From Project Syndicate, May 24:
While some major economies are recovering fast from the pandemic-induced recession, others are languishing, and still others remain in a state of acute crisis. The extent to which these global inequalities persist will depend on a range of factors, and will have profound implications for social, political, and geopolitical stability.
NEW YORK – After the most severe global recession in decades, private and official forecasters are increasingly optimistic that world output will recover strongly this year and thereafter. But the coming expansion will be unevenly distributed, both across and within economies. Whether the recovery is V-shaped (a strong return to above-potential growth), U-shaped (a more anemic version of the V), or W-shaped (a double-dip recession) will depend on several factors across different economies and regions.
With the coronavirus still running rampant in many countries, one key question is whether the emergence of virulent new strains will trigger repeated stop-and-go cycles, as we’ve seen in some cases where economies re-opened too soon. One particularly ominous possibility is that more vaccine-resistant variants appear, heightening the urgency of vaccination efforts that have so far been too slow in many regions.
Beyond the virus, there are a number of related economic risks to consider. A recovery that is slow or insufficiently robust could result in permanent scarring if too many firms go bust and labor markets start exhibiting hysteresis (when long-term unemployment renders workers unemployable owing to an erosion of skills). Another question is how much deleveraging there will be among highly indebted firms (small and large) and households, and whether this effect will be fully offset by the release of pent-up demand as consumers spend down pandemic-era savings.
Another area of concern is socio-political: will rising inequality become an even more salient source of instability and depressed aggregate demand? Much will depend on the scale, scope, and inclusiveness of policies to support the income and spending of those left behind. Likewise, it remains to be seen if the macro-policy stimulus (monetary, credit, and fiscal) implemented so far will be sufficient, insufficient, or actually excessive, leading to sharply rising inflation and inflation expectations in some cases.
Keeping all of these uncertainties in mind, the recovery currently looks like it will be stronger in the United States, China, and the Asian emerging markets that are part of Chinese global supply chains. In the US, a decline in new infections, high vaccination rates, increased consumer and business confidence, and the far-reaching effects of fiscal and monetary expansion will drive a robust recovery this year.Here, the main risk is overheating. The recent increase in inflation could turn out to be more persistent than the US Federal Reserve expected, and today’s frothy financial markets could undergo a correction, thereby weakening confidence....
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