A year after COVID became a pandemic, more studies say the way economies are measured needs an overhaul.
The United Nations has raised its forecast for global economic growth in 2021 as governments step up COVID-19 vaccination programmes and keep fiscal and monetary stimulus measures in place following the loss of more than a quarter of a billion jobs due to the pandemic.
But the UN’s trade and development agency says in its latest report published on Thursday that the recovery from the steepest-ever annual drop in global economic output is likely to be uneven and unpredictable, with people’s incomes unlikely to return to pre-pandemic levels for years.
Meanwhile, the pressure on policymakers to pull back their extraordinarily large stimulus measures even before they have succeeded in returning employment to pre-COVID levels is beginning to mount as expectations of accelerating inflation rise.
Global gross domestic product (GDP) is likely to grow by 4.7 percent, the United Nations Conference on Trade and Development (UNCTAD) said in its report. That is 0.6 percentage points higher than its 2020 projection.
Earlier this month, the Organisation for Economic Cooperation and Development – a grouping of mostly rich countries – also raised its global growth forecast for this year to 5.6 percent from 4.2 percent.
Even at UNCTAD’s projected accelerated rate, “the world economy will still be 5 per cent below its pre-COVID-19 trend by the end of this year with significant hits to all countries,” its report says.
“The loss of global output in 2020 with respect to the pre-pandemic trend meant destruction of income on an unprecedented scale, an estimated $5.8 trillion, and with already vulnerable parts of the population bearing the brunt, at a time when better income distribution had become most urgent,” the report’s authors wrote.
“This loss will persist as even the most optimistic projections for the bounce back of growth will not cover the shortfall of income for several years.”
The International Labour Organization estimates that the crisis resulted in the loss of 255 million jobs worldwide.
UNCTAD’s rosier GDP growth forecast hinges on the assumption that vaccination programmes and coronavirus containment measures continue to improve in advanced and middle-income countries.
It is also based on the expectation that governments move from short-term economic relief measures to longer-term recovery programmes and on there not being any financial crash of global proportions.
While overall economic growth is expected to accelerate this year, the recovery is likely to be unevenly spread around the world.
China will likely lead the world in terms of GDP growth in 2021, with an 8.1 percent expansion, accelerating from its 2.3 percent growth rate last year, UNCTAD says.
India is seen expanding by five percent after shrinking by 6.9 percent last year.
The United States, fuelled by a recently passed $1.9 trillion stimulus package, is expected to grow by 4.5 percent this year, rebounding from a 3.5 percent contraction in 2020.
Europe’s four percent growth rate is likely to be led by a 5.3 percent expansion in France.
But some of the poorest regions are likely to lag behind.
Africa’s economy is expected to grow by 3.1 percent, while UNCTAD sees that of Latin America and the Caribbean expanding by 3.8 percent.
In addition to it being geographically lumpy, the recovery is also disproportionately benefitting investors while leaving behind wage earners, UNCTAD says.
“There was a V-shaped recovery in many financial markets, which saw sharp losses followed by unprecedented gains, by the year’s end,” the report says.
“This not only contrasts with the weaker recovery in terms of output, employment, investment, wages, etc, it has also contributed to what was referred to … as a K-shaped recovery in many countries as the owners of assets (and certain types of knowledge capital) have successfully managed the crisis, while the situation facing many other workers has been one of job loss and precarity.”
‘A misguided return to austerity’
Several factors could yet derail the recovery. One is a temptation by fiscally conservative policymakers to reduce government deficits before unemployment and wages fully recover.
“A misguided return to austerity after a deep and destructive recession is the main risk to our global outlook, especially in the context of fractured labour markets and deregulated financial markets,” UNCTAD says.
For now, policymakers in the world’s top economies seem happy to keep their markets and economies flush with cash by keeping interest rates ultra low and buying government debt, in effect printing money. That has allowed companies and individuals to borrow cheaply, pushing up the prices of assets such as stocks and real estate.
As a result, investors are starting to worry that consumer and production prices might start rising too quickly, eroding the value of their holdings.
In the US, for instance, the Federal Reserve said on Wednesday that it expects to keep its benchmark interest rate near zero through to 2023. And while it sees US consumer prices rising by slightly more than its 2 percent annual inflation target by the end of this year, the Federal Reserve expects it to moderate back down to nearly that level by 2023.
Financial markets, however, see a rather more aggressive rise in inflation.
Bond traders have been ramping up their bets that inflation will accelerate in the coming years, with some market measures of inflation expectations surging to multi-year highs on Wednesday, the Bloomberg news agency reported.
If the market is right, the Federal Reserve may end up having to act earlier than it is comfortable with in reining in its stimulus measures.
In the United Kingdom, Chancellor of the Exchequer Rishi Sunak is facing a backlash from his own Conservative Party colleagues against his plan to raise business taxes for the first time since 1974 to help pay for the government’s fiscal stimulus measures.
Another source of potential trouble for the global economy is the lack of international cooperation, especially when it comes to the vaccine rollout, as developed countries hog most of the world’s supplies, endangering lives and economies in poorer countries.
“The delay in economic recovery and further damage to overstretched health systems in the developing world will be devastating but prolonging the pandemic anywhere will have consequences everywhere,” UNCTAD says.
Mounting debts and growing food insecurity in developing countries also pose threats to the global recovery, according to the report.