The cure: Economic outlooks of countries will certainly get better once a vaccine becomes widely available. — Reuters IT will be Christmas in a few more days and then 2021 begins. At this time, the globally economic outlook doesn’t look so good. Slowly but surely, the Covid-19 pandemic is taking its toll. Overall, policy makers feel something needs to be done. Politically, that’s not so easy. Still, efforts are being made. The world is a long way from normal. Governments continue to enforce social distancing measures (SDMs) to keep the virus at bay. They reduce output-through allowing fewer diners in restaurants, banning spectators sporting events. People still remain nervous about going out for fear of being infected. Economic uncertainty among both consumers and enterprises is near record highs, and this probably explains why firms are reluctant to invest. Estimates I have seen suggest that SDMs continue to reduce global GDP by 7-8%. Yet, although the global economy is operating at about 80%-90% capacity, there’s a lot of variations among nations – this growth gap between the best and the worst performers in 2020 is estimates at 6.5% age points – far wider than the last global downturn decade ago. Indeed, among the big economies only China is set to grow in 2020.To avoid the middle-income trap, Malaysia critically needs to drive productivity, giving more urgent emphasis on research & development to create a more fertile ground for innovation. The recently passed 2021 Budget caters mainly for today’s needs. Tomorrow needs fundamental reforms and structural change, to stimulate creativity in order to be better placed to meet future challenges... United States Good Friday (April 10) was the worst day of the pandemic. Global GDP was estimated at 20% lower than it would otherwise have been. Since then, things are improving as lockdowns are lifted, and vaccines slowly become available. In the US, sharp recovery in the summer and autumn has pulled back. According to the Fed, it has lost stream. That’s bad news for the millions out of work, including the rapidly growing share of Americans living in poverty. Latest indications on hotel occupancy, diners, and air passengers have turned for the worse since the robust 3Q’20. Still the US looks better than Europe where governments have imposed another round of lockdowns (including in Germany). Early December data suggest that US & European output stopped growing in November. Three reasons for this: (1) continuing intensity of the pandemic spread; (2) pulling-out of the generous stimulus fiscal packages, & the impending budget crunch; and (3) the virus’ further drag on the economy. Things will get better once a vaccine becomes widely available – it’s a long, dawn-out affair. People appear to be getting skittish. Less than 50% of the US can be vaccinated by the end of spring. Latest survey suggests more and more people worry about catching the virus. And, the pandemic still remains out of control. The full impact of vaccines won’t be really felt until 2Q’21. Prospects are for the poorest to face a tough winter. In the end, performance comes down to three factors: (a) industrial composition (states that rely on retail and hospitality will become more vulnerable than those with large manufacturing); (b) confidence (experience in handling the pandemic under lockdown); and (c) stimulus – as long as Congress is unable to agree on a top-up, the rescue will get messy. Even with the vaccine, there will be scars – reluctance to invest means less productive capital in the future; old jobs will not come back; US unemployment is unlikely to return to its pre-pandemic rate of 4% until 2023 (at least). The Covid induced downturn will leave the world economy and US feeling sub-par for some time to come. Growth in US won’t top 4% until 2Q and 3Q’21, depending on how quickly and widely vaccines are distributed. Europe No doubt, Europe is worst hit than the US. Still, Europe hopes to spur an economic recovery from the pandemic by boosting government spending, a shift in strategy from the 2008 financial crisis; through: (1) setting up a US$750bil fund to aid nations hardest hit (especially Italy and Spain); and (2) massive bond buying by ECB to bring down borrowing costs, enabling them to spend more freely. In so doing, Europe wants “notably to recover, but to come out of the crisis with a better economy; greener, more digital, more resilient, fit for the next generation.” This paradigm shift aims to make it cheaper to provide fiscal stimulus to the most adversely affected regions in Europe. This time, ECB is encouraging governments to spend freely and borrow really cheap (key interest rate being –0.5%). Activity in Europe contracted significantly in 3Q’20 and has since steadied as some restrictions are being eased. Still it will end 2020 as a real weak spot for the global economy. Even with the vast stimulus, forecasts suggest that a return to levels of activity at end-2019 is unlikely before early 2023. Europe’s combined budget deficit will reach 6% of GDP in 2021 (10% in 2020). The aim of the stimulus is to bring about structural changes to make the weaker economies more competitive (including adoption of digitalisation and of low-carbon technologies), and to keep businesses afloat and demand buoyant, in 2020 & 2021. China and Asean China was the first to be hit by the pandemic; also, the first to recover - indeed the only major economy to grow this year (world economy down – 4.4%:IMF) boosted by early containment of the virus, vast government spending and strong exports. The spill-over effects on its neighbours (especially Asean) will support the global economy’s very “difficult climb” going forward. Resurgence of the virus poses more downside risks to the global outlook, urgently needing enhanced international co-operation in this health crisis to ensure sustained recovery. This reflected “extraordinary policy measures”: governments together injected nearly US$12 trillions in fiscal support to households and firms, amid unprecedentedly very easy monetary actions. But it’s still far from over. Exit is liking to be “long, uneven and highly uncertain.” Much concern is now centred over possible second waves. There is no turning break. China is leading the pack, with a strong tailwind in Asean, especially Malaysia where it will help lift its trade performance. China is already Asean’s top trading partner over the past 11 years: It’s also its top travel market (more than 30 million in 2019). Asean is also China’s second largest destination for it’s FDIs in 2019. China’s rapid recovery bode well for Asean as one of its largest import market gets back on its feet. Asean’s outlook now looks good as China shows the way to economic rebound. Asean’s GDP growth contracted 2-2 ½% this year, even as two of it’s largest economies (including Malaysia) posted some growth. ADB expects Asean to recover in 2021. The recently signed Regional Comprehensive Economics Partnership (including China, Korea, Japan, Australia and New Zealand) - RCEP, brought into play the world’s largest free trade bloc (accounting for 1/3 of the world’s population, GDP & trade), which will drive mutually beneficial cooperation in investment, finance, technology and trade. It offers immense potential in promoting multilateral and bilateral exchanges, regional development and stability. It will not only reinforce industrial supply chains, boost cross-border investment, enhance the ability to fight the pandemic, but also strengthen China’s trade impact on the region. The deal is expected to significantly expand Asia-Pacific economies for 21st century international commence. What then we use to doLike most of the world, Malaysia continues to struggle along in 4Q’20 – its October data are not good – adversely affected by the conditional movement control order (CMCO) which brought most activity to a stand-still, weakening domestic demand. October industrial production fell even as manufacturing output growth slackened in the face of falling mining production, with external activities losing steam. There is nothing much to cheer about. The outlook looks grim – expect more of the same. GDP will creep-up 4-4 ½% in 2020, although most see a pick-up in 2021. I don’t share this optimism as there aren’t any real plans ahead to shout about. Yes, prospects do look grim. On top of it all, many things can still go wrong: (1) global geo-political troubles won’t go away, even though Trump will be gone in January 21 – still, he will remain a trouble-maker (continuing to make life hell for Biden); (2) expect greater volatility in financial markets, as inflationary concerns lure its ugly head; (3) back-lash against inequality and poverty in the midst of ugly populism and nationalism; and (4) Covid-19 is still around. As I see it, things will not be plain sailing. Local politics has been muted – so far, political stresses have not escalated out of control. Lessons have been learnt. Challenges, contained. Yes, there will be surprises (big power politics; climate change; slowing globalisation; unicorn reverses), including positive ones – ultra easy monetary conditions; supply-side reforms; economic drive by China & technology; and hopefully, Covid-19 will be gone. Still, the worst has yet to come, even as political and policy fundamentals become more manageable. To avoid the middle-income trap, Malaysia critically needs to drive productivity, giving more urgent emphasis on research & development to create a more fertile ground for innovation. The recently passed 2021 Budget caters mainly for today’s needs. Tomorrow needs fundamental reforms and structural change, to stimulate creativity in order to be better placed to meet future challenges, I expect no less. *Former banker, Harvard educated economist and British chartered scientist, Prof Lin of Sunway University is the author of Trying Troubled Times Amid Trauma & Tumult, 2017-2019 (Pearson, 2019). The views expressed are the writer’s own.
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