You would never think that, in the thick of a global pandemic crisis, a new-found sense of stability and recovery could be returning to the world. But there are glimmers of economic recovery in global demand, stock markets are no longer in free fall and are clawing back good gains, and market fear factors are in retreat, too. It may not seem apparent to ordinary folk still suffering dire consequences of the coronavirus but the bounce back in financial markets is helping to lead the way back towards revival. Emerging markets are rallying, higher-beta stocks are in demand and risk appetite is gaining ground. Even the weaker US dollar can be perceived as a marker for the upturn as the weight of global capital shifts out of safe-haven dollars into the hunt for higher yields. If any better proof were needed that economic recovery is under way, the latest data from the world’s two largest economies, the US and China, are showing encouraging signs of progress. In July’s US non-farm payrolls report, employers returned nearly 1.8 million people back into work, after 2.5 million and 4.8 million jobs were restored in May and June, proof that the economy is heading back into a stronger space after the lockdowns, lay-offs and shutdowns. Likewise, China’s July trade data showed a stronger-than-expected 7.2 per cent bounce in exports from a year ago, a further pointer that world trade flows are starting to pick up stronger momentum. It is being reflected in a wide array of global business activity indicators moving back into positive growth territory again after the shocking collapse in confidence in the first four months of the year. IHS Markit’s world manufacturing purchasing index rose above the all-important 50 boom-or-bust line to 50.8 in July, confirming that business confidence is back on the mend. It will take a while for consumers and companies to go back into full-on spending sprees, but there are sure-fire signs the global economy is heading in the right direction. The key is whether the better mood can be sustained and recovery builds critical mass over the long term. If it’s only a temporary respite, then stock markets are in for a shock. But if world leaders have learned any lessons from the past, the priority must be on ending the pandemic, beating the recession and easing the current global political logjam, especially between the US and China over trade. It means negative interest rates, continuous quantitative easing and extreme deficit spending may be needed for years. If investors believe policymakers mean business, then world stock markets are radically undervalued with equity weightings in global investment portfolios running at four-year lows right now. The danger is that we end up with a divided world – one defined by the haves and have-nots, as prosperity returns for the privileged well-off, but hardship increases for lower-paid workers and the growing ranks of unemployed in the industrial world. The coronavirus has had unfortunate side effects, not least a new “fire and rehire” mentality among some corporations taking advantage of the downturn to boost productivity and profitability at the expense of pay and working conditions for employees. Policymakers will need to maintain the flow of future economic stimulus measures to ensure social tensions and divisions are kept to a minimum. It’s not just a temporary fillip but a sea-change for policy for decades to come. Red flag raised about ‘negative consequences’ of China’s virus stimulus It means wider budget deficits and bigger public debt mountains will be building up around the world for a very long time. Increased government debt issuance is not a problem while the central banks continue to monetise debt and while negative interest rates help investors fund bigger bond market portfolios. Deficit-busting bonds must be funded at all costs to break the cycle of recession, deflation and weak confidence and to help defend the world economy from deeper risks. Between the US-China trade war, Brexit, the coronavirus and global recession, the world has entered a dangerous fusion of risk. If global leaders are lucky, the illusion of perpetual policy plenty can last long enough for sustainable recovery to finally take hold. If policymakers are unlucky, the show could come apart, with ugly consequences. There is no turning back. Global capitalism is reaching its limits and our future prosperity is on the line. Hopefully, there are still tenable backup options just in case. If not, we are all in trouble. David Brown is the chief executive of New View Economics