The worst of the pandemic-induced global economic crisis is now seemingly in the rear-view mirror. Lockdowns have slowed infections, health-care responses have improved, and government support has largely kept flowing.
In 2021 the rollout of vaccines should also permit a loosening of restrictions. That would underscore a bounce-back in fortunes for the global economy. Last year it experienced its sharpest contraction since the Great Depression, with the United Nations estimating that around 90% of the world economy was under some form of lockdown during the pandemic’s peak.
While it is inevitable that most economies will grow in 2021, after shrinking so starkly in 2020, governments across the world should not be lulled into a false sense of security. Recoveries could easily peter out, particularly if bailout packages are rapidly reined in and post-crisis nationalism takes hold.
Many countries will also need to revamp domestic agendas to address, and capitalize on, economic and social shifts born out of the pandemic. Indeed, while governments across the world have taken on a much greater role during the pandemic, when it comes to the recovery, their influence will only intensify.
Fiscal policy support will remain important. After developing and developed nations spent well over US$12 trillion to prop up businesses and households during lockdowns, more will need to be spent to kickstart bruised economies.
In the second quarter of 2020 the International Labor Organization estimated that around 400 million full-time jobs had been lost globally. Global corporate insolvencies were expected to increase by a quarter in 2020, business debt hit new records, and the World Bank warned that up to 150 million people worldwide could fall into extreme poverty in 2021. These scars will only widen if left unattended.
Long-term unemployment could take hold, supply chains may face a domino effect as corporate failures grow, and hiring and business investment will be restrained by poor balance sheets.
Governments may have to resort temporarily to record public debt to shore up recoveries. While global public debt is expected to hit 100% of the world’s gross domestic product, less fiscally fragile Group of Seven nations may be relied upon to drive global growth with further spending. That will test the nerve of finance ministries wary of ballooning debt, yet eager to assure economic growth while central banks help to keep borrowing rates depressed.
The United States’ recent $900 billion stimulus bill and the European Union’s $2.2 trillion recovery package offer some uplift. While continued spending will be important, particularly while monetary policies are already stretched, how funds are spent will be even more pivotal.
Businesses and households will need an off-ramp from grants, loans, and tax-deferral support rather than a precipitous drop as restrictions ease. Funds and tax breaks that support investment by businesses as well as investment in businesses can help firms switch from treading water to growth strategies.
Governments also have an opportunity to build on the acceleration of digital and green trends that took place during the pandemic. Investment in broadband infrastructure, green industries, and support for businesses to adopt technology, could drive productivity gains and even shift post-pandemic growth trajectories above trend.
Above all, policymakers will need to build national retraining schemes to help those made jobless by the pandemic find new work. These endeavors will require a wholesale reshaping of domestic industrial strategies in 2021.
Dynamics abroad will impact recoveries just as much as what happens at home. Globalization, which has been a powerhouse of growth across the world, threatens to slow or even reverse as a result of the pandemic.
Those with access to a vaccine will be able to recover faster, but their growth will hit a ceiling if limited rollouts elsewhere restrict global trade, tourism, and business activity. Research by Eurasia Group, a consultancy, finds that ensuring equal access to inoculations could be worth more than $460 billion to 10 major economies by 2025. This means COVAX, the body promoting global access to vaccines, will play a key part in the recovery.
Access to vaccines for the emerging world will be all the more crucial in the context of their fragile domestic economies. Many have lost significant revenues from exports, tourism, and remittance payments, and currencies have weakened sharply. This makes efforts to alleviate their debt burdens even more crucial.
Shockwaves could spread quickly across emerging markets as fiscal stress mounts. The G20, International Monetary Fund and World Bank have already collaborated to enable some of the poorest countries to defer debts. Further negotiations among debtors and creditors, and structuring efforts including making repayments contingent on economic fundamentals, will be important in 2021.
Limiting economic nationalism, which often arises out of global economic crises, will also be crucial. In the US, EU and UK, support for state-led industrial strategies and protectionism of sorts is mounting, particularly in the technology sector. Governments will need to balance national-security considerations carefully with the need to maintain an international flow of ideas and capital.
Likewise, a desire to protect strategic industries from competition and foreign takeover will need to be weighed against supporting key exporters, looking to adapt their supply chains, with trade deals. Indeed, for many reshoring may not make commercial or operational sense.
A global approach to international travel as vaccines come into force will also be important. Common health protocols, testing regimes, and certification will need to be established to allow tourism and transport sectors to bounce back.
During the recovery, global cooperation will also be important in embedding lessons learned from the pandemic, in what remains a highly interconnected international economy.
In the second quarter of 2020, mechanisms to transfer government support funds quickly to households and businesses were put to the test. Revamping welfare systems across the world will become important, particularly with the legacy of the pandemic driving economic despair, inequality, and social unrest, which may impact regional recoveries.
Likewise, while the 2008 financial crisis spurred wider global efforts to limit and monitor the buildup of systemic banking risks, policymakers will need to assess how trade and supply-chain risks highlighted by the pandemic may need to be mitigated.
In many ways the pandemic has opened up a Pandora’s box of new challenges for national and international governance. At home, governments will play a pivotal role in securing economic recoveries and reshaping industrial strategies. Abroad, diplomacy and negotiation will be at the heart of reopening, and alleviating risks to, the global economy.
While growth will return in 2021, the heavy lifting for policymakers is only just beginning.