Headwinds for Global Recovery as Delta clouds Economic Outlook


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The global economic recovery is expected to continue throughout this year as more countries are slowly rebounding from a challenging 2020. However, the new variants of Covid-19 particularly the Delta variant, are casting a cloud over the global expansion. The Delta variant has become the most dominant and daunting strain of the coronavirus globally and the World Health Organization (WHO) has warned that the variant which was first detected in India is the most transmissible variant yet, being almost twice as contagious as the original strain of Covid-19.

According to the European Centre for Disease Control (ECDC), the Delta variant is estimated to account for over 80% of new cases in the Euro area and in the United States (US). Recent data from the WHO shows that it has also been detected in nearly all countries worldwide leading to rapid outbreaks especially in high-risk places where vaccination rates are lower. The persistent economic problems faced throughout the world, coupled with the new Delta variant therefore poses a major risk to the overall global economic outlook.

Return to Lockdowns:

More lockdowns are being implemented in the Asia-Pacific region in countries such as Australia, China, Philippines, Thailand and Vietnam in an attempt to contain the recent surge in cases due to the spread of the Delta variant. With further restrictions however, there has been increased protests and resistance, requiring the heavy presence of law enforcement to ensure protocols are being followed in hot spots.

Even in Israel, where more than half of the population is fully vaccinated is experiencing a major rise in cases and is on the brink of further or new lockdowns. Dr Anthony Fauci, top U.S infectious disease expert, does not think the US will need to shut down again as it did last year, but he warned that “things are going to get worse” as the Delta variant continues to spread and fuel a surge in cases mostly among the unvaccinated. WHO experts stated that the growing spread of the Delta variant is creating a stark choice that could make the difference between more re-openings or a return to restrictions that evidently damaged the world’s economies.

A recent Reuters poll suggests that there has been a slowdown in growth of the global economy, along with rising prices for raw materials and goods in the US and China, which accounts for more than half of world growth. The US Bureau of Economic Analysis states that economic output in the US grew 1.6% in 2Q21, up from 1.5% in 1Q21, above its pre-pandemic level. This was driven by an extraordinary increase in consumer spending and business investment, however at the end of July, US consumer sentiment fell as the Delta variant cases rose. US economists generally do not expect the recent surge in cases to make a major dent in the economy but it could disrupt the recovery further, if restrictions are reimposed on businesses and consumer spending is curbed.

On a quarterly basis, China’s GDP expanded by 1.3% in the April-June period, according to China’s National Bureau of Statistics. The Chinese economy is still growing but the pace of its recovery slowed in the second quarter as the country struggled with surging commodity prices and supply chain disruptions. Furthermore, the world’s second largest economy faces downside risk as new Covid-19 outbreaks have initiated new lockdown measures in some cities and provinces.

The Eurozone remains optimistic thus far having recovered from its pandemic-driven recession, recording a faster than expected growth of 2% in the 2Q21 according to data from the Eurostat. This is the first time the bloc has outpaced growth in the US and China since the start of the pandemic. This marks a strong rebound for the bloc from a contraction of 0.3% in 1Q21. Officials from the European Union expect the economy to return to its pre-pandemic size during the final quarter of this year.

Inflationary Concerns:

As the global economy recovers, inflationary pressures have started to emerge. The International Monetary Fund (IMF) however sees the price pressures as transitory and have suggested that inflation is expected to return to its pre-pandemic ranges in most countries by 2022. However, it warned that “uncertainty remains high”. Higher prices increase the chance that central banks will start to rollback their ultra-accommodative monetary policies, such as tapering of asset purchases. The Fund noted that if the US were to provide more fiscal support, then this could stoke inflationary pressures even further and lead to a hike in interest rates sooner-than-expected. In emerging markets (EMs), inflation expectations are rising and are above the central banks’ targets. This has prompted central banks in Brazil, Chile, Mexico, Russia, and Turkey to raise policy rates in order to tighten monetary conditions to rein in inflationary pressures, while central banks in several other EMs have signalled that hikes are coming.

Road to Recovery

In its latest World Economic Outlook (July 2021), the IMF noted that global economic recovery continues but the gap between advanced economies and emerging and developing economies is widening.  This is largely due to the varied pace of infections and vaccination programs. The report stated that advanced nations have vaccinated nearly 40% of the population, compared to barely 11% in emerging markets and a tiny fraction in low-income countries, therefore “the immediate priority is to deploy vaccines equitably worldwide”. They noted that the failure to achieve this will allow highly infectious variants to take hold which poses a danger to world growth. While the global recovery is expected to remain relatively strong, its pace is threatened by the Delta variant which brings uncertainty as the concerns of rising cases and the reimposition of lockdowns may begin to weaken economic activity once more.


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