcoming challenges of vaccine distribution are key immediate priorities for advancing global recovery. And global cooperation is crucial to tackle many of these challenges.

Global trade is expected to grow in recovery. According to theIMF,“consistent with recovery in global activity, global trade volumes are forecast to grow about 8 percent in 2021, before moderating to 6 percent in 2022”. “Services trade is expected to recover more slowly than merchandise volumes, however, which is consistent with subdued cross-border tourism and business travel until transmission declines everywhere”.In contrast, trade in goods is less affected after adapting to the pandemic-related impacts.

Inflation will remain at high levels. COVID-19 caused global food and oil prices to soar in 2020. As indicated by the food price index of the Food and Agriculture Organization of the United Nations (FAO), by the end of 2020, food and edible oil prices jumped up to the highest level since 2014. In addition, the separation measures to control COVID-19 led to rise in transportation costs, which in turn pushed up  prices. In 2021, global inflation expectation will continue to be well-anchored and economic recovery will put up demands, while supply will be subdued by the disrupted transportation and less efficient global supply chain. Monetary policies of central banks will keep easing, which will bring capital abundance, thus pushing up inflation. From Policy perspective, central banks will not raise short-term interests until the momentum of economic recovery takes hold. What happened was that the high inflation expectations caused a big fall on the last trading day in February in the global stock market.

II. Global economic recovery still faces multiple challenges and has considerable uncertainties.

1.Uneven distribution of vaccines may lead to a resurgence in the pandemic,and impedesglobal economic recovery.

Pandemic control is an important precondition for economic recovery. At present, vaccines play a significant role in controlling pandemic transmission and reducing hospitalization and death rates. In Israel and the United States which were hard hit by the pandemic, COVID-19 infection cases and deaths have fallen significantly following large-scale vaccination among the public. The world is counting much on the vaccines for overcoming COVID-19 impacts and restoring social and economic situations to normal. But first and foremost, the global vaccine production, distribution and inoculation must outpace the virus mutation. That will ensure mass immunity on a global scale before the vaccines become invalid as a result of the virus mutation.

But global vaccine production and distribution is hugely uneven. “Vaccine nationalism” is serious. Developed and rich countries have almost monopolized vaccine production and supply in the world except those produced in China and Russia. According to John Hopkins University, more than half of the production of 13 most promising candidate vaccines have been secured for the 1 billion people, the total population in developed countries. Specifically, Japan, Australia and Canada, with a population of 200 million combined,  have secured 1 billion vaccines while the 5 billion people in poor nations have nothing. Delivery of vaccines to poor countries has just started under COVAX, with only Ghana and Cote d’Ivoire receiving 600, 000 and 500, 000 vaccines respectively. It remains a long way to reach the goal of delivering 2 billion vaccines by the end of 2021.

In this era of globalization, no country can be safe alone in front of the pandemic. If poor and developing countriescannot have timely access to vaccines and achieve national immunization at an early date, even when rich and developed countries realize mass immunization through vaccines, the mutated COVID-19 viruses will still spread across borders to pass on to the vaccinated people in other countries, thus perpetuating the pandemic transmission. Now there are already mutated corona viruses which are much more infectious. With uneven distribution of vaccines, the mutated viruses may well give rise to a third round of pandemic, which will plunge the world once again into lockdown and isolation and thus kill economic recovery.

2.The US-China strategic competition is not good for global economic recovery.

The United States is the sole super economy in the world while China is the world’s second largest economy that is developing steadily and robustly. Both of them are economies of over 10 trillion US dollars, with their combined GDP taking up about one quarter of the world. In recent years, their economic growth contributed more than 40% to global growth, with China contributing over 30% to world economic growth for several years consecutively. That’s why the world economic prospects hinge upon the economic performance of China and the US to some extent, and the situation of China-US ties will affect the economic growth of the two countries and the whole world as well.

The Trump administration provoked trade frictions with China and worked for “decoupling” with China, sending bilateral ties to the lowest point since establishment of China-US diplomatic relations. After taking office, the Biden administration pledged to rejoin the international community and expressed willingness to take a rational attitude and reshape China-US relations through negotiations.  But by now, it is hard to say that there is any marked improvement in the bilateral relationship. The increased tariffs imposed on China by the Trump administration are still there, the US has not changed its policy of taking China as the biggest strategic rival and containing China as such and the US wants to forge an alliance of so-called democratic countries to isolate China. So it is still about containing China. What has changed is just how the containment is done. 

Under the influence of being tough on China, the Biden administration may find it hard to completely reverse the Trump administration’s China policy. Even if Biden has the intention to improve relations with China to some degree, he may well encounter the opposition from the anti-China members in the US Congress. Just recently, Senate DemocraticLeaderCharles Schumerasked members of Congress to draft a legislative package to curb the rise of China and use the bipartisan tough China attitude to reinforce US science and technology industries and fight the assumed unfair practices in order to out-compete China. And the Republican China hawks have put more pressure on Biden, urging him to continue his predecessor Trump’s tough China policy.

Today’s China, the second largest economy in the world, has enough economic resilience and naturally will not yield to US pressure. The ongoing China-US strategic competition will inevitably have a negative impact on bilateral economic cooperation, and in turn, on their economic growth respectively. According to the US-China Business Council (USCBC), the US trade frictions with China provoked by Trump have resulted in the loss of 245, 000 jobs in the US. The Oxford Economics estimates that US-China decoupling will inflict 1.6 trillion US dollars in losses upon US GDP. Globally, the sustained strained China-US relationship is not good for the restoration of confidence in global trade and investment, as it will disrupt the normal operations of industrial chains and supply chains, leaving most countries in a difficult situation of taking sides, dividing the world into two economic camps and casting shadow on global economic recovery.

3.The world is confronted with heavy debts,withlong-term growth prospectsconstrained.

The latest report of the Institute of International Finance shows that the year 2020 saw an increase of 24 trillion US dollars of global debts caused by COVID-19, with a record 281 trillion US dollars in total debts globally, of which 203.7 trillion US dollars were for developed countries and 77 trillion US dollars for developing countries. Global debts are 355% of global GDP, up 35 percentage points over that in 2019. Such a jump is even bigger than that in 2008 when the sub-mortgage crisis started. Back then, global debts to global GDP ratio only increased 10%. In 2021, the pace of global debts expansion will not slow, as government public debts alone will increase by another 10 trillion US dollars to reach 92 trillion US dollars by the end of 2021.

Although massive economic stimulus plans are effective countermeasures to tackle the COVID-19-related recession, and in times of extremely low interest rates, immediate debt costs are almost zero, thus generally well under control, in the long run, however, debt risks are accumulating at an accelerated pace, and with high interest rates coming ahead, debt burdens will continue to worsen. The debt-strapped governments and enterprises will all fall into a dilemma.

On the government level, following the economic recovery, central banks will have no choice but to raise baseline rates to prevent rapid growth of inflation, which will considerably push up debt servicing costs. If the borrowing costs of the US are 2 percentage points higher than market expectation, the debt servicing burdens of the US will surge from 2% of its GDP in 2020 to 6% of GDP in 2030. The debt servicing burdens of Italy will even go higher than the level during the European debt crisis. Exit of massive economic stimulus will be even harder than during the financial crisis in 2008 and 2009. Political and social pressures will constrain the efforts of the governments to reduce deficits and debts, which in turn will undermine governments’ capabilities to cope with other crisis. On the enterprises level, although companies survived the crisis during the pandemic by increased debt, the pressure to repay capital and interests in due time will force the companies to shift from business expansion to debt payment, thus jeopardizing their business operations. As a result, when the global economy gets out of the impacts of the pandemic and moves towards recovery, the heavy debt burdens will curb the long-term growth prospects.

III. Only by strengthening cooperation can the world truly realize economic recovery.

In this era of globalization, global challenges must be managed through global responses. Whether it is COVID-19, other infectious diseases, climate change, or anything else, none of these challenges can be handled by one single country alone. In the same vein, in the world of economic interdependence, no country can develop its economy well all alone. Only by seeking common ground while shelving differences and promoting cooperation, can countries truly achieve economic recovery globally.

It is important to increase cooperation for all countries in vaccine production and distribution, so that the vaccines against COVID-19 will become global public goods accessible to all. Only by doing that can we curb the pandemic sooner and provide preconditions for economic recovery. It is also important to be wary of“vaccine nationalism”, give full play to the World Health Organization and other international multilateral institutions. Providing vaccination for all countries through COVAX, the vulnerable people in the low and middle income countries in particular, is the most cost-effective and rapid way to curb the pandemic.

China and the United States shall take responsibilities as two major countries and work together in spearheading global economic recovery. The US must give up its unreasonable attempt to contain China and responsibly strengthen cooperation with China on fighting COVID-19, addressing climate change, advancing global economic recovery and other urgent tasks facing the international community. It should also respond to China’s call to activate or establish dialogue mechanisms in various sectors and at various levels in order to put bilateral ties back to the normal track at an early date.

It is imperative that all countries work together to intensify macroeconomic policy coordination. Fiscal, taxation and monetary policy collaboration and regulatory coordination must be increased among countries through G20 and other platforms as a way to make economic stimulus and recovery policies better targeted and more effective. To address the worsening global debt issue, countries need to make use of IMF, G20 and other international organizations to allocate financial resources globally, in particular to increase loans and reduce debts for low-income countries and emerging markets, implement debt restructuring plans, avoid sovereign debts default, and prevent severe financial turbulences which may impact the global economy, so as to bolster confidence and stabilize expectations globally. As mass vaccination rolls out worldwide, based on scientificallyevaluating the effectiveness of the vaccines, all countries should also work hard on the issuance and mutual recognition of vaccine passports, promote cross-border business travel and tourism, help restore the pre-COVID-19 conditions and facilitate global economic recovery.

Gu Baozhi is Director of the World Economy Research Institute, Chinese Academy of International Trade and Economic Cooperation, Ministry of Commerce.