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Reading the trend

Whether there will be a global economic recovery or not this year is too close to call at the moment


In principle, the world should see dramatically stronger real GDP growth this year than in 2020. Indeed, it would be pretty difficult for it not to be a lot better, simply because of the base effects of the weak growth in 2020, caused by the COVID-19 pandemic and the associated lockdowns.

This can already be seen in China's January-February economic data which was released by the National Bureau of Statistics on March 15. This showed dramatic rises in industrial production, retail sales and international trade, among other things. All these indicators suggest that in the first quarter alone China's real GDP might be close to 20 percent stronger than during the same time in 2019.

Because the novel coronavirus affected China before much of the rest of the world, and China's economy collapsed in February 2020, the results so far this year give a taste of what to expect elsewhere.

Europe and the United States are likely to register spectacular year-on-year growth rates--in their case starting in the second quarter--once again, largely, because of the low base. This will also apply to many emerging economies including Brazil, India and Russia. For the year as a whole, what will ultimately emerge in terms of the world's 2021 calendar GDP growth performance depends on a number of things. These include: whether there is a continued development of new COVID-19 vaccines, and, more crucially, a successful rollout of the vaccines around the world, the scale of monetary and fiscal support in many countries; and whether individuals in many countries will reduce what appears to be a massive involuntary rise in private savings, the performance of inflation and, of course, any other fresh unknown developments, and whether those are positive or negative.

On the vaccine front, the news is mixed to encouraging. On one level, effective COVID-19 vaccines have been developed, tested and approved in less than 12 months, which is truly wondrous. Beyond its immediate relevance, it also gives great hope for the medium to long term, suggesting that the whole vaccine development and rollout process might become permanently quicker, which would obviously be a boon in the future.

What is not so encouraging, however, is the divergent speed at which vaccinations programs are being carried out, with countries such as Israel, the UAE, the United Kingdom and the United States so far leading the way, with the European Union sadly struggling to introduce what it had planned, many parts of the emerging world yet to get access, and of course, many people scared of vaccines. Until a sufficiently large number of people across the world are vaccinated, it will be difficult to achieve herd immunity and restart all aspects of international economic activity. Personally, I have some hope that the vaccination process will become more widespread by the middle of the year, when more effective vaccines emerge.

As it stands at the moment, those rolling out vaccines the fastest should see positive development, and presuming lockdown measures are eased, many developed countries will see a dramatic improvement in economic activity from the second quarter of 2021 onwards.

Among the BRICS nations, India is likely to benefit more than Brazil and Russia, given its importance as a vaccine producer and the peculiar evidence that Indian citizens have not faced the same degree of deadly consequences as many other countries have. This is seemingly also true for many African countries and suggests an improvement in their trade with their major export markets--the developed world and China--will be the key to their economic revivals.

Linked to the ongoing introduction of new vaccines and their successful rollout, another huge influence on the world economy is going to be what happens with monetary and fiscal policy. In principle, many policymakers around the world have made it clear that they would like to be extremely accommodative, pursuing remarkably generous fiscal and monetary policies, and this is how many have started 2021. But, how committed they remain to these policies is going to depend on the interaction between their desires, and the scale of economic recovery, along with any signs of inflation, and related to this, but also perhaps separately, financial conditions.

One of the features of 2021 so far in this regard, has been a marked increase in longer-term bond yields, especially in the US, and central bankers are going to have to judge carefully whether this is a sign of inflation fears or acknowledgement of rising non-inflationary growth. If it is the latter, then this suggests a strong sustainable recovery for much of the world the more 2021 advances; but if it is the former, central bankers, and perhaps fiscal authorities, may have to adjust their policies, in order to avoid a destabilizing rise in inflation. Which is most likely? On balance I am in the optimistic camp, but it is a close call.

The author is chair of the Chatham House based in London. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

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