The Global Economy in 2021: Recession or Recovery?

The year of 2020 has been marked by great volatility in the global economy. Over the past few years，the world economy，confronted with rising unilateralism and protectionism，has been losing its growth momentum and vitality. At a roundtable discussion organized by China Forex，Zhang Ming，director and researcher at the Department of International Investment of the Institute of World Economics and Politics of the Academy of Social Sciences and Xie Yaxuan，chief macroeconomic analyst at China Merchants Securities，shared their opinions on the Covid-19 pandemic. The conversation，which follows in edited form，was moderated by Zhong Wei，China Forex deputy editor.

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Zhong Wei: First，I'd like to welcome our two guests. The world economy in 2021 is expected to recover although there are still many uncertainties as a result of Covid-19. According to some international institutions，in 2021 global gross domestic product growth will exceed 4% in developed economies and 6% in emerging economies. This represents a V-shaped recovery compared to 2020. However，people are still concerned about the global economy，especially when they look at the circumstances as 2020 draws to a close. For example，will some economies be still struggling with the pandemic in 2021? Can the Covid-19 vaccines meet global demand and will they be affordable? Will US unilateralism continue and hamper the world's economic recovery? What do you see ahead for the global economy? What challenges might arise?

Zhang Ming: According to the latest forecast in the October 2020 World Economic Outlook released by the International Monetary Fund (IMF)，global economic growth is projected at -4.4% in 2020，and a positive 5.2% in 2021. However，the IMF's high growth estimate for 2021 is based on the low baseline of 2020. In fact，global GDP in 2021 is assumed to be the same as that of 2019. At present，whether the global growth in 2021 can exceed 5% or not rests on a number of uncertainties. The first uncertainty is the pandemic，which still seems to be severe. The center of the Covid-19 pandemic has shifted from developed countries to emerging economies such as India，which is likely to have more confirmed cases than the US by the end of 2020. Latin America is also suffering from the pandemic now. Thus，the key to growth of emerging economies rests with whether the vaccine is widely available. Another uncertainty is US trade policy after the American presidential election. If the United States intensifies its unilateralism and trade protectionism，the outlook for global trade in 2021 is not optimistic.

Xie Yaxuan: A recovery cannot be regarded as dramatic because the expectation for relatively high growth in 2021，as mentioned before，will be based on a comparison with the weak results of 2020. As far as the economy is concerned，a slow recovery will be maintained. In addition，globalization has stagnated as a result of the unilateralism of US President Donald Trump. The slowdown in globalization，as a result of the long-term status of "low growth，low interest rates and low inflation" after the financial crisis，intensifies the stagnation of global economy in turn. And the de-globalization in the future，will be affected by the result of the US election. On the other hand，it will be related to the recovery of the economy and the economic power to strengthen international cooperation.

There is no doubt about an economic recovery. But regarding its level and strength，two challenges should be considered. One is whether labor productivity is permanently disrupted by Covid-19 and the other is whether high debt levels will suppress corporate investment interest.

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Zhong Wei: In response to the pandemic in 2020，economic stimulus policies were carried out by developed countries on an unprecedented scale. These were much greater than those rolled out in the subprime mortgage crisis. As a result，national leverage ratios were increased，quantitative easing (QE) policies and low interest rates were put in place for lengthy periods of time. In 2021，will these stimulus policies be scaled back or even canceled? What are the main factors to be considered in macroeconomic regulation，be it employment，inflation or anything else?

Zhang Ming: Regarding fiscal policy，many developed countries had a deficit of nearly 10% of GDP in 2020. In some cases，the level topped 10%. As to monetary policy，developed countries  adopted zero interest rates and even negative interest rates. They also carried out quantitative easing policies. However，in 2021，fiscal stimulus policies of developed countries are expected to be reduced significantly. Economic growth will still be below potential，and inflation will remain low. Additionally，the employment situation in developed countries will improve，especially in the US labor market. Overall，inflation will remain low，particularly core inflation，which excludes food and energy prices. If global economic growth in 2021 is lower than expectations，expansionary macroeconomic policies will be kept in place.

Xie Yaxuan: Although the US Federal Reserve has demonstrated it will maintain loose monetary policies，it is unable to implement further loosening. Market expectations regarding liquidity have changed.

The Fed terminated QE policies after the US economy showed two quarters of positive growth. However，it restarted QE again before long. So，it is likely that the Fed will stop using QE policies in mid-2021 or somewhat later. In August of 2020，the Fed abandoned the two-pillar policy framework of full employment plus price stability and proposed focusing on the "assessment of the distance (gap) to the maximum employment level" and "average 2% inflation." This indicates that current macro regulation has taken into account low growth，low interest rates，and low inflation for the global economy for the long-term. There are also a number of unfavorable factors in the medium term such as the problem of an aging population<