We entered 2021 with new hope and expectations of a soon-to-come recovery from the devastating Covid-19 pandemic. The arrival of vaccinations in some countries and additional policy support at the end of 2020 in certain economies promised a more positive situation. The recovery is expected to be significantly uneven across countries and will depend on access to vaccines & medical interventions and effectiveness of policy support, amongst others. It is therefore important to stress that there is a great deal of uncertainty around forecasts.
- Uneven world recovery foreseen
- High debt levels expected
- UK economic slump
- China the only country to recover in 2020
- Vaccinations give hope
Debt Distress and Defaults
The beginning of 2020 reflected a shocking decline in the world economy but started to show an upward trend again closer to the second half of 2020. Unfortunately, many challenges of 2020 did not stay behind and 2021 has begun with new peaks in coronavirus infections around the world. Millions are still unemployed or furloughed and inequality worsened during 2020. It is expected that many countries will have 2021 per-capita incomes below their 2019 levels.
A few governments entered the crisis with already high debt levels. With falling revenues combined with costly pandemic relief actions and borrowing, global debt has increased significantly. Several countries have already defaulted on their debt and a number of other countries, particularly low-income countries, are at high risk of debt distress. Last year, five sovereign defaults were recorded including Argentina, Ecuador, Lebanon, Suriname and Zambia. At the beginning of January 2021, Fitch calculated that global sovereign debt soared by $10 trillion to $77.8 trillion, or 94% of world GDP, as governments boosted spending on health and support their economies. Fitch expects more defaults in 2021.
Real GDP Growth
The global recovery is expected to be uneven across countries, sectors, and income levels. In its January 2021 World Economic Outlook Update, the IMF estimated a contraction of -4.9% for advanced economies. The Euro Area has seen the biggest blow in years and our panel of forecasters estimated a real GDP contraction of -7.4 for 2020.
A steady recovery in Japan is expected and our panel forecasts the economy to grow from a negative 5.3% in 2020 to 3.3% in 2021. Japan’s government announced a massive economic stimulus package in December 2020 which includes new ideas that have never been seen before, such as a ¥2 trillion Green Fund, mainly for environmental measures and a Digital Fund for digitalization.
The US economy is on a slow recovery path and our panel forecasts the economy to grow by 4.1% in 2021 after an estimated contraction of -3.6% in 2020. The prospect for higher growth is backed by expectations of earlier widespread vaccine availability in some advanced economies compared to emerging and developing economies.
GDP growth in Germany is expected to contract around 5.5% in 2020, mainly driven by falling private consumption, business investment and exports. The panel expects a slow recovery of 3.6% in 2021.
In China, the coronavirus outbreak seems largely under control in most parts of the country. As the first and only major country to start recovering in 2020, our panel estimates China’s economy to grow by 1.9% in 2020 and forecasts an 8.3% growth for 2021. Investment, in particular debt- and stimulus-fuelled infrastructure investment, boosted 2020 growth and real estate investment also showed considerable resilience. Exports experienced a boom on the back of pent-up demand for masks and other COVID-19-related materials and equipment as well as teleworking-related good.
India is now home to the world’s second-highest virus infections although it experienced one of the world’s tightest lockdowns. It has kept the government from fully reopening the economy. Our panel forecasts a contracted of 8.5% in FY20/21.
Overall, there is a certain degree of optimism that 2021 will be a better year than 2020, as progress with vaccine approvals and treatment is widely taken as light at the end of the tunnel. The prospects of a widely available vaccine towards the end of 2021 supports confidence and expectation that the world may finally be on the path to overcoming the COVID-19 pandemic. Earlier this month, the IMF raised its forecast for global growth to 5.5% in 2021 from 5.2% projected in October 2020. However, while economic conditions are expected to improve globally in the period ahead, countries will follow their own paths, many of which are likely to be bumpy. Policymakers still face formidable challenges in public health, debt management, budget policies, central banking, and structural reforms.