The global economy continues to rebound rapidly reaching new highs post-COVID. This is an important milestone for the global economy considering the downward spiral in growth in 2020 resulting from the impact of the COVID-19 pandemic. It was a long shot then, but now the global economic outturn is improving considerably.
Meanwhile, the recovery is not without risks as the stronger recovery is but asymmetric across countries worldwide. That notwithstanding, it is also boosting prices or surging inflation and overshooting Central Banks’ targets in advanced economies, especially, in the US. Thus, posing an upward pressure on bond yields.
Economists are of the view that this makes it more expensive for other countries to sell debt as investors demand higher returns, and for developing economies, especially Africa, a global economic recovery which started off as good news is gradually becoming a threat to debt financing. Not only that, investors are likely to redirect financing into US bonds as the US economy grows above emerging and developing economies (EMDEs), spurring outflows from EMDEs bond and stock markets.
According to the World Bank, in its June 2021 ‘Global Economic Prospect Report’, the global economy is projected to grow by 5.6 per cent, its fastest post-recession pace in 80 years, albeit, undergirded by stronger rebound from a few major economies.
Moreover, global forecasters such as Fitch Ratings and IHS Markit have further indicated global GDP growth to increase to 6.3 per cent and 6.0 per cent in 2021 respectively.
However, many emerging markets and developing economies are still struggling with the COVID-19 pandemic and its aftermath.
While there are welcome signs of global recovery, the pandemic continues to inflict poverty and inequality on people in developing countries around the world. Globally coordinated efforts are essential to accelerate vaccine distribution and debt relief, particularly for low-income countries.
As the health crisis eases, policymakers will need to address the pandemic’s lasting effects and take steps to spur green, resilient, and inclusive growth while safeguarding macroeconomic stability
”- David Malpass, World Bank President
Regional Real GDP Growth Outlook Positive But Still Uneven
Furthermore, advanced economies such as the US is expected to grow reaching 6.8 per cent in 2021, reflecting huge fiscal support and the easing of pandemic restrictions, according to the World Bank. Economic growth in other advanced economies are improving, but to a lesser extent. Precisely, Fitch Ratings forecasts the Eurozone to grow by 5.0 per cent, and the UK by 6.6 per cent, however, Japan is expected to grow by 2.5 per cent.
Emerging market and developing economies (EMDEs) combined are forecast to expand 6 per cent this year, buoyed by higher demand and elevated commodity prices. China is expected to rebound to 8.5 per cent this year. India’s previous forecast in March 2021 has been trimmed down, according to Fitch Solutions.
However, for many countries, the recovery is being held back by a resurgence of COVID-19 cases and lagging vaccination progress, as well as the retirement of policy support in some instances.
Based on World Bank statistics, for sub-Saharan Africa, growth is expected to expand modestly, reaching 2.8 per cent in 2021 and a further 3.3 per cent in 2022. The drivers of this recovery include positive spillovers that continue to firm up global activity, better management of COVID-19 globally, and improved domestic activity in agricultural commodity exports. Nonetheless, the recovery reflects risks of fragility, emanating from the effects of the pandemic and the slower vaccination rates in the region.
The region’s largest economies— Nigeria, Angola and South Africa— have experienced partial recovery after contracting averagely by 4.2 percent in 2020. According to the World Bank, this positive growth is underpinned by stronger external demand from China and the US, the main trading partners of the region.
Nigeria, for instance is projected to grow at a modest 1.8 per cent, and inch up to 2.1 per cent in 2022 on the back of higher oil prices, structural reforms in the oil sector, and a market-based exchange rate management, the World Bank predicts. More so, South Africa is expected to grow at 3.5 per cent this year, and subsequently decline to 2.1 per cent in 2022 and Angola is projected to grow at 0.5 percent in 2021, but will increase by 2.8 percentage points in 2022.
IHS Markit’s economists estimate that the US real GDP growth reached a new peak in May 2021. Also, Africa and the Middle East will reach their peak in the third quarter of 2021, while Europe and Latin America complete their recoveries in the final quarter of 2021.
Steady Rise In Global Inflation: The Status Quo
Inflation trends are picking up, and are likely to continue on this trajectory for the remainder of the year, global forecasters predict. This reflects a rebound in global inflation compared with declining levels of inflation in the first half of 2020. Notably, the World Bank posits that although rising, inflation is expected to remain within target bands, especially in countries operating under inflation targeting regimes.
Similarly, Fitch Ratings considers this inflationary trend unlikely to end up in a runaway inflation. Fitch Ratings’ economists attribute the rise in inflation to the quicker-than-expected expansion in demand for consumer durables and world merchandise trade without commensurate improvements in global supply chains.
However, Fitch Ratings, in its forecast notes that slower growth, adjustments to supply in bottleneck sectors, a return towards services consumption, and weakening impact from the fiscal stimulus package in the US present some headwinds to inflationary pressure, thus declining the rate of inflation by 2022.
Based on Fitch Solutions inflation tracker on emerging economies, as of early June 2021, inflation had risen above policy makers’ mid-point target in nine out of twenty-four economies captured, whereas in four out of the nine, inflation had risen above target range.
As a result, Fitch Solutions expects that inflationary pressures for emerging economies will likely continue to strengthen in the next two-to-three months. Factors to drive this phenomenon include base effects, rising commodity prices and strong demand.
More to the point, expectations are that inflation will ease as base effects from 2020 start fading and as rising production supports the ease of localised supply shortages, Fitch Solutions suggests.
For sub-Saharan Africa, inflation has picked up in some countries as a result of the pursuit of accommodative monetary and fiscal policies, thus, reflecting currency depreciations and rising food and energy prices, while for others, low consumption demand has kept inflation contained. Meanwhile, food insecurity remains a key risk that has skyrocketed food inflation across several countries in the region, the World Bank notes.
Fundamentally, global consumer price inflation is forecast to inch up from 2.1 per cent in 2020 to 3.3 per cent in 2021 before plunging back to 2.7 per cent as supply conditions improve and commodity prices decline, according to IHS Markit. Also, IHS Markit Economists further stress that the forecast risks are on the upside and depend on the path of long-term inflation expectations, as well as monetary and fiscal policies.
Snowball Of Debt, Inflation And Interest Rates
Neck Breaking Debt
The coronavirus pandemic has spiraled global governments’ indebtedness to historically higher levels. While this has aided assuaging what could have been a difficult navigation through the pandemic as huge governments’ borrowings provided some fiscal room for several economies, debt sustainability risks remain a hindrance.
Economies explored various refinancing strategies to cushion the economic impact of the pandemic for fiscal stimulus packages and to finance their budgets. Increasing their appetite for borrowing, various economies, especially in Africa, borrowed from the international debt market.
With such ballooning debts, sustainability becomes an issue and this increases the sensitivity of country’s credit worthiness to interest rate changes. According to Moody’s, global debt increased by US$32 trillion to US$290.6 trillion at year-end 2020, and this trajectory will continue in 2021.
However, while advanced economies have been able to borrow at very low rates, this is not so for emerging and developing economies as many face much higher cost of finance. According to S&P Global research countries such as Egypt, South Africa, Ghana and Kenya are the four emerging markets that could suffer the most from higher sovereign refinancing rates.
Meanwhile, given these setbacks, debt sustainability can be checked if the rise in inflation in a host of these economies are transitory than persistent. That way, markets may stick to their current debt portfolios and not demand higher yields to compensate for greater uncertainty with inflation outcomes.
Long term rates such as the US 10-year treasury yield- a significant benchmark for global sovereign borrowings- affects investors’ appetite for other sovereign bonds. Thus, with renewed fears of inflation in the US and expected rise in yields, financial market participants may shift from high-risk debts.
Rising Inflationary Pressures And Policy Implications: Should EMDEs Be Worried?
As earlier indicated, rising inflationary pressures signal participants within the financial market to become concerned about persistently higher inflation in major economies. Essentially, this brings new risks as investors may have high concerns for continued accommodative monetary policies by major central banks.
In such conditions, rising inflationary pressures may result in two outcomes in emerging and developing economies (EMDEs). First, this raises near term challenges to the policy choices of EMDEs, thus risking the likelihood of persistently breaching their inflation targets. Amid this complexity, policy makers may also rely on accommodative policies to ensure a robust recovery, economists suggest.
This notwithstanding, the World Bank is of the view that should these economies pursue policy measures that strengthen central bank credibility, it can help anchor inflation expectations.
On the other hand, if inflation in advanced economies persists, central banks may be compelled to tighten monetary policy. That could lead to higher capital outflows from emerging and developing economies into advanced economies and the resultant depreciation of currencies in EMDEs.
In the case where the recovery slows, the policy challenge would indicate a further testing of countries’ room for expansionary policy actions. Those where monetary policy and, in particular, fiscal policy have been stretched most, would face the more serious difficulties.
Given a combination of these factors, these indicate high risks, with potentially devastating effects on EMDEs and must therefore, not be ignored. Policy makers must be cautious of the policy measures to undertake in order not to escalate these pressures.