By Xavier Fontdegloria
The global economy is recovering faster than anticipated from the coronavirus pandemic as countries loosen initial lockdowns, but the road to full recovery will be slower and comes with patches of difficulty, economists say.
The outlook for the world's economy has improved during the summer, with hard data pointing to a pick-up in economic activity and employment across the globe. Even though most indicators remain below pre-pandemic levels, a flurry of upwardly revised forecasts point to a strong rebound in global gross domestic product during the second half of 2020.
Good news has come from across the globe. China, the world's second-largest economy, is well on the way to regaining its pre-virus levels of output. Retail sales in major developed markets such as the U.S., Germany, and the U.K. currently exceed February's reading. France's statistics agency Insee reported that the country's GDP in August was at 95% of pre-Covid levels. Russian and Brazilian economies are performing better than expected. J.P. Morgan Global Composite PMI, which is compiled by IHS Markit and covers about 90% of global GDP, reached a 17-month high in August as lockdowns and restrictions in response to the pandemic continued to ease.
"The outlook of Covid-19 impact in the economy has changed dramatically, with most large economies able to lift economic activity to much higher levels despite the ongoing virus spread," say economists at Morgan Stanley in a research note.
According to their forecasts, the global economy is likely to regain its pre-pandemic levels as soon as the next quarter, about three months earlier than previously estimated. That would mean the world would recover from the coronavirus-driven recession in 9 or 10 months, significantly less than the 16 months it took after the financial crisis of 2008.
Not all forecasts regarding the global economic performance in the short-term are that optimistic, but the upshot is that the recovery over the summer months has continued to gather momentum despite the clusters of infections across the world, especially in the U.S., some European countries and India. Those waves --which so far have brought more asymptomatic cases and less hospitalizations and fatalities-- have largely been dealt with via targeted measures rather than full lockdowns.
"As societies learn to cope with Covid-19, the pandemic seems to be turning gradually from a global shock into a more manageable problem," says Holger Schmieding, chief economist at Berenberg. "We believe that global economic activity will continue to rebound as the world adapts to the virus via low-cost mitigation measures, such as face masks, and monetary and fiscal policy remain supportive," says Jan Hatzius, chief economist at Goldman Sachs.
Broad policy support has contributed decisively to the rebound. Active fiscal policy--which has supported household incomes and businesses during the crisis--won't be tightened aggressively, and central banks are also keen to stay dovish to nurture the recovery, economists from Morgan Stanley say.
This optimistic big picture, however, masks significant sectoral and regional differences. While manufacturing and construction--where social distancing is not crucial-- are experiencing a fast recovery, the services sector and particularly consumer services are struggling. Similarly, those countries whose economies are more dependent on sectors requiring social distancing measures, such as Spain or Thailand, face a bumpier path to full recovery.
While the early recovery from the Covid-19 recession looks V-shaped, economists warn that the rapid gains driven by the reopening of the economies are unlikely to last and will give way to more moderate rates of growth.
"We do not expect the pace of expansion in recent months to continue, as the boost from reopening fades, labor market dislocations constrain consumer spending, and firms retrench on capex," says Brian Coulton, chief economist at Fitch Ratings.
"Despite the positives, we see plenty of reasons to remain cautious about the pace of growth in the latter stages of the year," says Ben May, director of global macro research at Oxford Economics. The pick-up in Covid-19 cases in some parts of the world and the cooler autumn weather in the Northern Hemisphere could deter some forms of low-risk social spending, such as outdoor eating at restaurants, he says.
Oxford Economics forecasts that global GDP could return to the end-2019 peak by the third quarter of 2021, significantly later than projections by economists from Morgan Stanley. While the U.S. bank expects an effective Covid-19 vaccine or treatment to be ready in the next couple of months, Oxford Economics only expects such an advance in mid-2021.
The main risk to the world's economic recovery is that a new wave in infections prompts full lockdowns similar to the ones of spring, economists say. Even targeted Covid-19 containment measures could carry risks depending on the instinctive response of households and businesses to them, says Neil Shearing, group chief economist at Capital Economics:
"Faced with a jump in infections, it's possible that people begin to mimic aspects of earlier lockdowns without actually being required to by governments. Pubs, restaurants and shops could start to empty once again. Travel and mobility could tumble. In such a scenario, countries where the fear factor is greatest--including the U.S., Italy and the U.K.--would be among the most vulnerable."
Full recovery could be also hampered by structural changes, with trends such as working from home, increased online shopping and less business travel, taking hold.
"This type of life will not generate the same level of GDP as we were used to, at least not for many years, and if this new structure of life stays in place, the sectoral composition of GDP will be very different from what we were used to", says Erik F. Nielsen, group chief economist at UniCredit.
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