Date: 31 December 2020
Author(s): Dan Burns, Mark John
When 2020 began, the global economy had just recorded its 10th consecutive year of uninterrupted growth, a streak most economists and government finance officials expected to persist for years ahead in a 21st Century version of the “Roaring ‘20s.”
Unbeknownst to all, in just two months, the mysterious new virus first detected in China in December 2019 – the coronavirus – was spreading rapidly worldwide, destroying those expectations and causing the steepest global recession in generations. The International Monetary Fund estimates the global economy to have shrunk by 4.4% this year, compared to just a shadow on a contraction of 0.1% in 2009, when the world last faced a financial crisis.
Government-mandated shutdowns of businesses and any non-essential activities in most parts of the world unleased a wave of joblessness that had not been observed since the Great Depression. Still, unemployment levels varied dramatically across the globe.
In some countries, like China, COVID-19 infection levels were effectively suppressed through strict but relatively brief lockdowns, allowing unemployment rates to remain low. Others, such as Germany, deployed government-backed schemes to keep workers on company payrolls even as work dried-up.
Elsewhere, including in Brazil and the United States, the uncontrolled spread of the virus and inconsistent government health and economic responses further increased rampant job losses. Some 22 million people in the United States were jobless in March and April alone and the unemployment rate jumped to nearly 15%.
Most economists expect it to take a year or more for labor markets to return to something resembling the pre-pandemic era.
The pandemic delivered a body blow to global trade, with export volumes lunging abruptly to their lowest in nearly a decade in March and April.
The recovery since then has been led largely by China, which is the only major economy seeing year-on-year growth in exports.
Unprecedented levels of government stimulus prevented even greater damage to many economies but that also meant adding to a global mountain of sovereign debt amassed by governments, raising questions about whether a financial crunch is the next crisis the world must deal with.
However, historically low interest rates floating around zero percent, and sometimes even below zero percent, mean that debt servicing costs for the Group of Seven (G7) economies are at their lowest since the 1970s, when the debt burden was only a fraction of what it is now.
“Debt today is sustainable and it will remain so for a few years because as long as economic activity and employment have not recovered momentum, central banks are unlikely to do anything with their interest rates. That allows governments to keep up the fiscal support in the form of retention schemes and support on firms,” said Laurence Boone, the OECD’s chief economist.
One outcome of the monetary aid has been that consumer spending has held up better than many had expected. While spending on services, particularly at restaurants and for travel and leisure, plunged and remains depressed, consumers had been putting down money on goods, especially big-ticket items such as cars and home improvements that benefitted from rock-bottom interest rates.
This resulted in retail sales in many economies improving on a year-on-year basis, in some cases by even more than they were at the end of 2019.
Another direct effect of all that a government spending has been a rise in savings among consumers in many parts of the world. Government support payouts in developed economies cushioned household bank accounts and, with consumers hunkered down in the pandemic’s early days in particular, savings rates rocketed.
Rates began returning to normal in the latter part of 2020 but remain well above pre-pandemic levels. Some economists perceive that this as the dry tinder to help fuel an economic rebound in 2021 and beyond when COVID-19 vaccines allow a wider recovery to take hold and consumers to begin moving about – and spending – more freely.
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