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After a projected -4% contraction for the world economy in 2020, with China’s expected 2% growth contrasting with sharp downturns elsewhere, a strong rebound is in prospect next year. Current projections range from 1.7% expansion in Japan, 3.3% for the US and 9%+ for China to give an average global growth figure of 5.6%. Assuming vaccines lessen the pandemic’s impact, in 2022 global economic growth should slow but again be strong at 4.2% with China’s contribution closer to – although still above – the mean at 5.6%.
Liu singled out three issues casting uncertainty over the global macro outlook:
The US election: With Joe Biden emerging as clear winner, US fiscal policy will again be in focus, with an expected further fiscal package of US$1trn-1.5trn – possibly more modest than some have anticipated. The Biden administration will continue a policy of rebuilding US manufacturing and reshoring back industries that have moved abroad over recent decades. Rather than Trump’s ‘America First’ Biden is likely to encourage a ‘Buy American’ policy and may accompany this with a US$700bn investment in research and development facilities.
Liu also expects the Biden era to be marked by multilateralism in several areas, most notably with the US re-joining the World Health Organisation (WHO) and the Paris Agreement on combating climate change. While US-China competition is likely to continue, it should not prevent a de-escalation of tensions with the removal of some tariffs and possibly even some collaboration in areas of potential mutual benefit.
The global pandemic: The recent acceleration in the rate of Covid-19 infections and deaths have persuaded several governments to reintroduce lockdowns, albeit not always as rigidly enforced as in the first wave. Hopes have risen that Pfizer/BioNTech’s vaccine can reach a broader population to help emerging markets. Further good news on other vaccine developments is expected over coming weeks (at the time of writing, US biopharma Moderna’s 94.5% success rate had been announced)3 and the benefits will extend to both developed and emerging economies.
However, the pandemic has created medium and longer-term economic risks from the sheer size of fiscal response packages, amounting to 10% of GDP in Europe and the US. The expected additional stimulus in the US during 2021 – still likely to be a massive US$1trn– US$1.5trn – nonetheless still represents a scaling back. A similar reduction is expected in the size of both the EU and Japan’s fiscal packages; the EU having clearly indicated that its new Recovery Funds will focus on environmental, social and governance (ESG) initiatives along with the digitisation of economies4.
The worldwide response to the pandemic from central banks has been hugely accommodative monetary policy and liquidity support, with at least US$7trn released from their balance sheets (far exceeding the figure provided during the 2008-09 financial crisis), interest rates cut to near-zero or less and the Federal Reserve relaxing its inflation target to an “average” 2%.
While the global monetary system will continue providing plenty of liquidity, Liu noted some attendant risks, such as
- fiscal drag and possible inflation at some later date;
- asset valuations pushed to unsustainable levels and substantial increases in public debt
both accompanied by fears about the impact when the stimulus is withdrawn.
China’s FX policy measures, given the increasing case for a weakening USD over the next one to three years as the market “reassesses the dollar’s fundamentals”. Liu expects the Euro to appreciate to €1=$1.20, adding “under Biden the dollar premium will be unwinding, so the currency will weaken”. China’s Renminbi (RMB) has already gained 6% against USD since May, making life difficult for Chinese exporters. While the central bank “doesn’t want to see the RMB appreciate too quickly, particularly with uncertainties surrounding the new US administration” the Peoples’ Bank of China (PBOC) indicates that it is becoming less inclined to actively keep the RMB lower regardless of the impact on exports.
As Liu pointed out, China’s benchmark interest rate stands at 2.2% against the US Federal Reserve’s overnight rate of 0.25%, so the differentials strongly support RMB versus USD. While the Chinese currency advantage is likely to continue in the near term, as other emerging markets recover from Covid-19 and their manufacturing sectors revive, reliance on Chinese exports could lessen.