The dangers of an uneven global recovery

, The dangers of an uneven global recovery
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Like COVID-19 vaccines, the economic recovery will not be evenly distributed across the world over the next two years. Despite the considerable political support provided by governments and central banks, economic risks remain deep, and not just for emerging economies facing looming debt difficulties, nor just for low-income willpayers facing a dramatic worsening of debt. poverty. With victory over the coronavirus still a long way off, and at a time of powerful populism, a documentary global debt, as well as a normalization of policies that promises to be uneven, rental remains precarious. This is not to forget the good news of the past 12 months. Effective vaccines were made available in a short time, much faster than most consultants predicted. The huge monetary and fiscal response has helped build a bridge to a long-awaited end to the pandemic. People have also learned to live better with the virus, with or without the help of national authorities.

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But while growth views across the world turn out to be much better than many predicted in the early days of the pandemic, the current recession remains catastrophic. The Global Monetary Fund is helping the United States and Japan not return to their pre-pandemic manufacturing level before the second half of this year. The euro zone and the United Kingdom, whose manufacturing is declining again, will not return to this level before the year 2022. The Chinese economy is fighting in its own category, and should by the end of the year. 2021 will register 10% growth compared to the end of 2019. But at the other end of the spectrum, many developing economies and emerging markets may need several years to return to their pre-pandemic trajectory. The World Bank estimates that the COVID19 pandemic is expected to push 150 million more people into poverty by the end of 2021, amid rampant food insecurity. The discrepancies observed in the performance projections are very clearly linked to the timing of vaccine availability, which is expected to be widely available to developed economies and some emerging markets by the middle of this year, but for which populations in the will poor pay will probably have to wait until 2022 or even beyond. Another factor is the huge gap that exists between the rich will pay and the poor will pay in terms of macroeconomic support. In developed economies, government spending and additional tax cuts in response to the COVID-19 crisis averaged around 13% of GDP, and loans and guarantees again 12% of GDP. In contrast, public spending increases and tax cuts in emerging economies totaled only about 4% of GDP, and loans and guarantees 3%. Among low-income willpayers, these figures do not exceed 1.5% of GDP in affirmative budget support, and are insignificant in terms of guarantees.

Before the 2008 financial crisis, emerging economies had relatively strong balance sheets compared to those of developed will pays. However, they entered the crisis with a much heavier private and public debt on their shoulders, and are therefore much more vulnerable today. Many would now find themselves in dire straits were it not for the presence of near zero interest rates in developed economies. And despite these rates, a growing vagueness of sovereign defaults is currently becoming increasingly important, particularly in Argentina, Ecuador and Lebanon.

In fact, an episode of “taper tantrum 2.0” is nearing the top of the list of things that could go wrong, and would risk, if it did, not only impact emerging markets . The tantrum tapping episode of 2013 occurred when the US Federal Reserve began to discuss the possibility of normalizing its monetary policy sooner or later, triggering huge outflows of funds out of emerging markets. This time around, the Fed is trying to signal that it does not have the arrangement to raise interest rates until a prolonged second, even going so far as to introduce a new monetary framework that essentially equates to to the promise to keep our foot on the pedal until unemployment drops to its lowest point. This policy makes perfect sense. As I have been repeating since 2008, allowing inflation to rise temporarily above the Fed’s 2% target would do far more harm than good in an environment characterized by high levels of debt, and manufacturing still below its potential level. There are in fact nine million fewer workers today than a year ago in the United States.

If, however, the United States achieves its vaccination targets by the summer, and the coronavirus mutations remain under control, forecasts of zero interest rate increases by the Fed may well show up in numbers. This is all the more skillful considering the colossal savings that many Americans have accumulated, due to a phase of the increase in the price of assets, and another phase of public aid that many beneficiaries have. preferred to keep in savings. While ultra-low interest rate policies around the world help prevent long-term scars, many large corporations, including large tech companies, do not need help propelling the stock price. their actions to new heights. This inevitably fuels populist anger (which has been glimpsed in the reaction of some US politicians to the recent war over the price of GameStop shares).

Even though inflation remains stubbornly low for the second, a sufficiently powerful explosion in demand could cause it to rise, and lead the Fed to raise its rates more than it currently forecasts. The ripple effect of such a move on asset markets would create a split between the strong and the weak, and hit emerging markets particularly hard. At the same time, political leaders, even in the United States, will eventually have to allow bankruptcies to happen and restructuring to take place. An increasingly imprecise recovery is inevitable, which, however, will not put all ships afloat.

By Kenneth Rogoff
Professor of economics and public policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics

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