INSIGHT: Global outlook improves but economic divergence deepens

Author: Tom Brown


LONDON (ICIS)--It could have been much worse, according to the IMF’s chief economist.

While there has been precious little collaborative action between governments, and protectionism around strategic supplies such as protective equipment and vaccines is only deepening as the pandemic continues, the unprecedented stimulus funding agreed by many states has cushioned the blow.

According to the IMF, the contraction in global GDP for 2020, currently expected at -3.3%, could have been three times worse if not for the level of financial support disbursed by many governments to businesses and those left unemployed by the contraction.

Source: IMF

The day-to-day coverage of vaccination programmes tends to focus on delays, health concerns, and other ways that campaigns are undershooting high public expectation.

Economists widely see the direction of travel as positive, with expectations for this improving as we enter the second quarter.

Ratings agency Moody’s upgraded the outlook for European and North American chemicals players late last month on the back of the progress in vaccinations, and the IMF followed suit for the global economy as a whole this week.

“A way out of this health and economic crisis is increasingly visible,” the organisation noted in its latest economic forecast.

“Adaptation to pandemic life has enabled the global economy to do well despite subdued overall mobility, leading to a stronger-than-anticipated rebound, on average, across regions.”

Global GDP is expected to increase by 6% this year, compared to forecasts of 5.5% in January and 5.2% last October.

The firmer expectations for the year are largely driven by advanced economies, with projections for the developed world increasing 0.8 percentage points, compared to half that for emerging markets.

Advanced economies' GDP is expected to grow by 5.1% this year compared to 6.7% for emerging markets.

The US and China are substantial forces behind the more bullish outlook, with the new stimulus bill substantially speeding the expected US rebound this year by 1.3 percentage points compared to the IMF’s January forecast, and potential for the mooted infrastructure bill to galvanise it further.

China returned to pre-pandemic growth levels at the end of last year, with 2020 GDP beating 2019 levels on the back of export demand and the pace of the recovery.

The US is expected to return to pre-coronavirus growth this year and the IMF has upgraded China’s expected pace of growth to 8.4%, despite private sector demand coming back much more slowly than public spending in the economy.

Despite the current near-record growth in European manufacturing output driving a private sector recovery in the region, little of the IMF’s bullishness on the pace of the 2021 global recovery is derived from EU growth.

With infection rates surging across much of the eurozone, the IMF increased its forecast for the 19-country currency union by just 0.2 percentage points compared to January.

By comparison the UK, which has grappled with one of the worst coronavirus per-capita death counts in the world as well as the economic fallout of Brexit, saw its 2021 GDP forecast upgraded by 0.8 percentage points, highlighting the weight that IMF gives to potential uplift of a quick vaccination programme.

The stronger overall prognosis for the global economy obscures a growing divergence between the pace of recovery in different countries, based on disparities in access to vaccines across the globe and the sawtooth rhythm of speeding recoveries and the stasis of lockdowns.

While vaccine programmes are underway, however lumbering, across the developed world, the bulk of emerging markets' citizens will not be vaccinated this year, according to the IMF.

AE: advanced economies; EM: emerging economies; LIDC: Low income developing counties
Source: IMF

“The pandemic is yet to be defeated, and virus cases are accelerating in many countries. Recoveries are diverging dangerously across and within countries, as economies with slower vaccine rollouts, more limited policy support, and more reliant on tourism do less well,” said IMF chief economist Gita Gopinath at a press conference this week.

Many developing countries came into the pandemic highly leveraged and with little flexibility to roll out the kind of stimulus programmes seen in the west, with countries over-reliant on tourism or commodity pricing hit especially hard.

The impact to per-capita income is also expected to be strongest in the developing world, set to drop an estimated 5.7% in low-income developing countries (LIDCs), 4.7% in emerging markets and 2.3% in advanced economies, according to Gopinath.

Heating interest rates in Europe and particularly the US in light of the multi-trillion dollar stimulus bill could also have a ripple effect on the global economy, potentially driving asset sell-offs and increasing risk aversion that could reduce foreign direct investment in the developing world.

“The spreads that we are seeing in emerging markets and the Middle East are mostly well behaved. Financial conditions should remain fairly accommodative,” Gopinath said.

“If interest rates start going up much faster then there is a loss in risk appetite, that can have an effect on portfolio flows to the rest of the world,” she added.

Source: IMF

The heating up of manufacturing sector output in Europe amid ongoing shipping and logistics disruptions could also have a cooling effect on European chemicals in the second quarter.

The bulk of producers, particularly in the more commoditised spaces, posted strong fourth-quarter financials, with momentum expected to continue through the first three months of this year, which we should start seeing data for in the coming weeks.

Order backlogs, higher input costs, and the third wave of the coronavirus infection could become more apparent in the European chemicals sector performance from March onward, with the economic impact of the latest phase to become more apparent as government response plans emerge.

Think tank economic forecasts tend to be extremely changeable at the best of times, but the speed with which the coronavirus spread can become exponential and the ceaseless volatility this imposes on an already-choppy global economy, can make leave projections stale on the day of publication.

The difficulty in drawing any kind of line from current trajectories has been exemplified in the latest forecasts for India.

The IMF raised its GDP growth forecast for the country by a percentage point to 12.5%, but that figure predates the spiking infection levels in the country, according to Gopinath.

“[The India upgrade] this came with evidence getting in last couple of months on normalisation of economic activity… [but] these numbers precede the current wave of the virus, which is quite concerning,” she said.

While specific vaccination timelines may prove to be more elastic than policymakers or citizens would like, hospitalisations will fall as the rates of inoculation grow, reducing the social and economic impact of the virus in advanced economies.

But full global recovery is necessary to truly draw a line under the pandemic and, with the impact overwhelmingly focused on the poorest countries.

Growing global disparities look set to continue to deepen through the first half of the decade.

By Tom Brown