The global economy is showing a robust recovery from the Covid-19 pandemic in 2021, but downside risks remain
With vaccination campaigns ongoing, the global economy is recovering fully from the major economic downturn in 2020 caused by the Covid-19 pandemic. The 6.2% growth rate is higher than was expected six months ago. As most economies have not fully reopened yet, fiscal support is often partially extended in 2021, while monetary support also remains loose, despite rising inflationary pressures. The economic cost of the pandemic will likely be felt at some point, but the pace of the recovery is generally surprising to the upside, certainly among advanced markets with high vaccination rates.
Advanced economies are forecast to grow 5.8% in 2021, more than making up for the cumulative drop in GDP in 2020. Some of the uncertainty that hung over the market last year has disappeared. In the United States, president Joe Biden is expected to follow a more consistent policy than his predecessor did. Furthermore, the Biden administration has implemented several fiscal stimulus bills, boosting GDP growth in the US and elsewhere. The outlook for the United Kingdom is also substantially brighter than it was at the beginning of 2020. Consumers are driving the recovery in the UK, with strong growth in the hospitality sectors, despite trade growth with the EU falling behind on Brexit and pandemic uncertainties.
Covid-19 infections are rising again in a number of major advanced markets due to the more transmissible Delta variant. However, the health crisis is less acute than it was in 2020, as vaccination programmes are preventing higher hospitalisation rates. The Delta variant is a larger threat for emerging markets with lower vaccination rates. Emerging markets in Asia had the pandemic relatively well under control, until the Delta variant started to spread in recent months. They have to prevent infections from spreading further, but growth prospects for the region remain relatively strong. Latin America has among the highest infection rates in the world, but benefits from looser restrictions and a robust US recovery.
New virus variants may threaten the recovery
Current forecasts assume governments maintain their grips on the pandemic, and will be able to effectively contain new surges of the virus. Moreover, vaccine rollouts will continue, unhampered by supply constraints. However, if vaccines are less effective against virus variants like Delta than expected, governments may have to re-impose restrictions later this year. This would reduce consumption opportunities and drag on GDP growth in 2021 and 2022.
It will be a challenge for governments and central banks to navigate a path out of the pandemic. The recovery prospects look good amid rising consumer demand and fiscal stimulus, but rising inflation indicates there are supply-side issues that need to be overcome. While we expect inflation to revert back to normal levels in 2022, high inflation remains a downside risk, especially if it triggers a forced tightening of monetary policy that would hamper the recovery.