Global economy threatened by Covid-19 resurgence

There is a high risk of a resurgence in Covid-19 infections derailing the world economy this year, according to a firm majority of economists in a Reuters poll, who forecast global GDP would reach pre-pandemic levels within two years.

That threat, flagged by analysts who have largely been too optimistic about recovery prospects, comes despite world stocks adding $33 trillion in value from March lows, lifted by stimulus overflows, near-zero interest rates and Covid-19 vaccine rollouts.

Reuters polls of around 500 economists across Asia, Europe and the Americas revealed modest downgrades or no change to growth outlooks compared with previous surveys, as well as tamer inflation views across most countries.

Economists have priced-in a Covid-19 resurgence as nearly two-thirds of analysts – or 95 of 155 – who responded to an extra question said there was a high risk that another wave of infections derails the global economy, including eight who said that risk was very high.

“It is difficult to overstate the importance of the coming months for the global economy and public health. As vaccine rollouts begin the world over, we are racing against time to head off the impact of potentially more contagious strains of the coronavirus,” said Aditya Bhave, global economist at BofA.

“The biggest downside risk to the global economy is that vaccines prove to be ineffective against the new mutations. In all, the emergence of a vaccine-resistant, dominant strain could result in a lost quarter for the global economy.”

Global growth was forecast to clock 5.3% this year in the Jan. 7-26 poll, unchanged from three months ago, after shrinking 3.9% last year, with the range of forecasts showing both higher highs and higher lows. Amongst common contributors, about 60% downgraded their 2021 outlook.

The 2022 consensus showed a 4% expansion, higher than the 3.5% expected previously. Those forecasts were based on expectations for accommodative monetary policies, with no major correction in global financial markets after years of low sovereign bond yields and soaring stock prices.

They were lower than the International Monetary Fund’s forecasts of 5.5% for 2021 and 4.1% for next year.

“Major vaccine breakthroughs in November and December have lowered uncertainty and raised hopes that life could become more normal again at some point in the next 12 months,” noted Janet Henry, global chief economist at HSBC.

“But things are much less hopeful in the short-term; indeed, the immediate economic prospects of many advanced economies have worsened again as they battle still worryingly high rates of infection and impose new lockdowns.”

FISCAL STIMULUS

The US economy, which has been hardest hit by the pandemic having lost around 420,000 lives, would get a significant boost from President Joe Biden’s proposed $1.9 trillion fiscal package, a Reuters poll showed.

“A vaccine, a major fiscal stimulus, ongoing Federal Reserve support and a more internationalist approach with allies and trade partners can lay the foundations for a vigorous recovery from Q2 2021,” said James Knightley, chief international economist at ING.

The euro zone’s coronavirus-ravaged economy would gain little benefit from the European Central Bank’s new policy package, according to a Reuters poll that saw the outlook for first-quarter growth nearly halved. Britain and Japan suffered similar cuts.

At the same time, the world’s major central banks were not expected to achieve inflation targets within three years.

The real worry in the near-term was emerging markets, which have carried global growth in recent years.

Bouncing back from a pandemic-stricken 2020 with interest rates likely to be held steady, China’s economy was expected to grow 8.4% in 2021 – while the best reading in a decade it was rendered less impressive coming off last year’s low base.

India’s battered economy was expected to recover next fiscal year, supported by the government’s expansion federal budget and reach pre-Covid-19 levels within two years. Brazil’s growth prospects are being overshadowed by fiscal tensions, denting the outlook in a country struggling with a second wave of the pandemic.

“Amongst emerging markets, China is leading the way. With the exception of China, which is likely to experience a short bout of deflation, most EMs are likely to experience a transitory period of higher inflation led by food,” said David Rees, senior emerging markets economist at Schroders.

“But once this passes and growth settles to more normal rates few central banks will be in a rush to tighten policy, particularly if governments begin to repair fiscal positions.”

(Source: Economic Times)