The world economy is entering the second half of 2020 still
deeply weighed down by the coronavirus pandemic with a full recovery now
ruled-out for this year and even a 2021 comeback dependent on a lot going
right.
It's a scenario few if any predicted at the start of the year
when most economists were banking on another year of expansion and a U.S. and
China trade agreement was meant to give corporate and investor confidence a
shot in the arm.
Instead, the rare pandemic forced swathes of the global
population into what the International Monetary Fund dubs 'The Great Lockdown.'
Central banks and governments responded with trillions of dollars in
unprecedented support to prevent markets from melting down and to keep
furloughed workers and struggling companies afloat until the virus passed.
Even with those rescue efforts, the world is still suffering
its worst economic crisis since the Great Depression. While some gauges of
manufacturing and retail sales in major economies are showing improvement,
hopes for a V-shaped rebound have been shattered as the reopening of businesses
looks shaky at best and job losses risk turning from temporary to permanent.
It's an economic trajectory Federal Reserve Bank of Richmond
President Thomas Barkin has likened to riding the elevator down, but needing to
take the stairs back up.
"There is a real danger of confusing rebound with
recovery," Carmen Reinhart, the World Bank's chief economist, said at the
Bloomberg Invest Global conference on June 23. "True recovery means you
are at least as well off as you were before the crisis started and I think we
are a long way off that."
Much depends on the spread of the coronavirus, a vaccine for
which remains out of grasp. The World Health Organization warns the worst of
the pandemic is still to come as cases top 10 million and deaths have risen
beyond 500,000. And even in countries where the virus appeared contained, fresh
flare ups are frequent.
The IMF estimates that by the end of this year 170 countries -
or almost 90% of the world - will have lower per capita income. That's a
reversal from January, when it predicted 160 countries would end the year with
bigger economies and positive per capita income growth.
It's now likely that global gross domestic product by the end
of 2021 will in many cases still be lower than where it was at the end of 2019,
according to HSBC Holdings Plc economists led by Janet Henry. Bloomberg
Economics describes it as 'Goodbye Victory V, Hello Worry W.'
Central bankers remain on the alert to do more. Federal
Reserve Chairman Jerome Powell has warned the outlook is "extraordinarily
uncertain" and European Central Bank President Christine Lagarde has
spoken of a "restrained" recovery that will change parts of the
economy permanently.
To be sure, there are pockets of recovery that could gain
traction. Morgan Stanley economists are sticking to forecasts of a V-shaped
recovery, pointing to positive surprises in recent economic data, especially in
the U.S. and euro region.
Global markets are split between investors who are betting on
a V-shape recovery, and those expecting significant dislocations. The MSCI
All-Country World Index of global stocks has gained nearly 40% from a March
low, but is still down about 6% this year, as investors bet policy stimulus
around the world will cushion the economic impact from the pandemic. U.S.
10-year Treasury yields have tumbled by more than 100 basis points this year to
around 0.67%.
Lessons on how the recovery plays out are being drawn from
Asia where the virus has been brought under control but the rebound has been
mixed.
In South Korea, which flattened its infection curve months
ago, the emergence of new virus clusters is casting a chill on shoppers.
China's manufacturing activity climbed in June, as did other
manufacturing gauges across the region, yet new orders continue to show
weakness.
That worrisome outlook means businesses are navigating in the
dark, according to Joerg Wuttke, president of the EU Chamber of Commerce in
China, who expects the uncertainty to last for another couple of years.
"The recovery is not V, it is not W, it is looking like
the top of a chainsaw," he said. "Up and down and up and down and
painful all the way."
It also means that fast-expanding emerging economies won't be
the global growth engine they have been, with the World Bank predicting this
group of countries will shrink 2.5% - their worst performance in data that
starts in 1960. Latin America is now on the front lines of the virus.
A complete rebound to pre-crisis levels looks impossible until
the virus is controlled - an outlook that's especially true for sectors such as
tourism, transport and entertainment where restrictions are expected to linger.
The hit to labor markets has been worse than initially
estimated and will be impossible to repair in the second half of 2020 even
under the most optimistic scenario, according to the International Labour
Organization. It last week estimated that working hours in the second quarter
were 14% lower than before the virus, equivalent to a loss of 400 million
full-time positions.
Although U.S. companies added 4.8 million people to payrolls
in June, only three in 10 jobs lost have been recovered and initial
applications for unemployment benefits remain elevated. More than 2.8 million
Americans lost their jobs for good in June.
"While a near-term mechanical bounce in economic activity
in response to the easing of lockdown measures looks likely, we expect the
subsequent climb to be long and arduous," said Joachim Fels, global
economic adviser at Pacific Investment Management Co.
There are other challenges too.
Record levels of debt will restrain how much additional
support governments can roll out - on top of the $11 trillion fiscal stimulus
already in train.
Governments are grappling with how to extend or terminate costly
near-term measures to fund wages and keep companies alive, while at the same
time gearing up for longer-term stimulus to drive a recovery.
That borrowing won't come without side effects, such as
keeping zombie companies going, according to Alicia Garcia Herrero, chief Asia
Pacific economist with Natixis SA.
"If there is no clean-up of debt, going back to
pre-crisis levels will take even longer," said Garcia Herrero.
Meantime, central banks have slashed interest rates to new
lows with some embracing negative borrowing costs. In a bid to cap market
rates, multiple types of assets have been bought and policy makers continue to
tweak their tool kit with hints of more innovation to come.
Morgan Stanley predicts $13 trillion in cumulative central
bank balance-sheet expansion from the U.S., euro region, Japan and U.K. through
the end of 2021.
Even with those steps, it's too soon to conclude they will be
enough, said Kazuo Momma, who used to be in charge of monetary policy at the
Bank of Japan.
"The crisis is far from over," he said.