Tale of three economies: coronavirus pandemic spells end of synchronised global growth

While China is leading the global economy out of the crisis, Europe, which appeared for a while to have suppressed the virus, is now facing a double-dip recession

Meanwhile, the US presidential election remains the biggest wild card for markets and the global economy

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A pedestrian walks past a poster of a person wearing a face covering in West London on October 11. Over the past few months, Europe’s largest economies have been hit by a second wave of infections that is forcing governments to reimpose restrictions. Photo: AFP

Published: 1:30am, 23 Oct 2020Updated: 1:30am, 23 Oct 2020

A cursory glance at the latest global economic forecasts published by the International Monetary Fund last week reveals the scale of the damage wrought by a pandemic that continues to rage. Global output is expected to shrink by 4.4 per cent this year, an improvement compared with the IMF’s prediction in June, but a sharper contraction than its estimate in April.

Gita Gopinath, the IMF’s chief economist, put it well when she warned that “the ascent out of this calamity is likely to be long, uneven and highly uncertain”.

The uneven element is partly attributable to sharp divergences in economic performance. Nowhere is this more apparent than in China, the only major economy expected to register growth for the year as a whole – a dramatic turnaround for the country where Covid-19 originated and which suffered a contraction in output of 6.8 per cent in the first quarter.

Never mind that China has fallen back on the debt-fuelled investment that it had been trying to wean itself off over the past decade, the world’s second largest economy is being lauded for bringing the virus firmly under control, providing a solid foundation for growth. A broadening recovery – retail sales beat expectations to rise 3.3 per cent last month – is accentuating China’s importance as the world’s only major growth engine.

Foreign investors are snapping up China’s higher-yielding domestic bonds, which are increasingly viewed as a defensive asset during periods of heightened risk aversion. Last quarter, the yuan surged 3.8 per cent against the US dollar, its best quarter since the global financial crisis. Even China’s volatile stock market, which has outperformed the S&P 500 this year, is benefiting from the stronger role of institutional investors, whose presence provides a more stable trading environment.

In advanced economies, however, the recovery will be a long and bumpy one. The disarray over how to deal with the pandemic is causing traditional and high-frequency gauges of economic activity to remain significantly below normal, and in some cases go into reverse. While China is leading the global economy out of the crisis, Europe, which appeared for a while to have suppressed the virus, is now facing a double-dip recession.