Few could have anticipated just how quickly these predictions would materialise. The jolt delivered by the COVID-19 pandemic has brought about a pace and magnitude of economic and societal change that is without precedent in peacetime.
The early years of the 2020s will be a period of rebuilding following the economic carnage brought about by the pandemic. The Centre for Economics and Business Research (Cebr) forecasts that the world economy will be 4.4% smaller in 2020 than it was the previous year. This figure belies imposition of lockdown restrictions, while in the case of Germany this is due to the country’s relative success in containing the COVID-19 outbreak, which allowed restrictions to be eased sooner in the second quarter. Remarkably, given the state of affairs in February, China is on course to register positive GDP growth in 2020, with its recovery having started in the early months of Q2 when much of the rest of the world was battling the worst of the pandemic.
So far, government furlough schemes and the expansion of welfare have provided a buffer between household incomes and the wider economic downturn. Businesses on the whole have been less insulated. As a result of the intense uncertainty and dramatic fall in revenues, business investment has plummeted throughout the global economy, at a pace significantly greater than the contraction of GDP. The OECD has projected a fall in foreign direct investment of at least 30% in 2020.
The global investment climate in coming years will be shaped by five key factors:
- The trajectory of the COVID-19 pandemic
- Monetary policy
- Fiscal stimulus measures
- Developments in the global trading environment
- Transitioning to a greener economy
Following a relatively rapid economic bounce back at the start of the summer – which coincided with the re-opening of shops, pubs and restaurants – the low hanging fruit of the recovery has now been gobbled up, meaning that further gains will be harder to come by. Moreover, with many parts of the world now in the midst of a second wave of the coronavirus outbreak, lockdown restrictions and weakening sentiment are erasing much of the economic gains that had taken place in Q3.
Encouraging developments in scientists’ search for a COVID-19 vaccine have been met with euphoria by the markets, with hopes that the roll-out of a vaccine this year will allow economies to reopen earlier than previously thought. The widespread availability of a safe and effective vaccine would undeniably deliver a major boost to the economic recovery.
However, irrespective of how and when the pandemic can be brought under control, the COVID-19 crisis will leave in its wake countless shuttered businesses, companies and governments economic front, rolling out creative measures to support their economies during the crisis. The key question is at what point governments will blink and take their foot off the fiscal accelerator in the face of a drastically enlarged pile of public sector debt. Saddled with unprecedented levels of debt and large pools of displaced workers. This means that suppressing the virus is just one of many important steps that will be needed to achieve a strong and sustained recovery.
On the monetary policy front, the Federal Reserve’s new approach of targeting average inflation of 2% means that the US’ monetary stance will remain extremely accommodative, with interest rates unlikely to be raised from their rock-bottom levels until after 2023. This will in turn allow other central banks to maintain their loose monetary stance with a reduced risk of triggering falls in their respective currencies. Low-interest rates together with government-backed loan schemes in many countries will support business lending during the recovery. However, record borrowing by businesses in Q2 has reflected the need for emergency loans to survive the worst of the crisis. It will be some time before businesses feel confident enough to resume borrowing for the purposes of long-term capital investment.
The fiscal outlook is less certain. So far, governments across the world have generally stepped up to the plate in the economic front, rolling out creative measures to support their economies during the crisis. The key question is at what point governments will blink and take their foot off the fiscal accelerator in the face of a drastically enlarged pile of public sector debt.
In the US, the ongoing risk of political gridlock means that little can be taken for granted on this front. In Europe, the EU has suspended its fiscal rules until at least the end of 2021, which will provide member states with more freedom to maintain their stimulus measures if they have the inclination and capacity to do so. Meanwhile, in the UK, the last-minute extension of the furlough scheme until the end of March has averted what could have been a cliff-edge withdrawal of stimulus.
Next, there is the question of the international trading environment. In the Brexit negotiations, the clock is continuing to run down on agreeing a free trade deal between the UK and the EU. Failure to do so would burden thousands of businesses on both sides of the channel that have already been pushed to the brink by the COVID-19 crisis with additional trading frictions and costs. There is also the issue of the West’s relationship with China. Sino-American relations have hardened in recent years, as disagreements over intellectual property protections and state subsidies among other things led to a full-blown trade war between the world’s two largest economies. Meanwhile, developments in Hong Kong have driven a sizeable wedge between the UK and China that looks set to remain an issue for the foreseeable future. More strained and or distant economic relations on a number of fronts have the potential to take the wind out of the sails of any nascent economic recovery.
In recent years, intensifying public pressure has pushed governments to step up their efforts in lowering carbon emissions and protecting the natural environment. The devastating fires that have ravaged many parts of the world in 2020 including Australia, Brazil and most recently the US will have served to heighten awareness of this issue among the public and policymakers alike. Many countries have committed to targets of reaching net-zero emissions by 2050 and in some cases earlier. These commitments will require a fundamental transformation of energy systems, production methods and consumption patterns, which in turn will have a profound effect on the investment landscape over the next decade.
While the path ahead is littered with obstacles, there are causes for optimism. Rarely do societies emerge unchanged from crises of the scale of the current pandemic and the COVID-19 crisis will leave an indelible mark on the global economy that will far outlive the pandemic. The habits and preferences formed during lockdown will eventually drive the creation of markets which cater to customers’ newfound tastes. The spread of remote working will fuel the growth of localised hotspots for economic activity in new areas, while the extended closure of physical shops and other outlets will have brought forward trends towards online shopping and digital uptake by several years. Therefore, while the dislocation brought about by business closures and redundancies will undoubtedly be painful, these displaced workers and resources will eventually be deployed towards the rebuilding of a global economy that reflects societies’ needs and demands in a post-COVID world.
Fundamental to this rebuilding process will be an investment – both from the private and public sector. Just as investment tends to fall more sharply than the wider economy during a downturn, it also tends to climb more dramatically during the upswing. Therefore, as the current uncertainty begins to subside, investment is set to surge as countries begin the process of building large swathes of their economies from the ground up.
During the last global economic crisis in 2008/09, countries were generally successful in limiting the economic turmoil to a severe recession rather than a depression. Where they fell short was in producing a sustained economic recovery accompanied with notable improvements in standards of living. This shortcoming can be attributed to the dismal rates of productivity growth that advanced economies have seen since 2008. Cebr’s research with Jersey Finance has identified some key areas to focus on during the recovery in order to promote higher productivity. These are investment in R&D, continual updating of technology, regular monitoring of productivity and a diverse workforce. This provides a blueprint for how the rebuilding of the global economy can also address the productivity puzzle that has befuddled policymakers for more than a decade.