Uneven global economic recovery in 2021 promises to reverse a long-held principle of success and failure

“All happy families are alike; every unhappy family is unhappy in its own way.
Leo Tolstoy, Anna Karenina

Tolstoy’s Anna Karenina’s opening sentence is one of the most famous in world literature, but it has special significance for economists, for whom it represents a principle that can be applied in multiple contexts and fields of study. ‘studies. The Anna Karenin Principle states that success requires the full fulfillment of a necessary set of conditions, and the absence of any of these conditions will lead to failure. Therefore, the successes are all fundamentally similar, as they reflect the presence of the same range of factors, while the failures are diverse, each stemming from its own shortcomings.

The global economic crisis surrounding the COVID-19 pandemic reverses Anna Karenina’s principle. The causes of the pandemic shock – lockdowns, border closures, trade collapse, travel bans and financial market volatility – were common to all countries and regions, while the expected recovery will be marked by the divergent circumstances of each. country and the peculiarities of its political response. Success in the post-pandemic era will reflect a constellation of country-specific policies and capacities, including national immunization rates, integration into major economic blocs, the ability to provide fiscal and monetary stimulus measures and restoring the solvency of the private sector. While all “unhappy” countries will be essentially alike, each “happy” country will be happy in its own way.

While each national recovery will depend on the characteristics of countries, the success or failure of large economies and economic blocs will profoundly influence the prospects of small economies and developing countries. Recent advances in vaccine rollout in the United States and other advanced economies have raised expectations about the global economic recovery. According to the Spring 2021 edition of the IMF’s Global Economic Outlook, the global economy is expected to grow at a rate of 6% in 2021, compared to 5.5% forecast in January, due to the faster-than-expected recovery of the economy. advances.[1] With unprecedented fiscal and monetary stimulus, the United States, China and Western Europe are on the verge of a rapid rebound: Annual GDP growth in the United States, China and Western Europe is expected to reach 6.4%, 8.4% and 4.5%, respectively, in 2021. Latin America and the Caribbean (LAC) and Europe and Central Asia (ECA) are expected to grow by 4.4% and 3 , 6%, respectively, although with large disparities between countries.

Differences in vaccination rates are behind the divergence in growth projections, as the easing of restrictions linked to the pandemic and the resumption of mobility, production, trade and travel all depend on generalized vaccination. Although good progress has been made overall, large disparities in immunization coverage closely correspond to national income levels. Slow vaccination efforts in developing countries threaten to hamper their recovery while exacerbating the global risk of mutating the virus. Several countries currently facing new waves of contagion and / or new virus strains have been forced to reimpose restrictions and delay the return to normal economic activity.

A second driver of divergent recovery trends is the degree of integration of each country into international value chains linked to advanced economies. As global economic activity rebounds, the World Trade Organization predicts that merchandise trade will grow at a rate of 8.0% in 2021. The reestablishment of global and regional value chains is also boosting trade in goods. equipment and intermediate inputs. For example, the growth of US industrial production is expected to accelerate the recovery of Mexico’s manufacturing sector due to the strong synchronicity between the economic cycles of the two countries. Likewise, given the close integration of many developing countries in the ECA zone with the European Union, the restoration of European regional value chains should improve growth prospects throughout the ECA zone. As global economic activity picks up, the prices of oil, metals, food and other commodities are expected to rise. The recovery in commodity prices has already boosted growth in some ECA countries, including Kazakhstan and Uzbekistan, as well as LAC countries such as Brazil, Colombia, Chile and Peru. While higher commodity prices will be favorable winds for resource-rich commodity exporters, they will be headwinds for net importers, especially developing countries that depend on oil imports. Trade in services is likely to remain moderate and is not expected to return to pre-pandemic levels until 2022. The hospitality and travel sectors continue to be the hardest hit by the crisis, and tourism-dependent countries in the Caribbean and the Balkans face a slow and uncertain recovery.

A third source of divergence lies in the policy response adopted by the fiscal and monetary authorities. Several countries are facing inflationary pressures that will limit the ability of their central banks to maintain accommodative monetary policies. Expansionary monetary positions, rapid credit growth, exchange rate depreciation and rising commodity prices have amplified inflationary pressures in Brazil, Kazakhstan, Mexico, Russia, Turkey and Ukraine. Many central banks have already raised their policy rates in the first quarter of 2021 or signaled the end of their easing cycles. Although necessary to manage inflation, monetary tightening could dampen prospects for a rapid recovery by putting pressure on interest rates, stimulating capital outflows or weakening exchange rates. Stricter monetary policies in advanced economies could also worsen financing conditions in emerging markets and heighten volatility in capital flows, especially to the most vulnerable economies in the ECA and LAC zone. Even in the absence of monetary tightening, US 10-year bond yields rose sharply in the first quarter of 2021, putting pressure on emerging market exchange rates which may need to accelerate monetary policy tightening.

Fiscal pressure has also intensified as governments seek to expand their emergency economic support without undermining investor confidence. The pandemic-induced recession triggered rising deficits and debt levels in many economies, particularly the LAC and ECA countries, many of which had already experienced rapid debt build-up before 2020. Debt dynamics unsustainable could force governments to cancel vital budget support before a broader recovery has fully consolidated. While budget deficits are expected to narrow, overall, between 2020 and 2021, they are expected to remain large by historical standards. The shrinking fiscal space will weaken the ability of many governments to provide additional cyclical support, although Chile and Peru are notable exceptions in the LAC region which have additional room to continue to stimulate economic activity. . In the ECA area, as fiscal space shrinks in many countries, including the Western Balkans and Ukraine, the EU’s Recovery and Resilience Mechanism will provide significant subsidies to Romania, Bulgaria and Ukraine. Poland. Resource economies in Central Asia may continue to provide stimulus measures financed by high commodity prices. If public debt trajectories become unsustainable, some countries may resort to financial repression to prevent soaring borrowing costs, accelerating inflation and weakening their currencies.

A final contributor to the uneven global recovery is the relative vulnerability of each country’s private sector. The corporate debt burden in emerging markets and developing economies (EMDE) was already at historically high levels before the COVID-19 outbreak: with easy access to international credit markets, liabilities denominated in foreign currencies accumulated over the past decade have resulted in a currency mismatch between profits. and debt servicing which has increased the vulnerability of companies to currency shocks and a growing global risk aversion. By the end of 2019, corporate debt levels in Ukraine, Poland, Slovak Republic and Slovenia reached almost 50% of annual GDP, while in Bulgaria, Russia and Turkey this ratio had reached more than 70%. Corporate debt levels are relatively low in the LAC region, with the exception of Chile, where corporate debt exceeds 100% of GDP. Business vulnerabilities in EMDEs increased sharply during the pandemic, especially among businesses with high pre-existing debt and those operating in industries particularly vulnerable to the economic impact of COVID-19. In the aftermath of the pandemic, policymakers in many EMDEs have focused on preventing premature corporate insolvency through an unprecedented cash injection and adopting forbearance measures to allow banks to expand credit to the real sector. However, the government’s abstention has blurred the line between illiquid firms and insolvent firms (i.e. ‘shadow firms’), and non-performing loan indicators do not fully reflect the deterioration in quality. assets in the financial sector. High business risk premiums indicate a high risk of default, and companies facing significant debt distress may reduce future investments and grow more slowly over the medium term. The divergence in recovery paths will reflect the relative ability of national policymakers to facilitate smooth debt adjustment and ensure that debt restructuring mechanisms and solvency frameworks operate effectively. These conditions are particularly critical in EMDEs, where bankruptcy frameworks are generally weaker and ineffective debt resolution often leads to excessive destruction of capital, even under normal circumstances.

[1] The January 2021 edition of the World Bank’s Global Economic Outlook forecast a global economic growth rate of 4%, but this projection was revised up to 5.3% in April 2021 due to the rate of GDP growth. stronger than expected in the second half of 2020, a faster-than-expected deployment of vaccination in 2021, and the continuation and expansion of monetary and fiscal stimulus in advanced economies.

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