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The world economy has to be on the lookout for potential risks in the post-COVID-19 era

Although COVID-19 plunged the global economy into the worst recession since World War II, clear signs of recovery have emerged. China began leading the way by pocketing positive growth in 2020 after bringing the epidemic under control. The U.S. and European countries initiated a bid for economic rebound via aggressive stimulus measures.

According to the forecasts of leading financial institutions, the pandemic’s impact on the world economy may not be as severe as expected. Nevertheless, in the long run, both COVID-19 and the subsequent stimulus and relief policies adopted may cause major disruptions. The world needs to guard itself against those risks.

Possible threats

To relieve their hard-hit economies, several countries embarked on an unprecedented policy of fiscal expansion and monetary easing, leaving behind huge debts. In March, the U.S. passed a $1.9-trillion coronavirus relief bill. Since March 2020, three such successive bills, totaling around some $5 trillion, have been enacted. Together, they equal to 24 percent of the U.S. economic output in 2020.

U.S. President Joe Biden and his administration then expressed their readiness to continue to pour money into the market by unveiling another $2-trillion stimulus proposal. Other countries, too, put forward similar packages. Financial services giant UBS estimated that governments ran an aggregate deficit of more than 11 percent of the global GDP in 2020, over three times the average of 2010 to 2019.

According to the Institute of International Finance, the continuing swell in debt will see the total top $300 trillion by mid-2022. Although there has been no indication foretelling a large-scale debt crisis so far, this has created a huge burden for economic recovery and the potential risks involved cannot be ignored. More specifically, if the fiscal and monetary policies of major countries fail to run properly, this malfunction is likely to give rise to economic volatility.

Another risk posed by any economy on the rebound is the rise in inflation expectations. Recently, Bank of America revised its year-end forecast on the 10-year treasury yield from 1.75 percent to 2.15 percent. As inflation expectations make up more than 60 percent of the actual bond yield, these could trigger a call for volatile adjustment within the international financial market.

Former U.S. Treasury Secretary Lawrence Summers repeated his warning that the U.S. risks rising inflation amid massive government stimulus, easy monetary policy and an expected surge in consumer spending as the pandemic recedes.

Across international markets, commodity prices have been on the increase. According to the United Nations Food and Agriculture Organization, the Food Price Index, which tracks the monthly changes in global prices of food commodities, rose 26.5 percent in February from a year ago, hitting the highest level since July 2014. Consumer prices in Brazil and Russia increased more than 5 percent year on year, whilst in Turkey this rate stood at 15 percent.

Major countries have given consideration to the security of the global industrial chain even before the pandemic, believing the chain created by globalization was too fragile. In the future, they should not only shift it, but also accomplish the fully independent production of some industries—or at least realize regional production.

COVID-19 has dealt an unprecedented blow to the global industrial chain, resulting in many nations suffering production disruptions and supply constraints. This has once again encouraged countries to speed up the restructuring of the industrial chain. For example, the proposed $2-trillion new stimulus plan of the U.S. aims to strengthen its manufacturing industry and ensure that key industries are manageable.

The raging virus has also brought changes to global business models, generating new services but also resulting in the nosedive of international travel, resulting in both business opportunities and unemployment.

The world today still hides in the shadows of the pandemic, with Europe and other major regions facing new infections. There are estimates that the world economy might not reopen until August. A number of structural changes may thus become the norm. In particular, once a regional industrial chain is established, it will likely send shockwaves through countries and industries that have long adapted to global production.

Since the 2008 financial crisis, the world has been caught up in a spiral of divergence; the COVID-19 pandemic has further complicated matters. Currently, the growing gap between the number of coronavirus vaccine doses administered in rich and poor countries has become a thorn in the eyes of many. Developed countries have snapped up more than two thirds of the world’s vaccines. Yet developing countries, especially those less developed, have received only small quantities.

By the end of March, the U.S. had vaccinated nearly 150 million people and announced it could reach herd immunity by this summer. However, vaccination efforts in Europe have been plagued by problems such as insufficient vaccine doses. This may determine just how quickly an economy can be resumed. Countries that fail to achieve mass vaccination are likely to fall behind in terms of economic recovery.

Furthermore, this year has seen the international political stage become more volatile. The U.S. and the European Union, for political purposes, have imposed more restrictions on China in trade, investment, and science and technology, all pillars of economic globalization. At the same time, global trade protectionism has gained momentum, with numerous proposals for new protectionist measures.

Joint efforts

As the pandemic continues to take its toll, now is not the time to throw caution to the wind. The world economy needs to remain stable so as to deal with potential risks in the near future. In this regard, the steady growth of China’s economy is a boon to the world at large.

Anticipating bullish growth in 2021, China has set its annual GDP target at more than 6 percent. Market expectations and forecasts by major international organizations point to higher growth. The Organization for Economic Cooperation and Development projected that China’s GDP will rise by 7.8 percent this year. No doubt, the China locomotive will continue to inject impetus into the pandemic-hit global economy.

China has conducted extensive communication with other major countries on macroeconomic policies and anti-pandemic cooperation. China for one is set to continue its efforts to guarantee a more stable world economic recovery. Indeed, all countries, major economies in particular, need to step up coordination and ensure their policies are efficiently aligned.
Source: China.org

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