COVID-19 turned the world upside-down for almost two years, and is still going. What began as a threat to human health, quickly spiraled into a financial crisis, leaving many wondering, what’s next?
Building on the latest policy research, as well as consultations and surveys, the quarterly briefing from the WEF aims to summarize the current economic environment. The goal is to identify what actions need to be made by policy-makers and business leaders in response to the global economic crisis, as triggered by the COVID-19 pandemic.
The content of their latest report covers three key takeaways: current vulnerabilities of the global economy, what can be expected of recent trends, and how policies can help the economy move forward.
1. Monitoring Fragilities
There is no denying that COVID-19 has drastically changed the global economy. This has led to many concerns surrounding the vulnerabilities of financial systems around the world.
Three areas that are being closely monitored are the possibility of bankruptcies, price surges, and the outlook of emerging markets.
How vulnerable is the current global economy, and what factors are contributing to fragilities of concern?
- The global economy remains in major disequilibrium. A one-size-fits-all approach is no longer an ideal approach to monetary and fiscal policy. Policy changes are now being influenced by complex domestic and international trade-offs, except for vaccine acceleration.
- Limited vaccine access is influencing the health toll and contributing to prolonged lockdowns in certain parts of the world.
- Earlier in 2021, a delayed wave of bankruptcies and excessive government support that would keep unviable firms alive short-term were both concerns.
- So far, the anticipated wave of bankruptcies has not happened and the number of firms being kept artificially alive is low. However, banks continue to prepare programs to reduce the risk of a failed phase-out of emergency measures.
Price surges have been seen across many sectors.
There is currently disagreement over what the main drivers are, making it tough to find optimal policy responses.
Open questions on the matter include:
- Are prices being driven by demand or rising costs? Is the greater risk overheating or stagflation in advanced economies?
- Are prices rising in isolated markets or is the general price level rising?
- How will inflation expectations evolve?
Global Financial Market Risks
Overall, the anticipated growth of emerging markets is poor. The International Monetary Fund (IMF) projections suggest that:
- Emerging and develop economies (excluding China) will remain 5.5% below the pre-COVID growth trend in 2024.
- Advanced economies will be an average of 0.9% above trend.
2. Disentangling Disruption From Trends
The global economy is being pulled in different directions and trends appear to be reversing.
So, the question remains, how long will this last? What forces are influencing post-pandemic dynamics?
From wage increases to global disruption, what’s ahead? What dynamics are temporary, and what dynamics will become more permanent?
The Outlook for Prices
Increasing prices have risen because of:
- Changes in behavioral patterns because of COVID
- Stimulus spending
- Shortages in building materials
- Supply disruptions
Overall, current levels of inflation are expected to be a short-term trend over the next 1-2 years. Central banks are confident they will keep inflation in check. However, housing and energy prices may be on an upward trend for longer.
The Outlook for Wages
Wage pressures are forming across low- and high-skilled occupations. Both are experiencing labor shortages.
- Wages among certain groups of employees are increasing. Labor shortages are giving employees in the retail and hospitality sectors an upper hand.
- Many jobs in the service sector remain unfilled, even though unemployment rates are higher than they were pre-COVID.
- Demands are shifting for skills, creating a talent war, particularly for green and digital skills.
- Labor shortages are being addressed via automation. This will lessen pressure on the wages of middle-skilled workers.
- Labor productivity growth is expected across high-income countries. Workers will be able to bargain for a bigger piece of a growing pie.
- Wage gains are expected to be a short- to medium-term phenomenon that will battle inequality. Automation and global competition for local jobs will likely dominate the bargaining dynamic long-term.
The Outlook for Global Economic Integration
- Global value chains have experienced a series of disruptions, starting with border closures, emergency shutdowns, shortages, loss of staff, missing shipments, and congested ports, which should subside.
- Other variables will likely affect global integration concerning value-chain linkages long-term, including resilience to new production networks, production being moved closer to markets, and measures implemented by governments to alleviate domestic pressures/geopolitical risks.
- Rivalry is expected to continue between the United States and China in terms of technology developments. However, the demand for greater global integration still exists between low- and middle-income countries.
- Overall, global fragmentation is believed to be a medium-term phenomenon. The current global challenges are expected to eventually force the adoption of a global mindset.
3. The Outlook for Policy
So, with the above in mind, it’s time to consider policy responses. What actions should be taken?
- Monetary policy has played a fairly accommodative role, as interest rates hit close to zero.
- The threat of inflation is now putting central banks in a situation of needing to cool down price pressures without abruptly ending the recovery.
- If overheating turns out to be the driving force behind inflation, monetary policy would combat it.
- Regardless, normalizing monetary policy to rebuild resilience for future crises will be important.
- Recovery financing — To end the pandemic and to help deal with the aftermath of the global economic crisis, the IMF proposed a $50 billion package to finance the distribution of vaccines to the poorest countries. There has also been a reallocation of IMF Special Drawing Rights to support the crisis recovery in low- and middle-income countries.
- Global tax coordination — 136 countries have agreed to the OECD deal, which imposes a global minimum corporate tax of 15%.
- Trade policy — Global trade integration will play an important role in fostering convergence across countries of varying income levels. This will require trade-offs with environmental goals and achieving greater resilience in value chains.
Reflections on Policy Lessons From 2021
The members of the Chief Economists Community reflected on the biggest policy lessons of this second pandemic year.
- Fiscal and monetary policy are powerful allies when a strong institutional framework is in place.
- It’s easier to support demand than restore supply, yet fiscal support is still lacking.
- Government interventions can address short-term crises.
- Digitalization will support vulnerable groups, including small businesses and less-educated workers.
- Public health is an economic issue — virus suppression should be a primary economic policy.
- In emergencies, countries showcase self-interest.
- Public-private partnership models need to be leveraged and deployed across borders, especially for vaccine development.
As 2021 comes to a close, few things are as critical as economic recovery. Focusing on the three takeaways discussed above will help economists, governments, business leaders, and policymakers take action. Although there are many considerations across the current economic environment, the latest policy research and insight from leading Chief Economists will help guide further action.
By addressing current vulnerabilities while remaining mindful of the latest trends and outlook for policy, the world will be able to build a resilient recovery plan.
Source: The World Economic Forum is the International Organization for Public-Private Cooperation.
The Forum engages the foremost political, business, cultural and other leaders of society to shape global, regional and industry agendas.
It was established in 1971 as a not-for-profit foundation and is headquartered in Geneva, Switzerland. It is independent, impartial and not tied to any special interests. The Forum strives in all its efforts to demonstrate entrepreneurship in the global public interest while upholding the highest standards of governance. Moral and intellectual integrity is at the heart of everything it does.