World economy takes elevator down faces steep stairs back up

7 July, 2020 12:00 AM printer

NEW YORK: The world economy is entering the second half of 2020 still deeply weighed down by the coronavirus pandemic with a full recovery now ruled out for this year — and even a 2021 comeback dependent on a lot going right.

It’s a scenario few if any predicted at the start of the year, when most economists were banking on another year of expansion and a U.S. and China trade agreement was meant to give corporate and investor confidence a shot in the arm, report agencies.

Instead, the rare pandemic forced large portions of the global population into what the International Monetary Fund dubs “The Great Lockdown.” Central banks and governments responded with trillions of dollars in unprecedented support to prevent markets from melting down and to keep furloughed workers and struggling companies afloat until the virus passed.

Even with those rescue efforts, the world is still suffering its worst economic crisis since the Great Depression. While some gauges of manufacturing and retail sales in major economies are showing improvement, hopes for a V-shaped rebound have been shattered as the reopening of businesses looks shaky at best and job losses risk turning from temporary to permanent.

It’s an economic trajectory Federal Reserve Bank of Richmond President Thomas Barkin has likened to riding the elevator down, but needing to take the stairs back up.

“There is a real danger of confusing rebound with recovery,” Carmen Reinhart, the World Bank’s chief economist, said at the Bloomberg Invest Global conference on June 23. “True recovery means you are at least as well off as you were before the crisis started and I think we are a long way off that.”

Much depends on the spread of the coronavirus, a vaccine for which remains out of grasp. The World Health Organization warns the worst of the pandemic is still to come as cases top 11 million and deaths have risen beyond 533,000. And even in countries where the virus appeared contained, fresh flare ups are frequent.

The IMF estimates that by the end of this year, 170 countries — or almost 90 percent of the world — will have lower per capita income. That’s a reversal from January, when it predicted 160 countries would end the year with bigger economies and positive per capita income growth.

It’s now likely that global gross domestic product by the end of 2021 will in many cases still be lower than where it was at the end of 2019, according to HSBC Holdings PLC economists led by Janet Henry.

Central bankers remain on the alert to do more. Federal Reserve Chairman Jerome Powell has warned the outlook is “extraordinarily uncertain” and European Central Bank President Christine Lagarde has spoken of a “restrained” recovery that will change parts of the economy permanently.

Six months ago, COVID-19 was not on anyone’s radar. Three months ago, there was hope it could be contained. Now, the pandemic appears all-consuming. Longer lasting lockdowns, a ceiling on activity for contact-intensive sectors, the scarring impact of high unemployment, and stimulus that — in some important parts of the world — is falling short, all weigh on the outlook. Bloomberg Economics is lowering its estimate for global growth in 2020, and anticipates a weaker recovery into 2021.

To be sure, there are pockets of recovery that could gain traction. Morgan Stanley economists are sticking to forecasts of a V-shaped recovery, pointing to positive surprises in recent economic data, especially in the U.S. and euro region. Goldman Sachs Group Inc. economists revised down their estimates for the U.S. economy this quarter, but predicted it will be back on track in September.