By Darren Chang, Eswar Prasad, Ethan Wu
The world economy is experiencing a tepid, uneven, and fragile recovery from the depths of the COVID-19 recession. The latest update of the Brookings-Financial Times Tracking Indexes for the Global Economic Recovery (TIGER) reveals pockets of strength in particular economies, but a broad-based and robust recovery does not appear on the horizon.
China’s economy is back on track and the United States appears to have turned the corner, while many other economies plumb new depths. As the struggle to contain the virus continues, and with fears of a second wave mounting, the risks of substantial and long-lasting scarring effects on economies are rising. Private sector confidence has been battered, which does not bode well for business investment and employment creation.
There are some positive omens. World merchandise trade has rebounded strongly, consistent with indications of a revival in household demand for goods in many economies even as the demand for services remains hobbled by restrictions and consumer concerns. Financial markets have held up surprisingly well, with stock markets in many countries recovering close to or even exceeding their pre-COVID levels. Even with near-zero interest rates, banking and financial systems seem mostly stable. Oil prices have recovered somewhat, while prices of other commodities have been buoyed by consumer and industrial demand.
Click a country name below the Composite Index to view charts for the main TIGER indexes by country and charts for the indicators that make up the indexes, which are broken down by real activity, financial, and confidence indicators for advanced economies and emerging markets.
In the United States, industrial activity and the labor market have regained some lost ground. The unemployment rate is falling and employment levels are up, although both are well off their pre-COVID levels. But increases in long-term unemployment and disruptions to the services sector portend a difficult path to a more robust and sustained recovery. Private consumption growth has slowed as fiscal stimulus measures wind down, which has led to a decline in household disposable income, and prospects of further stimulus remain uncertain. Business investment continues to contract, which does not augur well for a durable recovery in productivity and growth. Stock markets are taking a breather after a sharp rebound earlier in the year, perhaps reflecting concerns about the virus containment strategy. As the November elections approach, heightened political and policy uncertainty is likely to keep consumer and business confidence muted.
The eurozone has been battered by the pandemic and, with deflation setting in, faces rising risks of a deep and prolonged contraction. The revival of manufacturing in Germany and many other economies in the zone has been more than offset by the contraction in services on account of tighter virus-related restrictions. The Japanese economy is in equally perilous shape, although it has so far escaped falling back into deflation. Despite a revival of its services sector, the U.K. economy is also in the midst of a severe contraction, exacerbated by erratic lockdown policies and Brexit-related uncertainties.
China has led the global recovery, with many indicators of economic activity already above pre-COVID levels. Both the industrial and services sectors have revived, bolstered by China’s apparent success in bringing the virus under control. Retail sales and manufacturing sector investment have also come back up. However, unlike in the period after the global financial crisis, it is not clear that China will substantially boost global demand, especially with the government’s new dual circulation strategy emphasizing more self-reliance and inward-looking policies.
Other emerging market economies have not fared well. India is experiencing a sharp slowdown in economic activity and, as the country’s lockdown is eased, faces a resurgence of the virus that could prove calamitous. The government has pushed through some reforms to farm policies and labor markets, but a banking system hobbled by bad loans remains a constraint on growth. Brazil and Russia have not done much better, with substantial contractions in economic activity and few policy levers to revive growth.
Major central banks have pulled out all the stops in supporting economic activity and, in some economies, also trying to fend off deflation. They have been using not just unconventional monetary policy but in some cases even adjusting their policy frameworks to signal tolerance of higher inflation. Even the central banks of some smaller advanced economies such as Australia and New Zealand as well as emerging market central banks such as the Reserve Bank of India have resorted to unconventional measures. The limits to any type of monetary policy in supporting growth are, however, becoming increasingly apparent. Central banks are in peril of increasing entanglement in their economies through purchases of corporate and government bonds and direct financing of firms, which could leave them vulnerable to political pressures and threats to their independence in the future.
Governments have little choice but to invoke further aggressive fiscal stimulus, even though this may come on top of already high public debt levels. But this has to be juxtaposed against the risks of even greater and long-lasting scarring of economies in the absence of such stimulus. The global low interest rate environment will limit interest payment burdens, and, rather than crowding out private investment as in normal times, well-targeted government expenditures could serve as a catalyst.
To be effective, however, these measures will need to be complemented with coherent virus containment strategies that allow economies to reopen safely. Concerns about ineffectual management of the virus’s spread seem to be a dominant factor holding back a revival of demand and confidence. While the worst of the pandemic recession might be over, these are still desperate times that call for desperate measures.
