It looks as though many countries around the world have recovered (somewhat) from the pandemic. At least from the lens of an economist they have bounced back.
The US economy rebounded 12% in the second quarter of 2021. China grew 7.9% in the same period, though this was appreciably slower than the 18.3% jump in the first quarter. The Eurozone expanded 13.6% in the second three months of the year, after five consecutive quarters of contraction.
So, it seems the main engines of global economic growth, namely, the US, China, and the Eurozone have returned to where they were before COVID-19 struck. Here in Singapore, the economy expanded 14.7% in the second quarter, whilst our nearest neighbours, Malaysia, grew 16.1% over the same period.
Many observers are delighted with the recovery. But that got me thinking. What exactly does a return to normal really mean?
It could mean that economic growth in the US could continue to slow, just as it had done before the pandemic. It could mean that economic expansion in China could continue to moderate, in much the same way as it had done in the ten years before the pandemic….
…. Meanwhile, growth in the Eurozone had been worse than anaemic for almost 20 years. So, why would a recovery from COVID-19 make any difference?
I could go on. But I think you get the picture.
The global economy had been slowing long before the pandemic locked everyone down for months. All that COVID-19 has done is to interrupt the slowdown.
The pandemic has also provided many political leaders with a convenient excuse to talk about something other than try to explain to their people why their economies are stuttering.
And as far as the recovery is concerned, all that it has done is to bring us back to where we started. If anything, it has made matters worse. After all, finance ministers who have thrown money at COVID-19 are now looking at how they can claw back their largesse.
So, if the global economy was in a bad place before COVID-19, then it is in an even worse place now. Indebted countries are even more indebted, which leaves them with little wiggle room to borrow more.
The upshot is that taxes will probably need to rise, and government budgets will most likely need to be pared back. In the meantime, interest rates will probably have to remain low, regardless of what happens on the inflation front. Let’s not forget that inflation can be a silent but powerful weapon to whittle down debt in real terms.
Put another way, we are on our own. If we don’t look after our assets ourselves, then nobody out there is going to do it for us.
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David does not own shares in any of the companies mentioned.
