Read the July Economic Currents in PDF
Each July, I meet with nearly 25 economists from almost as many countries for a week of shared research and intense debate about the state of the global economy. The meetings are strictly Chatham House rules, which means I cannot attribute what anyone says but can share what I learned. The group has been meeting for more than 80 years and is older than most international institutions.
This is the second year we met virtually instead of in person; many of my colleagues were forced back into lockdowns in response to variants. The only break the group took was during WWII. Our meetings this year were again scheduled around the clock to accommodate different time zones.
Global growth is expected to exceed 6% in 2021 after contracting 3.6% in 2020. Optimism is greatest for the U.S., which is riding a tailwind of vaccinations and fiscal stimulus. The divide between the developed and developing worlds is widening along with inequality within countries. Everything from an uneven distribution of vaccines and unstable political regimes to limits on fiscal policy is stunting recovery in developing economies.
Debt loads have risen the world over, which could limit the ability to counter the next downturn and the damage caused by variants. Wealthier countries are stepping in to help with debt restructuring and forgiveness. Even Argentina, which has deflated more times than I can remember, will receive at least a one-year waiver in dealing with its debt problems.
Inflation is heating up pretty much everywhere. Most expect the surge in inflation to be transitory, though confidence in those forecasts is waning. Reopening is much harder than shutting down. Bottlenecks are broad-based, curbing manufacturing activity and efforts to ramp up the service sector.
Stagflation has begun to take hold in some of the most mismanaged economies. Turkey stands out, with inflation expected to surge to a double-digit pace by year-end.
Central banks are beginning to acknowledge the risks of a more persistent inflation. “A substantial majority” of participants at the June
meeting of the Federal Open Market Committee (FOMC) see inflation risks “tilted to the upside.” Central banks in many developing economies have already begun the painful process of raising rates.
The result could be a more compressed boom/bust cycle. That creates trouble for asset prices, which have benefitted from longer expansions and exceedingly low interest rates. Equity and home values are bubbling in much of the world.
The virus and its mutations remain the largest threat. The Delta variant, which ravaged India in May, now dominates all regions but Latin America where the Gamma variant is still spreading. Countries that escaped the first waves are getting hit. Our inability to extinguish the virus has meant that we are learning to live with the risks of COVID, which are dire for the unvaccinated.
Developed economies are not immune. Japan banned
spectators from the Tokyo Olympics. The Delta variant
is showing up in every state in the U.S. Florida is
experiencing a surge in infections as temperatures jump
and people move inside where air conditioning is the
norm. One recent study
suggests that vaccine-resistant
variants could emerge from pockets of the unvaccinated.
Climate change and the extreme weather events it
triggers are additional risks. A fifty-year drought in
Taiwan has forced a rationing of water, which is critical
to the island’s computer chip production. That has
exacerbated bottlenecks and chip shortages. Taiwan
accounts for more than 60% of the world’s computer
chips and a larger share of the most sophisticated chips.
This edition of Economic Currents
provides a roundup
of the global outlook by region. The global recovery is
gaining steam. The gains we are experiencing come with
a price: higher inflation, just about everywhere. Central
banks are expected to remain hesitant to preempt a rise
in inflation, especially given the rise of COVID variants.
The convergence evident between the developing and
the developed worlds before the crisis has been derailed.
More coordinated efforts to stem the spread of the
disease could help reverse those trends. Asset prices are
vulnerable to a correction. We have not seen the likes
of inflation like this in decades, before many financial
market participants were born.
The U.S. is expected to expand at a 6.6% pace in 2021
after contracting 3.5% in 2020. That is slower than we
expected last month. The spread of the Delta variant, new
lockdowns abroad and the shift in funds from stimulus
toward infrastructure moved growth into 2022 and 2023.
Our forecast assumes an infrastructure package, either
on a bipartisan basis or via the annual budget process.
Fiscal stimulus was much stronger in the U.S. than
elsewhere. Much of the spending was temporary and
used to fill gaping holes that the pandemic revealed
in our limited safety nets. The administration’s more
ambitious spending and tax goals are expected to be
curtailed by moderates in the president’s own party.
Consumers have amassed more than $2 trillion in excess
savings. That will support a lot of spending even if it is
not depleted. Stimulus checks enabled low- and middleincome
households to save along with high-income
households. That has temporarily boosted spending
gains. The gap between the haves and have-nots will
again widen as we move into 2022.
Spending is shifting from goods and homes to services,
but not fast enough to alleviate bottlenecks. Home sales
and construction started falling when consumers reacted
to sky-high prices and a lack of supply. Builders have
delayed projects in hopes that material costs will drop
and labor shortages will ease.
Inflation and wages are moving up. The largest gains
are occurring in areas most affected by the pandemic.
Vehicle prices, car rentals, airfares and entry-level wages
Wages in the leisure and hospitality sector soared nearly
90 cents an hour in the second quarter, the fastest
quarterly pace on record. That boosted overall wage
growth to a 6% pace in the second quarter, but inflation
wiped out that and more.
Large firms are better positioned to absorb those shocks
than small businesses. Profit margins widened for many
during the pandemic, while they rapidly adopted existing
technologies to boost productivity growth. Investment in
new technologies accelerated at the fastest pace since
the dot.com bubble, when companies made leapfrog
investments to avoid Y2K problems. (Google it, if you are
too young to remember Y2K.)
Still, a portion of wage gains is being passed along to
consumers. Some of the inflation we are experiencing
The Federal Reserve has taken note. Public debate over
when to take action has become heated. We expect the
Fed to taper its asset purchases by year-end. Hawks will
gain an upper hand among those who vote on policy in
2022. They will likely dissent as Chairman Jay Powell
pushes back on rate hikes.
Our forecast assumes regional outbreaks will worsen but
not trigger new lockdowns. They are likely to occur in
rural areas, which have a smaller effect on overall GDP.
Canada is expected to grow at a 6% pace in 2021 after
contracting more than 5% in 2020. The country imposed
some of the most stringent restrictions on congregating
in the developed world. Vaccinations have picked up; the
proportion of fully vaccinated could soon eclipse the U.S.
Consumers are emerging from lockdowns and the
housing market is bubbling; home prices are up more
than 30% in the hottest markets, the fastest pace
since the 1980s. The rebound in commodity prices has
provided a lift to Canada’s lumber and oil markets.
Canadian firms took over much of the U.S. lumber
business when the industry consolidated in the wake of
the subprime crisis of 2008-09. That put Canada on the
winning side of the global surge in lumber prices and
Inflation is accelerating. The Bank of Canada is expected
to raise rates in 2022, more than six months ahead of
the Fed. The focus will be on froth in the housing market,
which has become a global concern.
Latin America is expected to rise at a 6.5% pace in 2021
after essentially flatlining in 2020. This will leave the
region badly lagging its precrisis performance. Mobility
has increased despite a resumption of infections and
restrictions. People have no choice but to bear the risk of
contagion to feed their families.
Poor access to vaccines and poorer quality vaccines
exacerbated contagion. Chile, which rapidly vaccinated
its population, is suffering from breakthrough infections
associated with Chinese vaccines.
A bounceback in commodity prices and exports has
helped Brazil, the region’s largest economy. Mexico
is being helped by strong ties to the U.S., a pickup in
remittances and a rebound in manufacturing. Supplychain
constraints are slowing manufacturing gains.
Inflation is accelerating. The central banks in Brazil and
Mexico have already begun to raise rates to combat
inflation. Other central banks in the region will follow.
Political tensions are growing as reforms are being
overturned. Prime Minister Jair Bolsonaro has a hard-core
base as does former former President Luiz Inácio Lula
da Silva; Lula’s convictions on corruption were recently
overturned, which means he can run again. The political
instability in the region is undermining investment and
prospects for longer term growth.
Separately, the losses in educational attainment
triggered by the crisis could become generational. The
poor lacked the electricity and the electronics to stay
online as schools closed. Without a way to catch up in
economies still plagued by the rapid spread of infections,
the blow to educational attainment could linger and
further undermine the potential of the region to grow.
The U.K. is expected to rebound at a 7% pace in 2021
after contracting a heart-wrenching 9.9% in 2020; the
losses were the worst in 300 years. The Delta variant
is spreading despite a surge in vaccinations. The U.K.
government is moving ahead to lift restrictions in the hope
that vaccines will prevent the worst outcomes.
Inflation is picking up, both in response to a rise in
commodity prices and Brexit, which has put a damper on
trade. Brexit is exacerbating labor shortages.
"We have not seen the likes of
inflation like this in decades,
before many financial market
participants were born."
Businesses have a lot of cash on their balance sheets,
which should support a rebound in investment. The
question is how much of that will remain in the U.K. The
finance sector has held up better than expected in the
wake of Brexit but the pandemic likely delayed the move
by many banks out of London. Fiscal stimulus is waning
and will become a drag on growth as we move into 2022.
“China is already showing signs
of slowing and is expected to
continue to fall short of its 2030
The eurozone is expected to rise 4.5% in 2021 after contracting nearly 7% in 2020. Vaccinations are picking up across the region and restrictions are being lifted, but unevenly as the Delta variant spreads.
Fiscal stimulus and the excess savings triggered by the crisis are helping but could soon dissipate. The excess savings is concentrated in wealthier households than in the U.S. That suggests a smaller share of the funds will be spent. Stimulus checks, which provide an extra boost to savings in lower income households in the U.S., were not issued in the Eurozone.
Manufacturing activity is beginning to slow in response to supply-chain bottlenecks and the shift to spending on services. Travel and tourism are expanding, much as they did during the summer months in 2020.
Inflation is moving up but not as rapidly as in other parts of the world. Gains are expected to be transitory; the European Central Bank is expected to remain patient.
Supply-chain problems are widespread and slowing the recovery in the manufacturing sector. That has added to goods inflation, although hopes are high that bottlenecks will abate as we move into the second half of the year.
Inequality within the region is expected to intensify, despite efforts to provide stimulus for poorer countries. Germany and France are expected to regain losses to the crisis faster than Portugal, Italy, Greece and Spain.
Central Europe is expected to grow at a 4.6% pace in 2021 after contracting 4% in 2020. Manufacturing activity has rebounded but is not doing as well as it might because of supply-chain problems. Vaccinations are lagging the rest of Europe even as infections due to the Delta variant are increasing.
Inflation is picking up more rapidly in Hungary and Poland than in the Czech Republic, Slovakia and Slovenia. A combination of both fiscal and monetary policy stimulus helped support the region throughout the crisis.
President Viktor Orbán of Hungary is a destabilizing force in the region and Europe more broadly. He is both admired and emulated by his peers. He is a nationalist whose open racism and concentration of power is accelerating the backlash to immigrants and women. His corruption is well-documented. His consolidation of power during the height of the pandemic was so egregious that the European Union pushed back. Opposition parties are attempting to unite and defeat Orbán in the next election.
Russia is forecast to grow 3.3% in 2021 after contracting 3% in 2020. Rising oil prices have provided a bit of a tailwind but the spread of the Delta variant will no doubt undermine recovery. Despite developing and exporting Russian-made vaccines, vaccination rates are low, in part because of a lack of trust in the government.
Backlash to President Vladimir Putin has intensified, along with his crackdown on civil unrest. President Alexander Lukashenko of Belarus has close ties to Putin and is also cracking down on the surge in civil unrest. The hijacking of a plane crossing the country’s air space to arrest an opposition journalist is among the most egregious of his recent moves.
Separately, Russia remains a military threat to Ukraine. Putin continues to stoke violence and misinformation across Europe and in the U.S. Hacking attacks are accelerating, which is further disrupting supply chains and the broader recovery from the crisis.
Turkey is expected to grow at a 7% pace in 2021 after squeaking out a small gain in 2020. Gains are expected to be driven by a dramatic easing of credit and accumulation of debt. Tourism is picking up, mostly from Russia, after collapsing in the first half of 2020. Vaccinations are picking up but not fast enough to stem the spread of the Delta variant.
Inflation is expected to hit a double-digit rate by yearend.
Stagflation is the baseline. The country could suffer
a more prolonged slowdown if the central bank is not
allowed to continue to raise rates. It would not be the first
time the independence of the country’s central bank has
been undermined by President Recep Tayyip Erdoğan.
Japan is expected to grow at a 2.5% pace in 2021 after
contracting nearly 5% in 2020. The spread of the Delta
variant, low vaccination rates and limiting attendance at
the Tokyo Olympics have pushed risks to the downside.
Consumer spending is expected to pick up after
stagnating. Business investment remains suppressed.
Exports are expected to slow after surging earlier in the
crisis, notably to China.
Stagnant profits and lack of investment could collide
with upward pressure on wages and prompt a wave
of business failures. Smaller businesses were closing
ahead of the crisis instead of paying more to find young
workers, who are scarce in the aging country.
China is forecast to grow at an official rate of just above
8.5%, after slowing to 2.5% in 2020. The manufacturingled
recovery is losing steam along with consumer
spending. The Delta variant is prompting regional
lockdowns. Vaccines are being rolled out but trust in the
government on vaccines is justifiably low. China has a
history of releasing ineffective vaccines.
China is already showing signs of slowing and is
expected to continue to fall short of its 2030 plan. The
aging of its labor force into retirement and backtracking
on market reforms are undermining its potential growth.
President Xi Jinping is attempting to counter weaker
growth by shoring up his legitimacy. Hong Kong is rapidly
being absorbed into the mainland. Taiwan is his next
major target. Xi considers Taiwan a part of China. That
would ensure China’s chokehold on the global supply
chain. A hot war can not be ruled out.
China has had skirmishes with India and continues to
expand its military presence in the South China Sea.
Countries bordering China are looking to the U.S. and the
rest of the world to threaten sanctions. Regional experts
say the U.S. would have to threaten to oust China from
the World Trade Organization (WTO), an unlikely move
given the spillover effects for the global supply chain, to
stem Xi’s ambitions for Taiwan.
“The central banks in Brazil and
Mexico have already begun to
raise rates to combat inflation.”
South Korea is expected to grow at close to a 4% pace in
2021 after flatlining in 2020. Aggressive masking, testing
and tracing enabled Koreans to stem the contagion at the
onset of the pandemic. A slow rollout of vaccines and the
spread of the Delta variant are hitting the country along
with the rest of Asia. South Korea is hoping to get 70% of
its population vaccinated in the second half of the year.
Exports picked up with the global demand for goods.
Manufacturing has begun to slow in response to
bottlenecks and the pivot from goods to services.
Inflation is increasing but the central bank is expected to
remain patient. Inflation remains more contained than
in other countries, largely due to the fact that the region
was better at containing outbreaks and stayed fully open
longer than other countries.
India is expected to grow by 9.5% in 2021 after
contracting 7% in 2020. It has achieved an extremely high
level of immunity in the most painful way with widespread
infections. Infections and fatalities are likely understated.
Prime Minister Narendra Modi’s government is coming off
of a large win in May. His nationalist policies continue to
fall short on reforms. India is attracting investment as an
alternative to China.
Those gains in investments will enhance an aggressive
infrastructure package and are expected to spur the
recovery. The world is in need of a growth engine now
that China’s long term prospects are waning.
The Delta variant is now wreaking havoc on the
Philippines, Indonesia, Malaysia, Thailand and more
recently Vietnam. Singapore and Hong Kong are the
only places in peripheral Asia which have achieved high
vaccination rates. Most of Asia was able to escape earlier
outbreaks due to heavy masking and an adherence to
restrictions, sometimes aggressively enforced.
Australia and New Zealand
Australia and New Zealand weathered COVID much
better than other developed economies, with modest
contractions in 2020. Gains in 2021 are more muted than
their counterparts around the world, but the two countries
need very little in terms of growth to lower unemployment.
New Zealand is suffering more from closures and loss of
tourism than Australia. Australians have redirected the
ample funds they typically spend on travel and tourism to
domestic destinations, which has helped mitigate the loss
in tourism, mostly from China.
The countries have been slower to gain access to
vaccines. Both entered lockdowns quickly to contain
even small outbreaks. The border rules are draconian
for democracies and closer to those of authoritarian
regimes. Some fear protectionist policies and harsher
border restrictions will linger, which could undermine the
potential of the two countries to grow longer term.
Inflation is picking up as are wages. Central banks in
both countries are about to raise rates. New Zealand’s
central bank has been trying to use its regulatory system
to unsuccessfully stem a bubble in the housing market.
Institutional investors are flipping properties to rent.
Middle East and North Africa
Wealthy, oil-rich nations that have achieved a higher
level of vaccination are expected to perform much better
than less wealthy and less oil-dependent countries. Saudi
Arabia, Kuwait and the UAE fall into the first category.
They will need a year to catch up after sustaining deep
losses when oil prices plummeted as a result of the
pandemic and lockdowns.
Iran is an outlier, with sanctions limiting oil revenues.
COVID cases have soared again, prompting a new round
Tourism is a big industry across the region and has
been badly battered. It is hard to imagine that reversing
anytime soon given the surge in the contagion poorer
countries are suffering.
The continent’s recent history of fighting epidemics and a
cessation in travel helped stem contagion last year. Those
early successes are quickly evaporating. Infections due to
variants are surging and vaccines remain in short supply.
Treatment of the disease is not as good as elsewhere,
which could elevate fatalities. Data on infections grossly
understate the severity of the spread.
The region is one of the least vaccinated in the world.
Poorer countries rely on the developed world for vaccines
donated through the COVAX program.
Nigeria, the continent’s largest economy, is benefitting
from the rebound in oil prices and exports. Rising
infections are curbing those gains. Conflicts and violence
have escalated across the continent.
South Africa is the second largest economy and has
been hit hardest by a resurgence in infections. Lack of
electricity and rampant corruption remain the biggest
constraints on business activity. Violence and clashes
with police have intensified in response to rising poverty.
Historically, pandemics have led to labor shortages,
inflation, an erosion in public trust, escalating violence
and, in worst-case scenarios, the fall of nations. Sound
familiar? Demonstrations and violence in Cuba and South
Africa are recent examples.
Correlation does not imply causality. Much has changed
since the plagues of the past. We have science, which has
helped limit fatalities. The labor shortages we are seeing
may be due to sequencing rather than a permanent blow
to labor supply. Consumers are spending. Businesses
are ramping up faster than workers are able or feel safe
enough to return to work.
Fiscal and monetary stimulus helped blunt the economic
consequences, which should help to short-circuit civil
unrest. This may be true for developed countries more
than developing economies, although fuses are clearly
shorter than they were prior to the pandemic.
The pandemic accelerated the adoption of existing
technologies, which should curb the effect rising wages
have on prices this time around. Again, developed
economies were much better positioned to benefit from
The global economy is improving unevenly. Vaccines are
the best tool we have to level the playing field between
the developed and developing worlds. Debt restructuring
and forgiveness are others. Let’s put those tools to work.
Sharing time with my international colleagues reminded
me why. The humanity that binds us is stronger than the
borders and time zones that separate us.
Copyright © 2021 Diane Swonk – All rights reserved. The information provided herein is believed to be obtained from sources deemed to be accurate, timely and reliable. However, no assurance is given in that respect. The reader should not rely on this information in making economic, financial, investment or any other decisions. This communication does not constitute an offer or solicitation, or solicitation of any offer to buy or sell any security, investment or other product. Likewise, this communication serves to provide certain opinions on current market conditions, economic policy or trends and is not a recommendation to engage in, or refrain from engaging, in a particular course of action.