Economy: few certainties among many uncertainties, and only China is growing. The analysis by Nicola Nobile (Oxford Economics)

11-11-2020 | Featured in HP, News

This article is a summary of what was published in Macrotrends 2021 by Harvard Business Review Italia.

of Nicola Nobile

Even if the unknowns of the pandemic make it difficult to outline future economic trends, some prospects seem clear: interest rates close to zero, low inflation and rising public debt. The good news is that, in the confused global scenario, the Eurozone has taken timely and incisive measures which will lead to greater integration in the coming years.

After the very strong economic declines, never seen in a period of peace, which we witnessed in the first part of 2020, the available information confirms that the phase immediately following the lockdown was robust, with a record increase in GDP in the third quarter of 2020, despite some signs of a slowdown in some sectors. Indeed, beyond the third quarter, growth seems destined to slow down considerably. In fact, the latest Oxford Economics forecasts see global GDP growth around 5% for 2021, after an expected decline of over 4% this year (it should be remembered that during the financial recession of 2009 the decline was only 1.4% ).

The divergences between the various countries remain extremely high due to both the heterogeneous impact of the pandemic and the different responses of the fiscal and monetary policy authorities. China remains the only one of the main countries for which positive economic growth is already foreseeable by 2020. This, in the face of significant drops for all the other countries: Eurozone - 8%, United States - 4%, Italy and France approximately - 10%. In the five-year period 2021 - 2025, economic growth will resume but at levels below those expected before the global pandemic due, among others, to long-term negative effects on the labor market, productivity and accumulation of capital.

Although this scenario is currently the most probable, the uncertainties in this regard remain relatively high, especially as a function of the trend of the epidemic. These uncertainties also tend to increase with the lengthening of the time horizon. Some basic characteristics, interconnected with each other, should however remain substantially unchanged: low interest rates and low inflation accompanied by a steep rise in public debt. Rates will remain low as inflation will remain below central bank targets. Furthermore, although central banks remain formally independent from government authorities, this crisis has seen greater coordination between monetary and fiscal policies. This undoubtedly helps countries with a high public debt (for example Italy) to maintain debt service around sustainable levels and to maintain expansive fiscal policies also in the coming years.

In a context of declining economic activity and strong fiscal policy stimuli, the increase in public debts will have a very similar dynamic in all the countries of advanced economies. The United States, the main eurozone countries (excluding Germany), Japan and the United Kingdom will all have a increase in the debt to GDP ratio in 2020 of about 20-30 percentage points compared to 2019.

Furthermore, the plans to repay these high levels of debt will be very gradual and will spread over a relatively long period of time, also with the aim of averting possible debt-related financial crises. This could make it possible to apply an accommodative monetary policy which, in a context of low inflation, will still be oriented towards maintaining low interest rates. And these in turn will ensure that debt service can remain at sustainable levels ea avoid, even for high-debt countries such as Italy, the excessively rapid implementation of restrictive policies.

In Italy the public debt will rise above 160% of GDP, one of the highest in the world. While certainly problematic, the Italian public debt will remain sustainable, at least in the next two years, thanks to the low cost of debt service. Italy's payments on public debt amounted to 3.5% of GDP in 2019. The increase caused by the fiscal response to the coronavirus recession will bring debt to nearly 4% of GDP by 2020, one third of the average for the years '90, when Italy's debt payments were regularly above 10% of GDP. This obviously does not imply that a country's level of debt is not important in terms of sustainability, but low interest rates will help avoid an Italy debt crisis in the short term.

The current crisis has hit all countries without distinction but undoubtedly some economies, including the Italian one, have been hit more than others due to the harshness of the policies to combat the spread of the virus, the response of fiscal policies and the sectoral composition. While China remains the only major country for which GDP is not expected to decline this year, all other large countries will experience a decline in economic activity in 2020 to an extent that had only previously been recorded. in times of war (Italy and France about 10%, United States slightly less than 5% and Japan about 6%). The uncertainties about the future spread of the pandemic and the long-term effects on the economic structure of the different countries make it difficult to uniquely outline the future macroeconomic scenario, but we think that the shock resulting from the coronavirus will have long-term impacts on potential output, with an impact on productivity, but also on capital accumulation and the dynamics of the labor market.

Finally, we can at least be reasonably certain that it will be characterized by the three interrelated factors just described: interest rates close to zero, low inflationary pressures and rising public debt.

Economic growth and world trade 2019 - 2025
(var.% per year)

 2019202020212022202320242025
Real GDP
United States2,2-3,73,72,92,32,11,9
Canada1,7-5,16,22,72,21,51,6
Germany0,6-5,85,33,31,51,00,8
France1,5-10,17,04,43,31,91,4
Italy0,3-9,76,13,81,60,70,4
GB1,5-9,58,33,52,01,81,6
Japan0,7-5,62,63,02,01,41,0
China6,12,37,65,04,84,84,7
India4,9-10,09,26,37,67,77,6
Brazil1,1-4,63,93,63,02,32,1
World2,5-4,35,34,03,33,02,8
World trade0,4-7,67,74,73,63,33,1
Source: Oxford Economics, 2020

Nicola Nobile he is Lead Economist of Oxford Economics, an international macroeconomic consulting firm.

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