The Banking Executive Magazine - March 2021

Global Economic Outlook 2021 fact, total trade has decreased by 18.5% this year, the “steepest drop on record”, according to WTO Di- rector General Roberto Azevêdo. Causes for such a deep contraction are various. Covid-19’s impact on travel has adversely affected the tourism sector, which is in turn re- sponsible for the consumption of ap- proximately 6.5% of world-wide goods and services. Moreover, the closure of borders between coun- tries, accompanied by stricter import inspections, have resulted in an un- wanted strain on the production and delivery of durable goods, most no- tably on electrical and automotive industries. As delivery time in- creases, most businesses that rely on day-to-day transactions have suffered from an increase in costs, and the air freight industry has been barely avoiding total ruin. Finally, distur- bances in the credit market has had a rippling effect throughout trading economies, and as such, many agreements have fallen through. While the growth of global trade is imminent in 2021, complete recov- ery is less so. As borders gradually start the reopening process, airlines will start refilling their seats, and manufacturers will go back stocking their inventories. Nonetheless, trade’s recovery path depends on both overall confidence level, which will take time to go back to pre-pan- demic levels, and the time needed to replace firms that have either con- tracted or shutdown due to low de- mand. In short, global trade should expect nothing more than a slow, L- shaped recovery 2. Food Crisis The corona virus could not have come at a worse time for the 2030 zero hunger goal. With global food chains being hampered by the pan- demic and job losses caused by eco- nomic tolls leading to more poverty, a large percent of the population will become food deprived in the coming years. The most vulnerable countries so far are Afghanistan, Burkina Faso Cameroon, The Central African Re- public, Congo, Ethiopia, Haiti, Lebanon, Mali, Mozambique, Niger, Nigeria, Sierra Leone, Somalia, South Sudan, Sudan, Syria, Venezuela, Yemen and Zimbabwe. The UN esti- mates this crisis to be the worst food- related calamity in half a century. In fact, more people are now projected to die from Covid-associated food shortages than from the actual virus itself. A POTENTIAL DEBT CRISIS: DANGERS OF THE FOURTH WAVE OF DEBT The global recession triggered by Covid-19, along with the economic policy response, have generated a rise in debt levels, especially in emerging market and developing economies (EMDEs). Pre-pandemic, however, there has been an increas- ing concern about a “fourth wave” of debt accumulation, specifically in these economies, that can spark the possibility of financial crisis. This pandemic merely added to the risks and consequences of this fourth wave by intensifying this crisis. In 2019, global debt has increased to 230, an alltime high, and govern- ment debt to a record of 83% of GDP. In EMDEs specifically, total debt reached 176 percent of GDP and government debt is expected to rise by 9% of GDP in 2020. As a result of substantial financial stimuli, accrued interest on loans, and weaker capital flows, world debt has risen to 365% of global GDP, growing by more than $15 trillion in 2020 alone. Even though the global financial system is less inter-con- nected today than pre-2008 levels, six countries (Argentina, Belize, Ecuador, Suriname, Lebanon, and Zambia) defaulting in 2020, along with the IMF disbursing aid to 81 na- tions, has left a fiscal strain that could soon burst. The G20 has already identified this potential risk and has tried to address it by creating a “Common Framework” to oversee the management of a debt relief sys- tem but has so far been undermined by the U.S.’ unwillingness to endorse further IMF resource support. CONCLUDING REMARKS 2021 holds a great many uncertain- ties, challenges, and confusion as policymakers have to decide on whether or not to pursue recovery- inducing expansionary stimuli at a risk of ever-increasing debt and an imploding financial system. And while advanced economies generally have the means to induce economic activity, international organizations fear that this pandemic will hurt emerging countries’ prospects for decades to come. Not only will this crisis roll-back years of hard-work in reducing poverty, but the overall im- pact on welfare cannot be measured. Research has shown that a great number of college graduates that do not immediately find a job will suffer from related consequences for the rest of their lives, as evident by Japan’s lost generation where limited job opportunities between 1991 and 2003 has caused 3.4million 40 to 50 year-olds to remain jobless today. Prolonged mental health issues caused by either the health or eco- nomic toll of the pandemic is also something we find difficult to meas- ure and is an unaccounted welfare cost of the virus. If all goes according to pre-set plans and no new crises emerge, the global economy is set to grow back by 5.2% in 2021 in real GDP. Alternatively, this number, along with actual welfare, could even prove to be too low if the global community was to cooperate and come up with collaborative solu- tions. Making sure that vaccines are manufactured and distributed swiftly, providing a safety cushions for the most vulnerable classes, sharing ex- pertise on the navigation of Covid-19 induced calamities, and setting up an international framework to build up global resiliency to future crises through sustainable growth will not only allow for faster world-wide re- covery, but might also prevent future disaster scenarios by building global ties able to withstand pressure. the BANKING EXECUTIVE 30 ISSUE 147 MARCH 2021