The last forecast by the WTO for international merchandise trade for 2020 projected a decline of 9.2% for the world reflecting significant improvements in the 3rd quarter of 2020 after the sharp contraction in the second quarter. Services trade is trailing merchandise trade significantly as is reflected in the WTO ‘s December 4, 2020 press release, Electronics and automotive products lift global merchandise trade in Q3, services lag behind, https://www.wto.org/english/news_e/news20_e/stat_04dec20_e.htm. Two charts from the press release show data through the third quarter of 2020 for goods and services and are copied below.
The expected continued rebound in the fourth quarter of 2020 has likely been reduced in size by the large increase in COVID-19 cases in many countries, including the European Union, United Kingdom, the United States and some countries in Asia and reintroduction of restrictions on people in those countries, resulting in downward pressure on domestic consumption (and hence trade flows in both goods and services).
There is significant optimism about economic growth in 2021 in light of the progress on approval and production of COVID-19 vaccines. See my post from January 3, 2021, 2021 – how quickly will COVID-19 vaccines bring the pandemic under control?, https://currentthoughtsontrade.com/2021/01/03/2021-how-quickly-will-covid-19-vaccines-bring-the-pandemic-under-control/.
Today, January 5, 2021, the World Bank released its World Economic Prospects report. See World Bank, World Economic Prospects, January 2021, https://www.worldbank.org/en/publication/global-economic-prospects. The press release from the World Bank provides both an estimate for growth in 2021 for the world and for various regions of the world but also cautions that the economic rebound could be reduced significantly if there are problems with vaccinations in the developed world and various advanced developing countries. See World Bank, Global Economy to Expand by 4% in 2021; Vaccine Deployment and Investment Key to Sustaining the Recovery, January 5, 2021, https://www.worldbank.org/en/news/press-release/2021/01/05/global-economy-to-expand-by-4-percent-in-2021-vaccine-deployment-and-investment-key-to-sustaining-the-recovery. A large part of the press release is copied below (emphasis and italics in the original).
“Development risks remain as economic activity, incomes likely to stay low for extended period
“WASHINGTON, Jan. 5, 2021 — The global economy is expected to expand 4% in 2021, assuming an initial COVID-19 vaccine rollout becomes widespread throughout the year. A recovery, however, will likely be subdued, unless policy makers move decisively to tame the pandemic and implement investment-enhancing reforms, the World Bank says in its January 2021 Global Economic Prospects.
“Although the global economy is growing again after a 4.3% contraction in 2020, the pandemic has caused a heavy toll of deaths and illness, plunged millions into poverty, and may depress economic activity and incomes for a prolonged period. Top near-term policy priorities are controlling the spread of COVID-19 and ensuring rapid and widespread vaccine deployment. To support economic recovery, authorities also need to facilitate a re-investment cycle aimed at sustainable growth that is less dependent on government debt.
“‘While the global economy appears to have entered a subdued recovery, policymakers face formidable challenges—in public health, debt management, budget policies, central banking and structural reforms—as they try to ensure that this still fragile global recovery gains traction and sets a foundation for robust growth,’ said World Bank Group President David Malpass. ‘To overcome the impacts of the pandemic and counter the investment headwind, there needs to be a major push to improve business environments, increase labor and product market flexibility, and strengthen transparency and governance.’
“The collapse in global economic activity in 2020 is estimated to have been slightly less severe than previously projected, mainly due to shallower contractions in advanced economies and a more robust recovery in China. In contrast, disruptions to activity in the majority of other emerging market and developing economies were more acute than expected.
“’Financial fragilities in many of these countries, as the growth shock impacts vulnerable household and business balance sheets, will also need to be addressed,’ Vice President and World Bank Group Chief Economist Carmen Reinhart said.
“The near-term outlook remains highly uncertain, and different growth outcomes are still possible, as a section of the report details. A downside scenario in which infections continue to rise and the rollout of a vaccine is delayed could limit the global expansion to 1.6% in 2021. Meanwhile, in an upside scenario with successful pandemic control and a faster vaccination process, global growth could accelerate to nearly 5 percent.
“In advanced economies, a nascent rebound stalled in the third quarter following a resurgence of infections, pointing to a slow and challenging recovery. U.S. GDP is forecast to expand 3.5% in 2021, after an estimated 3.6% contraction in 2020. In the euro area, output is anticipated to grow 3.6% this year, following a 7.4% decline in 2020. Activity in Japan, which shrank by 5.3% in the year just ended, is forecast to grow by 2.5% in 2021.
“Aggregate GDP in emerging market and developing economies, including China, is expected to grow 5% in 2021, after a contraction of 2.6% in 2020. China’s economy is expected to expand by 7.9% this year following 2% growth last year. Excluding China, emerging market and developing economies are forecast to expand 3.4% in 2021 after a contraction of 5% in 2020. Among low-income economies, activity is projected to increase 3.3% in 2021, after a contraction of 0.9% in 2020.
“Analytical sections of the latest Global Economic Prospects report examine how the pandemic has amplified risks around debt accumulation; how it could hold back growth over the long term absent concerted reform efforts; and what risks are associated with the use of asset purchase programs as a monetary policy tool in emerging market and developing economies.
“’The pandemic has greatly exacerbated debt risks in emerging market and developing economies; weak growth prospects will likely further increase debt burdens and erode borrowers’ ability to service debt,’ World Bank Acting Vice President for Equitable Growth and Financial Institutions Ayhan Kose said. ‘The global community needs to act rapidly and forcefully to make sure the recent debt accumulation does not end with a string of debt crises. The developing world cannot afford another lost decade.’
“As severe crises did in the past, the pandemic is expected to leave long lasting adverse effects on global activity. It is likely to worsen the slowdown in global growth projected over the next decade due to underinvestment, underemployment, and labor force declines in many advanced economies. If history is any guide, the global economy is heading for a decade of growth disappointments unless policy makers put in place comprehensive reforms to improve the fundamental drivers of equitable and sustainable economic growth.
“Policymakers need to continue to sustain the recovery, gradually shifting from income support to growth-enhancing policies. In the longer run, in emerging market and developing economies, policies to improve health and education services, digital infrastructure, climate resilience, and business and governance practices will help mitigate the economic damage caused by the pandemic, reduce poverty and advance shared prosperity. In the context of weak fiscal positions and elevated debt, institutional reforms to spur organic growth are particularly important. In the past, the growth dividends from reform efforts were recognized by investors in upgrades to their long-term growth expectations and increased investment flows.
“Central banks in some emerging market and developing economies have employed asset purchase programs in response to pandemic-induced financial market pressures, in many cases for the first time. When targeted to market failures, these programs appear to have helped stabilize financial markets during the initial stages of the crisis. However, in economies where asset purchases continue to expand and are perceived to finance fiscal deficits, these programs may erode central bank operational independence, risk currency weakness that de-anchors inflation expectations, and increase worries about debt sustainability.”
Whether the economic recovery in 2021 is as robust as projected or is dramatically smaller (worst case scenario) will obviously affect trade flows of both goods and services. As can be seen from the initial roll out of vaccines in the U.S., EU, U.K., Canada and other countries, there are significant goods and services involved with the production, distribution and utilization of vaccines globally and within markets. Thus, if there are problems with vaccinating large parts of populations, that will have a direct effect on both goods shipments and on various services. There are also the indirect effects on goods and services from the likely continued restrictions on travel and tourism if the pandemic is not brought under control, something that widespread vaccinations will assist in achieving. My post yesterday reviewed some of the early challenges with vaccinations occurring in the U.S., EU and India. Additional articles are appearing which suggest a lot of work needs to be done to in fact permit rapid vaccinations of populations. See, e.g., Politico, The EU’s coronavirus vaccine blame game. Why so slow?, January 5, 2021, https://www.politico.eu/article/the-vaccination-blame-game-is-it-all-the-eus-fault/; Politico, Sluggish coronavirus vaccination rollout poses risks for Macron, January 5, 2021, https://www.politico.eu/article/coronavirus-covid19-vaccine-campaign-fail-france-president-emmanuel-macron-election/; Wall Street Journal, Covid-19 Vaccine’s Slow Rollout Could Portend More Problems, January 1, 2021, https://www.wsj.com/articles/covid-19-vaccines-slow-rollout-could-portend-more-problems-11609525711/ And this comes against the backdrop of continued surges of new cases of COVID-19 in the U.S. and many other countries which will extend restrictions into the early months of 2021 at least and hence restrict economic recovery in at least the first quarter of 2021. See, e.g., Financial Times, Covid surges as UK rolls out mass vaccination programme, January 3, 2021, https://www.ft.com/content/71140ee7-8e47-4499-9fcf-2d23d5c7d94f; New York Times, The Lull Before the Surge on Top of the Surge, January 5, 2021, https://www.nytimes.com/2021/01/05/us/california-coronavirus.html
The World Bank report identifies a host of policy issues for governments and challenges flowing from the high level of debt that has been incurred during 2020 and the downward pressures on investment flows in many countries. Many countries will have trouble implementing the appropriate policy options because of existing debt issues (particularly many developing countries) or because of political gridlock, as is apparent in the U.S. even with a new Administration due to be sworn in on January 20. See, e.g., New York Times, $900 Billion Wonʼt Carry Biden Very Far (Despite new pandemic aid, he confronts an economic crisis unlike any since he last entered office in 2009. And political headwinds have only stiffened), January 4, 2021. Indeed, as reviewed in a recent Congressional Research Service updated report on the Global Economic Effects of COVID-19 (updated as of December 23, 2020), the level of debt incurred by developed and developing countries has surged during the pandemic with the level of fiscal deficit relative to GDP reflecting declining government revenues and increased expenditures to reduce the negative effects of the pandemic. See CRS, Global Economic Effects of COVID-19, updated December 23, 2020, page 13, https://fas.org/sgp/crs/row/R46270.pdf. The figure from the report is copied below. Obviously the levels of fiscal deficit incurred in 2020 are not sustainable. They also reduce flexibilities of countries in policy actions that can be taken to speed up the recovery of the national and global economies.
The world needs to return to a period of sustained economic growth that is more inclusive and more equitable. The arrival of vaccines (with more expected in the first quarter of 2021) and the ramp up of production, distribution and utilization of vaccines around the world can expand economic growth both directly through the goods and services involved and indirectly through permitting countries to ease restrictions imposed to try to control the pandemic. The first few weeks of the rollout of vaccines have not been without significant problems. As reviewed in yesterday’s post, production of the vaccines that have been approved by individual nations is running behind what was anticipated, in some cases (e.g., India) significantly. While distribution has been reasonably robust in the U.S. and some other countries, there is a significant lag in getting the vaccines utilized with a wide variety of problems identified in different markets.
As the World Bank’s report today makes clear, if countries are not able to achieve significant vaccinations in 2021 the projected growth of global GDP could be cut by more than half. A global economy that is not expected to return to 2019 levels until 2022 even if 2021 growth rates are achieved will be further retarded if vaccinations lag what is needed. That will reduce trade volumes of goods and services, leave tens of millions of people around the world unemployed or underemployed, and challenge the ability to achieve UN Sustainability Goals on a host of issues including poverty, food security and many more.
President-elect Biden and his team are focused on dramatically ramping up the response in the United States, but the challenges here are significant and complicated by a divided public many of whom still doubt there is a pandemic or that it is problematic or who are opposed to vaccinations. Challenges exist in many other countries as well.
If ever there were a time for people to come together and ensure the timely vaccinations of as many people as possible as quickly as possible, it is obviously now. Whether that can be achieved is the multi-trillion dollar question.