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Wednesday, October 20, 2021

Is the worst over yet for global economy?

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When news emerges that the U.S. economy sank by 32.9% in the second quarter of 2020 and Germany and Japan struggled, too, many fund managers are relieved that there has been no mass panic in the financial market

In response to such gloomy news, the 7-8% drop in the stock market is acceptable. Some economists from major investment banks such as JP Morgan boldly predict that the worst is over for the world’s economy. Jim Glassman from JP Morgan says that the global economy will enter a sustainable recovery phase in the second half of 2020 although some regions still face stagnation.

After the disastrous performance in the second quarter, many major economies are expected to fare better, with third-quarter GDP growing by 15-20%.

Given the dramatic decrease in the second quarter, a 15-20% increase cannot fully offset the loss. However, some market analysts contend that what truly matters is confidence, among enterprises and investors, in the possibility of an almost V-shaped recovery path, whether or not that vision will materialize. Rays of hope are needed to prevent an economic downturn bred by pessimism.

How hope will fuel economic growth

Hope will change companies’ defense-driven strategy. Many big firms try to cut losses by steering clear of dividend payments, borrowing more, retrenching staff and trimming costs. Their aim is to boost liquidity and avoid a financial meltdown. For example, Disney has placed almost 100,000 staff worldwide on furlough; it is mulling plans to let some of them restart work. At an online seminar with analysts of major banks on August 4, its CFO, Christine McCarthy, said that Disney is making an effort to let the staff on furlough start work again at theme parks.

These changes are experienced not only through speeches at online seminars during this period, when big companies release profit figures, but also in the number of visitors to entertainment facilities. In March 2020, the number of people visiting Greece’s entertainment facilities fell by 80% compared with that at the start of the year; however, the figure in July rose by over 13%, which was impressive as it translated into an increase of almost 100% from that at the peak of the pandemic.

The U.S. and many economies in the Europe also showed signs of recovery from the doldrums in March. The number of people visiting entertainment facilities in these countries fell by 60-90%. Since then, the figure has improved, sometimes by over 100% (Sweden and the Netherlands). Even India, which has difficulty managing the pandemic, has experienced an improvement of over 30%. The number of people visiting retail centers increased after plunging by 80-90% in March and April, so the drop at the start of August was only 20-30%.

Job figures are also rosier. Although the job market recovers more slowly than that for entertainment, there are signs that the worst is over. While no major economy has seen a V-shaped recovery in the job market, recruitment figures have started to increase in most economies, except in Japan. This lays the foundations for a recovery in consumption and shows that firms have started to employ more people so as to expand their business again.

Therefore, it can be argued that the global economy has started to improve after hitting rock bottom.

Will the economy dip again?

The threat to the slow but sustainable recovery that the global economy is undergoing comes from the possibility that the pandemic may erupt again in fall and winter in Europe and the United States. The situation in Australia, which has strengthened social distancing measures since it entered winter, is a worrying signal to China, Europe, the U.S., Canada and Japan, which are expected to face an even harsher winter than Australia.

Although the correlation between winter and the pandemic has been questioned recently (many countries have seen the pandemic erupt even in summer), there are causes to worry about a severe pandemic in winter. Moreover, a vaccine may not be ready in winter—some experts have warned that a vaccine, if any, may not be sufficiently effective.

Consequently, some economists remain cautious over whether the drop in the second quarter is the most severe. Even if it is, the fourth quarter may witness another decrease instead of an extension of the recovery in the third quarter. The global economy may struggle for another 9-12 months in its recovery path even though many experts agree that the third quarter will witness improvements in economic indicators and corporate profits.

Will inflation recur?

While many are concerned about a possible downturn in the fourth quarter, some worry about inflation triggered by the waves of monetary easing triggered by various central banks. This approach involves quantitative easing, money printing, intervention in the financial market, liquidity injection and an unprecedented scale of share purchase, with the value of financial assets purchased twice or thrice that in 2007-2009.

Such intervention has reduced the liquidity drop in the financial market and there are so signs of a crisis similar to that in 2007 in both the financial market and the housing market in the U.S. and Europe. Even in China, which for the first time in 20 years has had to let a bank shut down, the liquidity and debt crisis is not as serious as predicted.

However, the price of quantitative easing and monetary expansion is post-pandemic inflationary pressure. In theory, two opposing forces influence inflation. Higher money supply and lower production output (due to the damage inflicted on the global supply chain) may push up prices. On the other hand, the velocity of money circulation may drop as consumption and economic activities plunge, dragging down inflation. Only time will tell which force will prevail. Even then, nobody should be so complacent as to think that the economic downturn will make inflation unlikely.

The tendency for many international investment funds to pour money into gold shows that some expect inflation to soar at a certain point of time following the pandemic (they are also worried that the interest rate will be increasingly negative in many economies, making cash and financial instruments resembling cash not as attractive as gold).

Implications for Vietnam

Optimistically speaking, it is good that many analysts think the economy has bottomed out. The global recovery in the third quarter will have a significant impact on Vietnam, an open and export-oriented economy.

Although the pandemic has returned to Vietnam, the situation is still better than in many countries. Given the Government’s determination and focus in its pandemic management strategy, it stands a great chance of keeping the pandemic under control. The third quarter will remain an opportunity that Vietnam should seize as export orders gradually resume.

In the long run, the country should brace itself for two negative scenarios. First, the pandemic may erupt again in large economies in fall and winter and a vaccine is not ready by then. Second, inflation may soar again. For many big firms, the return of inflation is not necessarily bad news if they can ensure input prices rise less rapidly than output prices. However, people who have struggled this year will find higher prices a virtually unbearable burden.

By Ho Quoc Tuan, University of Bristol, UK

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