International Finance

How can the world get back on its feet?

Vaccination is key for global economic recovery but vaccine disparity is now a growing concern that needs addressal

It is, without doubt, 2020 was a catastrophic year for businesses and economies across the globe. Economic forecast for 2020 went for a toss when the Coronavirus hit Wuhan in late 2019. Soon, the World Health Organisation (WHO) declared the coronavirus crisis a pandemic as the virus soon found its way out of Wuhan and into other Southeast Asia, the Middle East, Europe and gradually into Africa and the Americas. The pandemic landed a knockout blow on the global economy and now it needs to get back on its feet.

Major economies such as China, the US and many European countries reported economic contraction for 2020 as borders were sealed, trades were disrupted, flights were grounded and people were advised to stay indoors. With economic activities halted across the globe, the global economy contracted by 4.4 percent in 2020, according to the International Monetary Fund (IMF).

2021 dawned and according to the World Bank, the global economy is set to expand 5.6 percent this year, its strongest post-recession pace in 80 years. This is a sharp upgrade compared to its previous forecast made in January 2021, where the World Bank said that the global economy will grow by 4.1 percent in 2021. Much of the recovery will depend on factors such as fiscal policies, stimulus packages, employment growth and the vaccination drive.

Vaccines key to global economic recovery
Similar to the World Bank, the IMF, in its World Economic Outlook released in April 2021, said that the global economy is projected to recover in 2021 and 2022 with an anticipated GDP growth of 6 percent and 4.4 percent respectively. The recovery of the global economy will depend on various factors, but mostly on the success of the global vaccination drive which is currently Within months of the Covid-19 virus becoming a global crisis, funds were raised and the search for a Covid-19 vaccine began. So far, around 20 vaccines have already been authorised in different parts of the world and many more remain in development. So, how important is a widespread vaccine roll-out for the recovery of the global economy?

Professor Andrew Delios, Vice Dean, MSc Programmes, Professor of Strategy and Policy at the National University of Singapore (NUS) Business School told International Finance that the vaccine roll-out is crucial. He said, “What we have learned now is that the plans to control borders, test and trace only temporarily reduce the threat of the virus. As an invisible enemy, it is not possible to evade the spread of the virus in a jurisdiction for an extended length of time. The lessons have been hard, but they have also yielded the clear message that widespread vaccination is the only possible means to resume social and business life on a wide scale in a way analogous to pre-Covid.

“Nearly 70-80 percent of the nations needs to be vaccinated. “Nations need to independently build vaccine security, meaning, if at all possible, domestic vaccine manufacturing capabilities to contend with at least the next few years while Covid-19 vaccinations of various types become a routine part of life for everyone,” he added.

Nuno Fernandes, who is a Professor of Finance at IESE Business School, chairman of the Board of Auditors of the Portuguese Central Bank (Banco de Portugal), Non-Executive (Member of Audit Committee) at the European Investment Bank, and a Research Associate of the European Corporate Governance Institute told International Finance, “Governments are risk-averse, and will therefore be reluctant to fully dispense with medical restrictions until they’re certain that no new outbreaks will occur. Without successful vaccination rollouts and the vast majority, or at least 70 percent, of adult populations being vaccinated, certain restrictions will stay in place.”

Harald Fadinger, Professor of Economics at the University of Mannheim, Germany also echoes the same thought. He told International Finance that the vaccine roll-out is the single most important factor contributing to global economic recovery because it allows to phase out social distancing measures. The manufacturing sector is already booming in many economies since consumption has shifted from services to physical goods during the pandemic. He said, “Widespread vaccine rollout will enable fast recovery of the service sector which accounts for the largest share of GDP in most economies (many services require personal contact). “
But the problem now is not vaccine development, but making the vaccine available to the 7.7 billion population. It is critical for a global economic recovery that the vaccine reaches every section of the society, especially the marginalised.

In this regard, Neha Anna Thomas, Senior Economist & Programme Manager, Frost & Sullivan told International Finance that extensive vaccination is critical to global economic recovery in 2021 and 2022. A weak pace of vaccination stands to delay the lifting of economic restrictions as well as dampen consumer and business confidence. She said, “As information shows that the likelihood of mutation is linked to higher virus circulation, it becomes important to boost national vaccination campaigns in order to quell variants and prevent new Covid-19 waves and associated lockdowns. Proof of vaccination has now become especially important for the opening up of the global tourism sector, with vaccination proof to become increasingly important across other industries as well, especially those relying on in-person contact.”

Can vaccine disparity hinder economic growth?
To make sure vaccine distribution is not uneven, WHO launched the Covid-19 Vaccines Global Access (COVAX) in April 2020. However, there is a disparity in the vaccination rates across continents. It is estimated nearly 50 percent of the adult population in the US has been fully vaccinated so far. In Europe, so far, nearly 30 percent of the adult population have received at least one dose of a Covid-19 vaccine, whereas, around 17 percent of them have been fully vaccinated. However, this is not so in the case of lower-income countries, where the rates remain as low as 1 percent of the population when it comes to the Covid-19 vaccine.

In this regard, Neha Anna Thomas said, “Data clearly shows that there is a disparity in vaccine coverage across the global economy, with advanced economies seen to be taking a lead in vaccine coverage. To begin with, weaker progress in vaccination, particularly amongst prominent emerging markets which are fairly significant global GDP contributors, could potentially derail the pace of domestic recovery in these countries and in turn, directly impact global growth prospects. Disparities in the pace of vaccination would also negatively impact international tourism and cross-border trade and investment flows. Finally, weaker vaccination programmess and higher virus circulation increases the risk of exposing global economies to newer mutations, necessitating recurrent lockdowns and restrictive measures.”

Andrew Delios too has similar views. He agrees that a slow vaccination programme could hamper economic growth. That is why it is critical that government stresses the importance of vaccine security. They need to build independent capabilities to manufacture vaccines. They need to build relationships with pharmaceutical companies that permit licensed or other such sanctioned production of proven vaccines. Developing productive capacity is a much more manageable task than developing independent R&D skills. “Just as a nation does not want to be dependent on others for the basics of its food supply, it should not be for vaccine supply. If it is, it will always be behind other nations in vaccinating its population and catching up those countries that are able to manufacture vaccines for their own populations,” he added.

Local fiscal and monetary policies also to play a pivotal role
While inoculating the population is key, other factors such as stimulus packages and monetary policies will also play an important role. Businesses, irrespective of size, had to bear the brunt of the Covid-19 pandemic. Sectors such as aviation, hospitality and tourism were the hardest hit. Even though economic activities have resumed across the globe, many businesses are finding it hard to sustain their operations and are seeking government assistance.

Safety nets such as business loans, job retention schemes and protection from eviction are important to help businesses, especially the small and medium-sized enterprises (SMEs),. In Spain, the government announced an €11 billion economic relief package that includes €7 billion in direct aid to distressed businesses. Recently, France’s Finance Minister Bruno Le Maire announced a €3 billion fund that will primarily focus on supporting mid-sized and large companies emerge from the Covid-19 crisis.

Through stimulus packages, it is also important that governments across the globe put money into the hand of the consumers to keep the wheels of the economy rolling. In March, the Japanese government announced $20 billion in reserve funds to offer financial support to struggling businesses and households.

Harald Fadinger believes key factors that will contribute to the global economic recovery besides vaccine rollout will be the local fiscal and monetary policy stance. Taking the US as an example, he said the nation has seen extraordinary loose monetary and fiscal policy. While US monetary policy is likely to tighten soon due to rising inflationary pressure, this is not the case for fiscal policy.

The situation in the EU is a bit different: while the ECB continues to support the economy strongly via asset purchases and ultra-low interest rates, fiscal policy has been somewhat less expansionary than in the US. Differences across EU economies in local fiscal space have led to variation in the generosity of fiscal measures used to preserve employment and prevent firm bankruptcies.

“The EU’s $750 billion recovery package will help to maintain a certain level of public investment and a relatively loose fiscal policy stance. However, a number of fiscally conservative EU countries are already putting pressure to go back to much tighter fiscal policy soon and to reduce public debt levels. Conservative economists, in particular in Germany, also (wrongly) worry about mounting inflationary pressure and lobby for a tightening of the ECB’s monetary policy stance.”

Similarly, Neha Anna Thomas said, “A strong vaccination campaign goes hand-in-hand with appropriate social distancing and other precautionary requirements. Enforcement of these measures, at the national and enterprise level, is important to both contain virus circulation as well as boost consumer confidence levels for higher economic activity.

“Stimulus packages will continue to play an important role in driving recovery. The US’s $1.9 trillion stimulus package, approved in March 2021, for example, significantly accelerated the country’s growth prospects. Frost & Sullivan revised its 2021 growth forecast for the US economy from 4.4 percent, to 6.8 percent).”

She also mentioned that while some countries are expected to continue to roll-out new stimulus packages in the second half of 2021, the global scale of stimulus support in 2021 is expected to be lesser compared to 2020.

“Accommodative central bank monetary policies through 2021 and 2022 will also be important in supporting economic activity. Premature or drastic interest rate hikes could dampen the fragile economic recovery in some countries,” she said.

Nuno Fernandes added that government spending is indeed needed, but it must be administered intelligently. According to him, it is vital to avoid zombie lending, or directing resources to companies that were struggling before the pandemic. “This was done, to disastrous results, during the financial crisis. And you can bet that politicians will remain tempted to rescue businesses with more political clout than financial viability. Recovery plans should instead focus on boosting innovation. After all, misdirected subsidisation is no way to fuel a healthy economy,” he added.

Joe Biden’s $1.9 tn stimulus package to support global economic growth?
The Organisation for Economic Co-operation and Development (OECD) forecasts that the world economy will expand 5.6 percent this year and the Paris-headquartered think-tank believes the US president Joe Biden’s $1.9 trillion stimulus package will lift global income by 1 percent this year. Similarly, IMF spokesman Gerry Rice said that the stimulus package will help the US economy expand by five to six percent in the next couple of years. This means higher demand and at the same time an opportunity for other exporting nations to sell more products in the US market.

The US has been one of the worst affected countries by the Covid-19 virus. The stimulus package includes $415 billion to fight the virus and around $440 billion for small businesses in the country. While the US economy is already on its recovery path, the stimulus package is expected to have a ‘spill over’ effect on the rest of the world.
Sharing her views on this, Neha Anna Thomas also believes that the $1.9 trillion stimulus package will help support the global economy as well. With the US being a top global GDP contributor, a significant boost in the US economy will translate into stronger global growth.

She said, “As a leading global goods importer, the stimulus package should especially help fuel stronger export demand for the US’s trade partners. The package encompasses $1400 in stimulus checks which should particularly help drive US consumer spending and import demand. 2020 data itself revealed how earlier rounds of stimulus checks helped drive US consumer demand. The US’s top goods import partners such as China, Mexico, Canada, Japan, and Germany stand to consequently benefit from a demand boost.”

However, there are also growing concerns about the stimulus package overheating the US economy. Professor Andrew Delios believes the $1.9 trillion stimulus package has come at an interesting time. Independent of fiscal stimuli the US economy is already beginning to recover. Long closed or crippled industries like tourism or F&B are recovering and the recovery will be fast.

“Moreover, Americans are flush with cash. With private sector growth, an economy charged with liquidity and then a fiscal stimulus emerging as well, we have a dangerous combination that can lead to an overheated economy quickly. To me, the concern is not whether the stimulus package will turbocharge the US, the concern is whether it will overheat the US economy. As for the world economy, even though the US is the key nation in the world’s economy, the spill-overs will not be as substantial to heat the global economy. The effects of the stimulus should be largely local focusing on domestic business activity and domestic employment growth,” he added.

Harald Fadinger added that rising inflationary pressure resulting from potentially over-expansive fiscal policy in the US could force the FED to raise interest rates. This may have a negative impact on emerging markets, in particular those with a weak balance of payment and lots of dollarised debt. In conjunction with the dangers from slow vaccine rollouts, this could well trigger a financial crisis in some emerging markets.

Global unemployment crisis and economic growth
The International Labour Organisation (ILO), in its latest report, revealed that nearly 220 million will remain unemployed this year. The report further stated that the unemployment rate will be 5.7 percent in 2022 with an estimated 205 million unemployed people around the world. Employment growth enabled by widespread vaccine rollout is one of the most important criteria for global economic recovery.

Harald Fadinger said that while other physical production factors such as capital have not been much affected by the pandemic, stay-at-home orders and social distancing measures have led to a large drop in employment and a resulting negative labor supply shock. Once this shock is reversed, recovery will be smooth and quick. This, however, requires that firms stay alive until workers can be allowed to go back to work.

“If vaccine rollout is too slow, many firms will eventually go bankrupt. This will not only destroy matches between firms and workers but could also put at risk the local financial system, which would have to sustain large losses on outstanding loans. Thus, in poor economies with slow vaccine rollouts, the crisis could prolong and deepen,” he added.

However, much depends on what is the nature of work going forward but clearly, unemployment is not positive for growth. Increasing employment levels both contribute to and reflect a global economic recovery. Andrew Delios said, “The world needs to put people back to work, however that work is defined. Employment growth is essential to the global economy’s recovery.”

Job losses can also be viewed as an indirect fall-out of the Covid-19 impact. New job creation will partially come about as a result of the containment of cases and lifting of restrictions. At the same time, job creation itself will contribute significantly to the economic recovery process. This is because employment opportunities will help put more disposable income into the hands of workers, thereby helping to boost demand for goods and services.

Neha Anna Thomas said, “Additionally, with the lifting of restrictions, more businesses can move towards full operational levels, thereby reducing the need for government wage support to furloughed workers. These funds can instead be directed into infrastructure development and other activities that will help accelerate growth potential.”

Nuno Fernandes also believes employment growth will play a strong role in the recovery. Lower-income households spend a greater share of their income on consumer purchases. Indeed, many households spend their entire salaries. That’s why jobs are so vital to keeping economies rolling. Wage growth is also critically important to growth.

Unfortunately, we will at the same time have to come to terms with the fact that some of these jobs will not be coming back. Hotels, restaurants, cinemas, sports arenas and cultural venues are still facing an extremely uncertain future. Just as airlines stay afloat by packing people onto planes, the viability in these sectors depends on crowding people into confined spaces. Many people might avoid crowded places even after the crisis subsists. “The spread of the Delta variant has made this worryingly clear, as even some fully vaccinated people are exercising increased caution as compared to just a few weeks ago,” Nuno added.

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