Asia at the Forefront: The World’s Uneven Emergence from COVID-19.

Overview

Early in 2020, at the onset of COVID-19 related lockdowns, we noted that the world was entering an economic downturn which would rival, if not surpass, the 2008 global financial crisis (GFC) in economic and social magnitude. Faced with a global pandemic reminiscent of that experienced in 1918, governments (to varying degrees) embraced mobility restrictions and public health measures intended to slow the virus’s deadly spread. At the same time, in an attempt to offset the devastating impacts of a resulting sharp drop in consumer spending, political leaders of all major developed economies embraced unprecedented accommodative shifts in fiscal and monetary policy. These policy responses have brought much needed support to those most impacted by COVID-19 related lockdowns, as well as to financial markets, helping to partly offset the sizable macroeconomic impacts of the pandemic.

Ultimately, we saw a strong sequential economic recovery in the third quarter of 2020 as some of the more severe mobility restrictions that were put in place to deal with the pandemic were scaled back. However, more recently the high frequency indicators around the world have indicated that the so-called “V-shape” recovery has eased, particularly as more countries faced new COVID-19 waves and some mobility restrictions were re-introduced. Now, the development and the distribution of COVID-19 vaccines promises to be a game changer that will bring about a rapid acceleration of economic activity as health risks are mitigated and mobility returns.

Nonetheless, the latest forecasts from the International Monetary Fund (IMF) in January 2021 indicate that growth is still estimated to have been deeply negative in 2020, and that the recovery is expected to be slow. Specifically, the IMF estimates global growth to have fallen 3.5% in 2020 and expects it to rise 5.3% in 2021. Except for China, the world is barely expected to reach its pre-pandemic fourth-quarter 2019 level until the end of 2021. Still, the IMF expects that most economies will remain well below their pre-pandemic trend throughout 2022. For its part, the OECD (Organisation for Economic Co-operation and Development) projects that while global growth may pick up in the medium term, it is unlikely that we will regain the ground lost relative to the world economy’s pre-COVID-19 trend.

Across the world, even with massive job retention schemes in major developed markets, unemployment rates remain elevated. In addition, the presence of massive employment schemes suggests that these unemployment levels, particularly in Europe, could in fact rise in the coming quarters, absent continued fiscal support.

These impacts have not been felt evenly. Rather, the negative consequences of lockdowns have disproportionately impacted lower-income jobs. A September 2020 study from the Pew Research Center indicated that 47% of US lower-income earners (or someone in their household) had either lost a job or had to take a pay cut due to COVID-19, while the same was true of only 32% of upper-income recipients (see Table 1 in the PDF). A similar disparity was seen in the proportion of those who were able to go back to the job they had been laid off from due to COVID-19. Among middle- and upper-income persons, 42% found themselves back in their previous position in September, while only 24% of lower-income earners could say the same.

Around the world, we are seeing similar impacts. In an October publication, the World Bank estimated that global extreme poverty is expected to rise in 2020—by 88 to 115 million people—for the first time in over 20 years as the disruption of the COVID-19 pandemic compounds the forces of conflict and climate change, which were already hindering poverty reduction.¹

Policymakers around the world have highlighted the uneven impact of the COVID-19 recession. In its World Economic Outlook (WEO) Update, the IMF stated that “the burden of the crisis has fallen unevenly across groups: workers with less education, women, youth, those in contact-intensive sectors, and those informally employed have suffered disproportionate livelihood and income losses.” There is a growing consensus that policy support, including fiscal and monetary, will need to address not only the aggregate output and income losses but also to help mitigate and reverse disparate impacts of COVID-19. As the recent IMF Fiscal Monitor Update spells out: “Budget needs are expected to remain sizable…as economies emerge from the pandemic amid a disproportionate adverse impact on the poor, women, and informal workers.”

Additionally, there is significant variation in how countries have handled the pandemic, managed fiscal and monetary policy, and supported their economies. While the euro area and the US contend with deepening fiscal deficits and excessive monetary accommodation, areas of Asia are in stronger fiscal shape, with greater growth potential, robust trade dynamics and current account surpluses. The decade ahead appears likely to be characterized by the ascendent economic and political strength of China, with regional trade and asset ownership becoming increasingly denominated in the Chinese yuan.

In this edition of Global Macro Shifts, we explore the macroeconomic impacts of the COVID-19 pandemic, the consequences of extraordinary policy responses to the crisis and the economic outlook for a post-pandemic recovery. The paper is organized as follows: Section 1 covers the US economic outlook for 2021 by reviewing the damage endured to date, the uneven impacts on demographics within the workforce and the economic recovery’s dependence on further government support. Section 2 discusses the implications of the economic policy choices of the US for the rest of the world from the vantage point of macroeconomic theory. Section 3 draws on these foundations and translates theoretical principles into economic reality by laying out our expectations for economic and financial developments of other large countries and regions. Finally, we conclude the paper with a summary of our views.

Global Macro Shifts is a research-based briefing on global economies featuring the analysis and views of Dr. Michael Hasenstab and senior members of Templeton Global Macro (TGM). Dr. Hasenstab and his team manage Templeton’s global bond strategies, including unconstrained fixed income, currency and global macro. This economic team, trained at some of the leading universities in the world, integrates global macroeconomic analysis with in-depth country research to help identify long-term imbalances that translate to investment opportunities.