What are the economic prospects for the summer?

A personal perspective from Ian Stewart, Chief Economist at Deloitte in the UK.

So far, 2021 has been a year of improving global economic prospects, especially in advanced economies. The roll-out of vaccines and an easing of restrictions across the West have supported a strong upturn in activity – though increasingly marked by an increase in cases of the Delta variant.

Growth forecasts for developed economies this year have risen sharply. In May, the OECD raised its GDP forecast for 2021 for all but two of its 38 member countries. This led to an upward revision of its 2021 global GDP growth forecast from 4.2% to 5.8%. The United States and the United Kingdom have seen particularly strong revisions, driven by a head start on vaccinations and, in the United States, an expansionary fiscal policy.

The overall positive image masks the varied experience of each country. Some large economies, including China, South Korea and the United States, have already regained their pre-pandemic size. But others, including Mexico, Saudi Arabia and South Africa, are not expected to recover until 2023-2024, according to the OECD. This gap in recovery times reflects three factors.

The first is the gulf between what The Economist has dubbed “the jabs and the jab-nots”. Countries with sufficient vaccine supplies, primarily in North America and Europe, are in a better position to ease restrictions and limit hospital admissions. This gap generally corresponds to the gap between rich and poor countries, although the situation is changing with China, Malaysia, Cuba and Cambodia, for example, increasing vaccinations. Taiwan, New Zealand and Australia have successfully suppressed the virus, but have relatively low vaccination rates, making them vulnerable to periodic outbreaks. Over the past month, emerging economies in Southeast Asia, including Indonesia, Vietnam and Thailand, where vaccination rates are below 20%, have seen a sharp acceleration in cases.

Second, countries’ reliance on the production of goods, which generally thrived during the pandemic, versus in-person services, which were disproportionately affected by the lockdowns. Sales of televisions, keyboards and gym kits jumped; spending on haircuts, restaurants and shows has plummeted. Manufacturing powers such as China, Germany, South Korea and Taiwan have recorded better recoveries than tourism dependent economies like Costa Rica, Iceland, Spain and Portugal. This could be partially reversed when consumers switch from goods to services, although much of this depends on continued easing of restrictions. Demand for manufactured goods has also supported commodity prices and the outlook for emerging commodity-producing economies.

Third, the extent of public support to households and businesses, which was greater in wealthy economies. This has limited the damage or scars on the economy and put consumers and businesses in a position to spend once the restrictions are relaxed. China’s political support has been focused on industry rather than households and is therefore recording a recovery in domestic consumption that is weaker than the West.

This global recovery is facing headwinds from new variants of COVID-19 and resurgent inflation.

The greatest danger is the emergence of more infectious or vaccine-resistant COVID-19 variants. The Delta variant has already led to an increase in the number of cases in the UK, Spain, Portugal, Cyprus and the Netherlands and slowed down the planned reopening of the UK economy. (The rate of increase is mind-boggling; in the three weeks since the Netherlands removed most restrictions on June 26, case rates have increased 15-fold. The Dutch government has apologized for the premature relaxation and imposed new restrictions.) For countries with high vaccination rates, the link between case rates and hospitalizations has weakened. However, the high infectivity of the Delta variant means that a large number of cases can still be disruptive. The FT reported last week that some UK companies are missing a fifth of their staff due to self-isolation requirements. Countries with high vaccination rates are also at risk of the emergence of a vaccine-resistant variant while those with low vaccination rates bear the cost of further restrictions to limit further epidemics. High levels of infection globally create a large pool from which new variants appear likely to emerge. Delta is unlikely to be the last variant we face.

The huge economic shock triggered by the pandemic has resulted in a global mismatch between supply and demand for raw materials, manufactured goods and transport ships. This disruption may even worsen in the short term, as the new school year and Christmas time approach. Eurozone industrial production fell in May due to shortages of raw materials despite strong demand. Labor supply has also been disrupted, with businesses in certain industries, such as accommodation and food services, reporting labor shortages.

This mismatch between supply and demand pushed up world commodity prices and spilled over into consumer price inflation. Central banks in emerging markets have already raised rates, despite incomplete economic recoveries, to support their currencies and curb inflation. Inflation data for the UK and US last week surprised on the upside.

The consensus among central bankers and financial markets is that the inflation resulting from this supply disruption is transitory. Indeed, some of the most extraordinary price increases, such as lumber, copper and soybeans, have retreated in recent weeks. In addition, the massive budget support provided in 2020-2021 will fade in the coming quarters. The number of unemployed and workers on leave remains well above pre-pandemic levels, providing capacity in the labor market.

In the US and UK, where recoveries are more advanced and inflation higher, central banks have turned to more hawkish and anti-inflationary rhetoric. The challenge will be to prevent temporary price hikes from taking hold, for example by raising wages, without raising rates prematurely and risking the recovery.

Given the magnitude of the shock that the global economy has experienced, the overall outlook is positive. Favorable winds for growth, particularly in advanced economies, appear to be robust. These include strong household balance sheets, limited economic scars, healthy banking sectors, and ambitious hiring and investment plans among companies. Businesses and workers have adapted remarkably well to operate under far-from-normal circumstances.

But it won’t be the COVID-free recovery many of us hoped for last year, a recovery in which the withdrawal and roll-out of vaccines made the virus go away just like SARS did in 2003. COVID-19 is expected to remain a real and present danger for the foreseeable future. Restrictions, behaviors and public health systems will have to adapt to counter the evolution of the virus. As the Prime Minister of the Netherlands, Mark Rutte, sadly conceded earlier this month when reimposing restrictions that had been lifted just a fortnight earlier, “what we thought was possible has turned out to be impossible in the convenient. We had a bad judgment, which we regret and for which we apologize ”. The range of uncertainties regarding the future direction of the pandemic remains wide. We may be tired of COVID-19, but he’s not tired of us.

For the latest charts and data on health and the economy, visit our COVID-19 Economics Monitor:
https://www2.deloitte.com/uk/en/pages/finance/articles/covid-19-economics-monitor.html

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