A pedestrian walks past a poster of a person wearing a face covering in West London on October 11. Over the past few months, Europe’s largest economies have been hit by a second wave of infections that is forcing governments to reimpose restrictions. Photo: AFP
Opinion
Nicholas Spiro
Nicholas Spiro
Tale of three economies: coronavirus pandemic spells end of synchronised global growth
While China is leading the global economy out of the crisis, Europe, which appeared for a while to have suppressed the virus, is now facing a double-dip recession
Meanwhile, the US presidential election remains the biggest wild card for markets and the global economy
A cursory glance at the latest global economic forecasts published by the International Monetary Fund last week reveals the scale of the damage wrought by a pandemic that continues to rage. Global output is expected to shrink by 4.4 per cent this year, an improvement compared with the IMF’s prediction in June, but a sharper contraction than its estimate in April.
Gita Gopinath, the IMF’s chief economist, put it well when she warned that “the ascent out of this calamity is likely to be long, uneven and highly uncertain”.
The uneven element is partly attributable to sharp divergences in economic performance. Nowhere is this more apparent than in China, the only major economy expected to register growth for the year as a whole – a dramatic turnaround for the country where Covid-19 originated and which suffered a contraction in output of 6.8 per cent in the first quarter.
Never mind that China has fallen back on the debt-fuelled investment that it had been trying to wean itself off over the past decade, the world’s second largest economy is being lauded for bringing the virus firmly under control, providing a solid foundation for growth. A broadening recovery – retail sales beat expectations to rise 3.3 per cent last month – is accentuating China’s importance as the world’s only major growth engine.
Foreign investors are snapping up China’s higher-yielding domestic bonds, which are increasingly viewed as a defensive asset during periods of heightened risk aversion. Last quarter, the yuan surged 3.8 per cent against the US dollar, its best quarter since the global financial crisis. Even China’s volatile stock market, which has outperformed the S&P 500 this year, is benefiting from the stronger role of institutional investors, whose presence provides a more stable trading environment.
In advanced economies, however, the recovery will be a long and bumpy one. The disarray over how to deal with the pandemic is causing traditional and high-frequency gauges of economic activity to remain significantly below normal, and in some cases go into reverse. While China is leading the global economy out of the crisis, Europe, which appeared for a while to have suppressed the virus, is now facing a double-dip recession.
Over the past few months, Europe’s largest economies have been hit by a second wave of infections that is forcing governments to reimpose restrictions, having already implemented stringent lockdowns earlier this year. Not only is the renewed fear of the virus dealing a blow to consumer and business confidence, parts of Europe have clearly lost control of the pandemic.
Indeed, what is most damaging, both from an economic and a political standpoint, is the confusion surrounding the patchwork of city and region-specific rules and restrictions across the continent. Governments are finding it extremely difficult to coordinate their responses with regional administrations. Cities, such as Madrid and Marseille, and national authorities are at daggers drawn over measures to contain the virus.
Not surprisingly, markets are reassessing the outlook for the European Union, which also faces the challenge of trying to strike a deal with the United Kingdom in the coming weeks to avert a chaotic no-deal Brexit. Hedge funds, which were increasingly bullish on the euro in July and August, are beginning to unwind their speculative bets on the single currency rising against the dollar.
04:06
Stepped-up Covid-19 restrictions ‘absolutely necessary’ as Europe enters new wave ahead of winter
Stepped-up Covid-19 restrictions ‘absolutely necessary’ as Europe enters new wave ahead of winter
The United States, on the other hand, while faring better economically, epitomises the pervasive uncertainty hanging over the post-Covid-19 world. The US presidential election, which is less than a fortnight away, remains the biggest wild card for markets and the global economy.
As I argued previously, the fear of a contested result – which is still possible, particularly given that Democratic candidate Joe Biden’s lead in an average of polls produced by Real Clear Politics has fallen to less than 8 points – has made an orderly and timely transition to the next administration more important than who wins the race.
This increases the appeal of a Democratic sweep of Congress, which investors have been betting on since Biden widened his lead over US President Donald Trump.
Yet, not only were markets not even contemplating such a clear-cut outcome less than a month ago, polling data in the key swing states do not point to an emphatic Democratic victory. Although market expectations of post-election volatility are still higher than usual, the scope for an unpleasant surprise on the morning of November 4 is significant, with wide-ranging implications for asset prices.
Regardless of whether Trump or Biden wins the presidency, a divided Congress would ensure that the damaging politicisation of the US response to the pandemic persists. It would also dash expectations – which were overblown to begin with – that a Biden victory is likely to lead to an easing of tensions between Washington and Beijing. Equity and commodity markets are particularly vulnerable to post-election disappointment.
This tale of three economies – a resurgent China, a faltering Europe and an unpredictable US – is a far cry from the period of synchronised global growth three years ago. In the post-pandemic world, divergence is the watchword.
