In much of the world, Covid-19 infections continue at a sustained rate, but the global economy is rapidly recovering from last year’s crisis. Global trade volumes and industrial production were both higher in January than ever before, according to data collected by the Netherlands’ central bank. Releasing its latest global economic outlook on April 6, the International Monetary Fund raised its global growth forecast again, including nearly doubling its US growth forecast this year to 6.4%. As for the IMF figures, global production this year will comfortably exceed the level reached before the pandemic. Vaccines will soon stop the disease; the economic loss is already slipping behind us.
Australia is a good example. A year ago, Treasury officials feared a drop in production by one-fifth, recommending a proportionately vigorous response. In the first quarter of this year, production was probably higher than it had ever been before. In February, employment returned to pre-pandemic levels.
As the IMF points out, according to its forecasts world production in 2024 will likely be 3% lower than it would have been pre-pandemic forecasts. But so far there has been no major financial collapse, which usually makes recessions much longer and more severe. The 2008 financial crisis was just such a recession. The IMF estimates that the lasting impact of this slowdown was three times greater than the expected production loss from the pandemic.
Although its demise has often been predicted, globalization has resisted the pandemic.
With the global economy on the road to recovery, it’s time to learn some lessons from the most severe global health crisis and one of the fastest declines in global economic activity that most of us have ever seen. never known. In my new Lowy Institute paper Reconstruction, posted by PenguinI’m looking at where we were before the pandemic, what happened during it, where we are now and where we are going. Here are some of my findings.
First, what could have happened but was not
A year ago, it was commonly predicted that economic globalization, already said to be under strain, would be seriously injured by the pandemic. China halted the export of surgical masks for a time, Europe and the United States (and Australia) controlled the export of respirators, and critical attention suddenly shifted to chains of masks. global supply in the production of medicines. International travel has collapsed, as has international trade.
It is true that with the cessation of tourism and most cross-border business and study travel, trade in services is still significantly down from previous levels. It is also true that global cross-border investment is also declining, and in the first six months of 2020, cross-border trade in goods fell even faster than global production. But global merchandise trade is now booming. By the start of this year, the three-month average of global merchandise trade volumes had already surpassed the highest on record – a strong signal that economic globalization is continuing. The IMF expects world trade growth to be much faster this year than world output growth. Despite fears to the contrary, until 2020 few trade barriers were lifted except for certain categories of medical supplies – and these were generally temporary. On average, countries report 40 trade disputes to the World Trade Organization each year. Last year, the WTO only received five. Although its demise has often been predicted, globalization has resisted the pandemic.
Before the pandemic, it was commonly said that the United States and China were economically decoupling, a trend likely to be accelerated by the pandemic. In 2020, then-US President Donald Trump blamed China for the disease, threatening it would pay the price. In this case, there is very little evidence of decoupling between the United States and China. In response to the January 2020 bilateral trade deal, US exports to China increased 16% last year. China’s exports to the United States declined slightly, but that offset that with big gains elsewhere. No major American company operating in China has announced its departure. The United States imposed further restrictions on Chinese tech companies in 2020, hitting Huawei hard. Otherwise, trade relations have been less troubled than in the first three years of the Trump administration.
The rest of the world has not been decoupled from China either. It was the only major economy to record an increase in production in 2020. Its trade with the rest of the world has increased, as has industrial production. Overall, Chinese exports grew 3.6% last year, compared to a 10% drop in world trade. Globally, foreign direct investment inflows have declined. In China, foreign direct investment inflows increased by 4%. In 2020, China replaced the United States as the world’s largest recipient of FDI.
While the global recovery has been much faster and stronger than expected, there are two lingering issues that will influence domestic and international politics for the remainder of the decade.
The conflict between falling unemployment and controlling public debt will be the political and political battleground for the remainder of the decade.
The first and most serious is unemployment. The United States is a good example. Since the worst of the recession in April last year, the United States has recovered just under 15 million jobs, and the unemployment rate has more than halved from its peak. Even so, the number of jobs in the United States in March was still 8.4 million lower than the February peak of last year, and the unemployment rate was still 2.5% higher than the trough. from February.
Australia presents another example. By February, the number of jobs had returned to pre-pandemic levels, but the number of unemployed was still 110,000 higher than in February 2020. With perhaps 100,000 more jobs threatened by the recent closure of the JobKeeper grant, Australia could need 200,000 more jobs just to restore the pre-pandemic unemployment rate to 5.2%. Reaching the Reserve Bank’s new target of 4.5% unemployment would require 100,000 more jobs, for a total deficit of up to 300,000. Meanwhile, new young job seekers are entering the labor market. job. Achieving this goal will require not only a continued vigorous recovery, but also years of growth at a rate significantly greater than the decade preceding the pandemic.
Then there is the public debt. Already high in the aftermath of the 2008 crisis, public debt was increased by the $ 14 trillion in deficit spending that governments deployed to deal with the emergency of the pandemic. Public debt has now exceeded 100% of global GDP, with the bulk of it issued by wealthy economies. In principle, the debt will decline as a share of GDP in the years to come as long as the growth of the debt, which is the annual deficit of the government, is a little lower than the rate of growth of output plus inflation, or “GDP. nominal”. This is much easier to achieve if government borrowing rates stay well below the nominal GDP growth rate, as they are today and are likely to remain so for a long time to come. Even so, the rate of growth of deficits must be constrained to curb debt growth, which limits the ability of governments to use increased deficits to stimulate output growth. Monetary policy, on the other hand, is fully extended. Interest rates are as low as they can realistically go, and in most advanced economies (including Australia) central banks are now helping by buying up much of the newly issued government debt. In most advanced economies, including Australia, the conflict between falling unemployment and controlling public debt will be the political and political battleground for the remainder of the decade.