Is the Global Recovery Real or Fake?

In face of the ongoing COVID-19 pandemic,countries with different response strategies experience economic rebounds of different paces. As fiscal and monetary policies normalized,China’s recovery has been proceeding in a milder way after taking the lead in 2020,with growth in the second quarter of 2021 slightly weaker than market expectations. In Europe and the US,the recovery is accelerating after gradually building up a barrier against the pandemic. More developing economies,however,are still facing many difficulties. Against this backdrop,certain concerns are raised: is the current global recovery a real one where global governance is restored and the medium- to long-term growth momentum is clear and sustainable? Or is it a short-lived one stimulated by macro policies in response to the impact of the pandemic? The reasoning on this question may affect the basic judgment of the post-pandemic global economy. At a roundtable discussion organized by China Forex,Zhang Ming,Deputy Director of Institute of Finance and Banking,Chinese Academy of Social Sciences and National Institution for Finance and Development,and Xu Gao,Assistant President and Chief Economist,BOC International (China) Co.,Ltd.,shared their opinions on the global recovery. The conversation,which follows in edited form,was moderated by Zhong Wei,China Forex Deputy Editor.

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Zhong Wei: Welcome to this session of Roundtable. As we enter 2021,the recovery in some economies is becoming clear,particularly in the UK and the US. Emerging economies,on the other hand,are showing divergent performance. In this regard,one view is that the global recovery can be sustained in the medium term within the next two to three years,and may be restored to pre-pandemic levels. Another view is that the current recovery is only a short-lived response to the shock of the pandemic,while the fragmented structure of global governance and the continued slowdown in growth have not been changed during the post-pandemic era. Some even contend that the world economy has not yet seen a real recovery ever since the subprime mortgage crisis and the European debt crisis,and that new mechanisms and dynamics are still weak. What would be your judgments on the current economic recovery situation?

Zhang Ming: After the global financial crisis in 2008 and the European debt crisis in 2010,the global economy has fallen into the so-called Secular Stagnation. This kind of stagnation is characterized by “three lows and two highs”: low growth,low inflation,low interest rates,high government debt and high imbalance of income distribution. The reasons for a secular stagnation broadly include an increasingly aging population,slowed technological progress,slowed globalization,increased share of intangible assets in fixed asset investment,and a widening income distribution gap worldwide. Global economic growth plummeted to -3.3% in 2020 and may climb back to 5%-6% in 2021. When the pandemic ends,global economy is likely to return to the low-growth trajectory seen before pandemic.

Xu Gao: In response to the COVID-19 outbreak,accommodative macro policies were adopted worldwide to stimulate demand (notably in the US),leading to an expansion in global aggregate demand,which masked the lack of demand for the time being. In consequence,the economy has embarked a fast track of growth in the short term under the policy stimulus,although structural problems of the global economy have not been resolved. It is expected that accommodative policies for stimulating demand will continue for another year or two. Meanwhile,vaccination will gradually reduce the impact of the pandemic on economic activities. As a result,global economy should grow at a relatively high rate in the next year or two and move to a faster track than before the pandemic.

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Zhong Wei: Global commodity prices have been rising since the second half of 2020. Some argue that higher resource prices are driven by a combination of liquidity flood and economic restoration,while others hold that the roles played by market manipulation and financial speculation cannot be underestimated. At least so far,inflation expectations have not slipped in any significant way,and the Federal Reserve appears to be de-emphasizing inflation targets. In your views,when will the global commodity inflation reach an inflection point? Will global inflation averages in the post-pandemic era stand higher or lower than before the pandemic?

Zhang Ming: Global commodity prices fell sharply in the first half of 2020 at the time of the outbreak. However,since the second half of 2020,the prices have greatly exceeded their pre-pandemic levels. Furthermore,some prices have even surpassed the levels prior to the 2008 subprime crisis,with a few hitting record highs. When commodity prices surpass pre-pandemic levels and continue to rise rapidly,the driving factors are more likely to be financial speculation and market manipulation in the context of liquidity glut.

Xu Gao: Inflation is determined by the dual factors of supply and demand. After the pandemic,global aggregate demand was significantly stronger due to policy stimulus,while supply capacity did not expand in tandem. In consequence,the post-pandemic global inflation averages are higher. In expanding global aggregate demand,monetary easing played a large role. Thus,it can also be argued that monetary expansion is the reason for the current higher inflation. In addition,China’s domestic production restrictions have been significantly strengthened this year,which contributed to supply constraints and further heightened inflationary pressures.

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Zhong Wei: In response to the pandemic,major economies have adopted accommodative fiscal and monetary policies unseen before. It seems that China is the only country with largely normal macro policies and a gently healing economy. The market generally estimates that the Federal Reserve would gradually scale back its bond purchases and possibly increase interest rates by the end of 2022. However,there is more concern that,after the dual impact of the subprime crisis and the pandemic,fiscal and monetary policies in major Western economies have drifted away from normality even if the stimulus has been subdued. In your views,will quantitative easing,zero interest rates,tax policy competition,etc.,become the norm?

Zhang Ming: Looking at the path taken by the US since the subprime crisis,it is true that unconventional loose monetary policies are easy to enact but hard to withdraw. The US government has now fully enjoyed the benefits of loose fiscal policies and extremely accommodative monetary policies,however,they have not paid any price at this stage. The Federal Reserve has changed from inflation targeting to average inflation targeting,which gives them more room for implementing accommodative monetary policies. With this in mind,it is likely that zero interest rates and quantitative easing would become the norm in developed countries for a longer period. In recent years,Modern Money Theory (MMT) has begun to spread globally and,with time,has actually been practiced by some developed countries in their macroeconom