Image source: Mathilda Khoo / Unsplash

By Shrutee Sarkar

BENGALURU (Reuters) – The outlook for a global economic recovery over the past month has worsened or at best stayed about the same, according to a firm majority of economists in Reuters polls, with the ongoing recession expected to be deeper than predicted only last month.

World stocks fell to their lowest in over a week on Thursday, as recovery doubts have crept in, driven by a surge in coronavirus cases in many countries.

That includes the United States, which appeared to have gained some control over the pandemic in May, leading to several states lifting restrictions.

Along with increasing trade tensions, prospects of a second wave of the virus and the latest warning from the International Monetary Fund of a near 5% plunge in the global economy this year has raised fears the V-shaped recovery expected by financial markets is in jeopardy.

Reuters polls of over 250 economists taken this month showed ongoing recessions in most major developed economies would be deeper than predicted last month, leaving unemployment rates well above pre-COVID levels even by the end of next year.

When asked how the global economic recovery outlook had changed over the past month, 80% or 71 of nearly 90 economists said it had worsened or at best stayed the same.

The remaining respondents said it had improved, despite global gross domestic product forecasts for this year in the wider poll down from a month ago and roughly the same in a worst case scenario.

“We see three kinds of risks going forward. The first is that the virus comes back. That could trigger a reversal of the reopening process. The second risk is monetary and/or fiscal fatigue,” said Ethan Harris, head of global economics research at BofA.

“Governments have been very aggressive in countering the shock. However, monetary policy is now scraping the bottom of the policy barrel. More fiscal stimulus is likely to come in major developed economies, but it could be slower and smaller. The third risk is the second-round shock could be even worse than we assume.”

The world economy was forecast to shrink 3.7% this year and grow 5.4% next year, compared to a contraction of 3.2% and growth of 5.4%, respectively, in the previous poll.

While that median consensus for this year is less pessimistic than the IMF’s projection of -4.9%, in a worst case scenario in the latest poll the global economy was forecast to shrink 6.0%.

“Even with recent bright signs, the initial drop is much deeper than post-2008. While tens of millions of new jobs will likely be created between now and year-end, a quicker jobs recovery is not a V,” noted Ajay Rajadhyaksha, head of macro research at Barclays.

“We expect global GDP to surpass pre-COVID levels only in late 2021, and later still for advanced economies. And much could still go wrong, especially if the virus has a second wave.”

At the same time, the world’s biggest central banks were not expected to achieve their inflation targets even within three years.

Indeed, if anything, the bigger threat is disinflation or deflation once the pandemic subsides rather than higher prices, according to a separate Reuters survey of economists on the global inflation outlook, run alongside the latest poll.

That raises the question of what options policymakers have left.

“As the COVID-19 crisis has unfolded, talk has turned to ‘helicopter money’ and ‘debt monetization’,” noted David Mackie, economist at JP Morgan.

“In our view, much of this commentary is misconceived, not because of a lack of a legal mandate for central banks to do this, or because of the logistical challenges involved, but rather because it is inconsistent with the way that the modern monetary system works.”

Reporting by Shrutee Sarkar; Polling by the Reuters Polls team in BENGALURU; Editing by Ross Finley and Chizu Nomiyama

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Source: Reuters