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The dreaded second and third waves of COVID-19 are here, and any
illusion the world can easily control the spread of the virus has
largely vanished. The resurgence is especially pronounced in Europe
and parts of the United States, where pandemic fatigue has become a
formidable challenge for governments. Even countries with early
successes in combatting the disease (such as Germany) have had to
reimpose restrictions on restaurants, bars, and other gathering
places. Some countries (Czechia, France, Ireland, Israel, and the
United Kingdom) have reinstated partial national lockdowns.
Successful preliminary trial results for messenger RNA (mRNA)
vaccines are encouraging, but the widespread distribution of
vaccines is unlikely before mid-2021.
Even before the recent surge in infections, we were predicting
growth would fade in the closing months of 2020 and the beginning
of 2021. That fade is morphing into something worse.
In the case of the Eurozone and the United Kingdom, real GDP
will contract in the fourth quarter of 2020, and recovery will be
limited in the first quarter of 2021. Prospects are a little less
dire for the US economy. After the US grows an expected 3.7% in the
fourth quarter of 2020, average growth in the four quarters of 2021
should be a mere 1.9%. The outlook is brighter in much of Asia,
where the infection rates have remained low. After a 4.2% decline
in 2020, global real GDP growth should reach 4.2% in 2021, 0.2
percentage point below last month's forecast.
Mainstream economists and multilateral organizations such as the
International Monetary Fund are calling for more fiscal stimulus
(beyond the approximate USD12 trillion already enacted). The need
to bolster struggling economies has swamped notions of austerity.
Unfortunately, institutional and political constraints in Europe,
the possibility of a divided government in the United States, and
limitations on further budgetary expansion in the emerging world
mean hopes for big fiscal stimulus are fading.
Central banks will continue to shoulder the burden of stimulus.
Despite repeated pronouncements to the contrary, monetary
authorities around the world are not "running out of ammunition,"
as was amply demonstrated during the 2008-09 global financial
crisis and the current pandemic. That said, there are limits to the
effectiveness of massive asset purchases and other unorthodox
monetary policies, not least because they create considerable
distortions in financial markets. Moreover, uncoordinated monetary
easing runs the risk of more financial volatility.
Bottom line
Once again, the near-term global economic outlook has worsened,
and the most likely policy mix looks to be suboptimal.
