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April 2021 update to TIGER: The world economy stumbles toward a two-track recovery – Brookings Institution

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The world economy faces sharply divergent growth prospects across various regions, as prospects of a uniform swift snapback from a dismal 2020 have become clouded. The latest update of the Brookings-Financial Times Tracking Indexes for the Global Economic Recovery (TIGER) reveals grounds for optimism about global growth prospects but also renewed concerns about impediments to a strong recovery. Vaccination euphoria and attendant hopes of a rapid, broad-based recovery have been tempered by a fresh COVID-19 wave sweeping through a number of economies, putting their growth trajectories at risk.

The U.S. and China are shaping up to be the main drivers of global growth in 2021. Household consumption and business investment have surged in both economies, along with measures of private sector confidence. Industrial production has rebounded in most countries, contributing to firming commodity prices and robust international trade. However, the U.S., China, and India are likely to be the only major economies (along with Indonesia and South Korea) that exceed pre-COVID-19 GDP levels by the end of 2021. In most other regions, the scarring effects of the 2020 recession on both GDP and employment are likely to be longer-lasting.

The U.S. economy is poised for a breakout year as massive fiscal stimulus, loose monetary policies, and pent-up demand power rapid GDP growth. Renewed consumer and business confidence have been reflected in generally strong consumption and business investment growth, while financial markets have continued to perform well. Labor market performance has been encouraging, although progress in job growth and unemployment reduction has been uneven in recent months.

Click a country name below the Composite Index to view charts for the main TIGER indexes by country.

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Learn more about the recovery in advanced and emerging markets (PDF)

Greece
Ireland
Netherlands
Portugal
South Korea
  • Advanced Economy
  • Emerging Market Economy
  • Euro Periphery Economy
  • Euro Periphery / Advanced Economy

Indices constructed by Eswar Prasad, Aryan Khanna (Cornell), and Darren Chang (Cornell), The Brookings Institution, April 2021

Separating the imminent phantom increase in inflation (due to base effects from a weak 2020) from underlying wage and price pressures will complicate monetary policy during 2021. Parsing the rise in government bond yields—which reflects a combination of better growth prospects, risks of inflation, and concerns about rising debt levels—encapsulates the challenges that policymakers face as they try to decipher and manage market expectations. Any additional stimulus measures should ideally aim to simultaneously boost aggregate demand and improve long-term productivity.

China’s growth momentum has stayed strong and balanced, with the government’s attention turning to medium-term structural issues and containment of financial system risks. The recent National People’s Congress meeting ended with a renewed focus on rebalancing demand toward household consumption and shifting growth sources toward high-end manufacturing, the services sector, and small and medium enterprises. The government seems to be leaning toward normalization of macroeconomic policies, with a lower fiscal deficit and some tightening of monetary policy anticipated later in the year. This is being backed up by prudential regulatory measures to manage frothiness in the real estate sector. Trade tensions with the U.S. now appear likely to persist under the Biden administration, but this no longer seems a major factor influencing private sector sentiment or growth in either country.

European economies, both in the core and periphery of the eurozone, are struggling as they cope with another wave of COVID-19 infections, floundering vaccination programs, and a lack of policy direction. While industrial production, particularly in Germany, has held up well, much of the eurozone might return to pre-COVID-19 GDP levels only by late 2022. The U.K., which in 2020 faced a double whammy from Brexit and COVID-19, has made good progress on vaccinating its population and improved its growth prospects. Japan’s recovery appears fragile. Despite extensive stimulus measures, weak consumer confidence is restraining consumption while export growth has been subdued.

In India, both the manufacturing and services sectors are contributing to a strong rebound.

However, a resurgence of the virus and limited policy space due to high public debt levels and rising inflation could erode some momentum. The rebound in oil prices has buoyed the prospects of countries such as Nigeria, Russia, and Saudi Arabia. Meanwhile, Brazil’s economy is tottering as the virus spreads unchecked and ineffectual political leadership hampers a concerted response. Turkey faces similar concerns, although it was one of the few economies to register positive growth in 2020. In short, even among emerging markets, there are multiple tracks to the recovery.

Following a marked decline during 2020, the U.S. dollar has firmed up in 2021. In tandem with the upward shift in U.S. bond yields, this portends ill for many emerging market and other developing economies, particularly those with heavy foreign currency debt exposure. Financial market pressures could build up if divergent growth patterns, with more vulnerable economies registering weaker growth, persist through 2021.

Policymakers around the world face an important pivot point. One decision many countries are grappling with is whether to open up their economies despite the continued spread of the virus. Another is whether to infuse additional macroeconomic stimulus, risking an unfavorable tradeoff between short-term benefits and longer-term vulnerabilities. Uncertainties are rife and the stakes are high. Indecisive policies are affecting consumer and business confidence in the weaker economies, adding to economic strains.

The recipe for a strong and durable recovery remains the same as it has over the past year—resolute measures to control the virus coupled with balanced monetary and fiscal stimulus, with an emphasis on policies that support demand as well as improve productivity. In economies that are doing well, it is far too early to ease up in either dimension while in others policymakers will need to redouble their efforts.

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Canadian dollar notches biggest gain in a month as stocks rally

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The Canadian dollar strengthened to a one-week high against its U.S. counterpart on Thursday as investor sentiment picked up and domestic data showed that retail sales fell less than expected in July.

World stock markets rallied and the safe-haven U.S. dollar retreated from one-month highs as worries about contagion from property developer China Evergrande eased and investors digested the Federal Reserve’s plans for reining in the stimulus.

Canada is a major exporter of commodities, including oil, so the loonie tends to be particularly sensitive to investor appetite for risk.

“The assumption here is that (Fed interest) rate hikes are still a long way out and so equities markets can still perform with accommodative financial conditions,” said Mazen Issa, senior FX strategist at TD Securities in New York.

“Consequently, currencies that have a higher beta to the equity market, like the CAD, can do alright.”

U.S. crude oil futures settled 1.5% higher at $73.30 a barrel, while the Canadian dollar was trading up 0.9% at 1.2653 to the greenback, or 79.03 U.S. cents.

It was the currency’s biggest advance since Aug. 23. It touched its strongest level since last Thursday at 1.2628.

Canadian retail sales dipped 0.6% in July, compared with expectations for a decline of 1.2%, while a preliminary estimate showed sales rebounding 2.1% in August.

Canadian government bond yields were higher across a steeper curve, tracking the move in U.S. Treasuries.

The 10-year touched its highest level since July 14 at 1.335% before dipping to 1.330%, up 11.6 basis points on the day.

(Reporting by Fergal Smith; Editing by Nick Zieminski and Peter Cooney)

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China Vows Better Policy Support to Economy as Headwinds Mount – BNN

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(Bloomberg) — Chinese policy makers reiterated the need to fine-tune economic policies as the world’s second-largest economy faces increasing headwinds from virus outbreaks and high commodity prices. 

Policy should be preemptive and coordinated across cycles, the State Council, the equivalent of China’s cabinet, said in a statement after a meeting chaired by Premier Li Keqiang Wednesday. Governments at all levels should maintain the continuity and stability of macroeconomic policies and enhance their effectiveness, while also do a good job in preventing and controlling virus cases, it said.

Efforts are needed to better coordinate fiscal, financial and employment policies in order to “stabilize reasonable expectations by the market,” it said. 

China again vowed to make sure the economy is operating within a reasonable range, with further measures to boost consumption, guiding private capital to play a better role in expanding investment, and ensuring stable growth in foreign trade and foreign capital, according to the statement. While the employment situation is stable this year, efforts are still needed to maintain employment and help companies, it said. 

The economy took a knock in August from stringent virus controls and tight curbs on property. While China’s Covid zero approach helped to quickly quash the infections, retail sales growth suffered, slowing to 2.5% in August. 

Facing the continued commodity boom, the State Council also pledged to use more market-based measures to stabilize commodity prices and ensure supplies of power and natural gas during the winter. 

©2021 Bloomberg L.P.

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UAE Says It's Unwinding Pandemic Stimulus as Economy Recovers – Bloomberg

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The United Arab Emirates has begun winding down an economic support program launched in response to the coronavirus pandemic as the economy shows signs of gradual recovery, the central bank said in a statement.

The reduced reserve requirements for banks won’t change for now and neither will the lower loan-to-value ratio required for first-time home buyers seeking mortgage loans, the bank said. The loan deferral component of the Targeted Economic Support Scheme will expire by the end of 2021 with financial institutions able to carry on tapping a collateralized 50-billion-dirham ($13.6 billion) liquidity facility until the middle of 2022, in line with earlier guidance.

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