The world economy is on course for its fastest growth in more than a half century this year, yet differences and deficiencies could hold it back from attaining its pre-pandemic heights any time soon.
The U.S. is leading the charge into this week’s semi-annual virtual meeting of the International Monetary Fund, pumping out trillions of dollars of budgetary stimulus and resuming its role as guardian of the global economy following President Joe Biden’s defeat of “America First” President Donald Trump. Friday brought news of the biggest month for hiring since August.
China is doing its part too, building on its success in countering the coronavirus last year even as it starts to pull back on some of its economic aid.
Yet unlike in the aftermath of the 2008 financial crisis, the recovery looks lopsided, in part because the rollout of vaccines and fiscal support differ across borders. Among the laggards are most emerging markets and the euro area, where France and Italy have extended restrictions on activity to contain the virus.
“While the outlook has improved overall, prospects are diverging dangerously,” IMF Managing Director Kristalina Georgieva said last week. “Vaccines are not yet available to everyone and everywhere. Too many people continue to face job losses and rising poverty. Too many countries are falling behind.”
The result: It could take years for swathes of the world to join the U.S. and China in fully recovering from the pandemic. By 2024 world output will still be 3% lower than was projected before the pandemic, with countries reliant on tourism and services suffering the most, according to the IMF.
The disparity is captured by Bloomberg Economics’ new set of nowcasts which shows global growth of around 1.3% quarter on quarter in the first three months of 2021. But while the U.S. is bouncing, France, Germany, Italy, the U.K. and Japan are contracting. In the emerging markets, Brazil, Russia and India are all being clearly outpaced by China.
For the year as whole, Bloomberg Economics forecasts growth of 6.9%, the quickest in records dating back to the 1960s. Behind the buoyant outlook: a shrinking virus threat, expanding U.S. stimulus, and trillions of dollars in pent-up savings.
Much will depend on how fast countries can inoculate their populations with the risk that the longer it takes the greater the chance the virus remains an international threat especially if new variants develop. Bloomberg’s Vaccine Tracker shows while the U.S. has administered doses equivalent to almost a quarter of its people, the European Union has yet to hit 10% and rates in Mexico, Russia and Brazil are less than 6%.
“The lesson here is there is no trade-off between growth and containment,” said Mansoor Mohi-uddin, chief economist at the Bank of Singapore Ltd.
Former Federal Reserve official Nathan Sheets said he expects the U.S. to use this week’s virtual meetings of the IMF and World Bank to argue that now is not the time for countries to pull back on assisting their economies.
It’s an argument that will be mostly directed at Europe, particularly Germany, with its long history of fiscal stringency. The EU’s 750 billion-euro ($885 billion) joint recovery fund won’t start until the second half of the year.
The U.S. will have two things going for it in making its case, Sheets said: A strengthening domestic economy and an internationally respected leader of its delegation in Treasury Secretary Janet Yellen, no stranger to IMF meetings from her time as Fed Chair.
But the world’s largest economy could find itself on the defensive when it comes to vaccine distribution after accumulating massive supplies for itself. “We will hear a hue and cry emerge during these meetings for more equal access to vaccinations,” said Sheets, who is now the head of global economic research at PGIM Fixed Income.
And while America’s booming economy will undoubtedly act as a driver for the rest of the world by sucking in imports, there could also be some grumbling about the higher market borrowing costs that the rapid growth brings, especially from economies which aren’t as healthy.
“The Biden stimulus is a two edged sword,” said former IMF chief economist Maury Obstfeld, who is a now senior fellow at the Peterson Institute for International Economics in Washington. Rising U.S. long-term interest rates “tighten global financial conditions. That has implications for debt sustainability for countries that went deeper into debt to fight the pandemic.”
JPMorgan Chase & Co. chief economist Bruce Kasman said he hasn’t seen such a wide gap in 20 to 25 years in the expected out-performance of the U.S. and other developed countries when compared with the emerging markets. That’s in part due to differences in distribution of the vaccine. But it’s also down to the economic policy choices various countries are making.
Having mostly slashed interest rates and started asset-purchase programs last year, central banks are splitting with some in emerging markets beginning to hike interest rates either because of accelerating inflation or to prevent capital from flowing out. Turkey, Russia and Brazil all raised borrowing costs last month, while the Fed and European Central Bank say they won’t be doing so for a long time yet.
Rob Subbaraman, head of global markets research at Nomura Holdings Inc. in Singapore, reckons Brazil, Colombia, Hungary, India, Mexico, Poland, the Philippines and South Africa all risk running overly-loose policies.
“With major developed market central banks experimenting on how hot they can run economies before inflation becomes a problem, emerging market central banks will need to be extra careful to not fall behind the curve, and will likely need to lead, rather than follow, their developed market counterparts in the next rate hiking cycle,” said Subbaraman.
In an April 1 video for clients, Kasman summed up the global economic outlook this way: “Boomy type conditions with quite wide divergences.”
— With assistance by Eric Martin
Why populist policies won't fix Canada's economy – Financial Post
Canadian dollar notches biggest gain in a month as stocks rally
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)
China Vows Better Policy Support to Economy as Headwinds Mount – BNN
(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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