South China Morning Post
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Americans line up outside a Kentucky Career Centre hoping to find assistance with their unemployment claims in Frankfort, Kentucky, on June 18. US labour markets have recovered sharply in recent months, but September’s unemployment rate of 7.9 per cent is still more than double the 3.5 per cent cyclical low reached before the recession hit. Photo: Reuters
Opinion
David Brown
David Brown

A V-shaped recovery in the global economy should not be feared

  • The burst of activity as economies in China, the US and the EU emerge from the coronavirus-induced lethargy raises hopes of a spectacular return to growth
  • As long as fiscal support holds up, paying particular attention to vulnerable groups, the dreaded double-dip recession can be fended off
David Brown
David Brown
Why you can trust SCMP
The world economy has a battle on its hands, a struggle between sustainable recovery and the damage being inflicted by a new upsurge in coronavirus infections. The good news is that global growth in the third quarter has bounced back with a vengeance, exciting hopes that a vibrant V-shaped recovery is under way.
The worry posed by the pandemic is whether the upturn has sufficient momentum to see the recovery through the difficult winter months. If not, then what’s the shape of things to come and what kind of recovery can we expect from here? Can a V-shaped recovery transcend the pandemic with the help of a viable vaccine, or is worse to come in the shape of a double-dip recession?

It’s no surprise that global stock markets remain conflicted. With so much uncertainty, the message for policymakers is there’s no turning back on super-stimulus.

The building blocks for global recovery are definitely in place. China is leading the way, the US is following closely behind and Europe’s economy is heading back onto much higher ground as well. The third-quarter growth data looks really promising, with gross domestic product growing at an annualised rate of 10.8 per cent in China, jumping by 33.1 per cent in the US and surging at a spectacular 48.4 per cent for the European Union.

The positive news for China is that recovery from this year’s weakest point began three months earlier in the second quarter when growth jumped at a quarterly annualised rate of 46.8 per cent. There is every reason to believe the world is emerging from a very weak spot into a much stronger space.

Of course, these rates of starburst recovery can’t be sustained for long and should moderate to slower growth trends over time, as long as the reflation momentum is maintained and there is no early U-turn on monetary or fiscal stimulus.

Economic growth in China should be settling back towards its underlying 6-6.5 per cent long-term trend by early next year, while the US should be gravitating back towards its 3-3.5 per cent long-term potential from 2021 onwards. Europe may be hamstrung by Brexit withdrawal risks in the short term, but economic growth averaging 2-2.5 per cent should be achievable in the next few years.

The main risk is that growth ends up lopsided, with a K-shaped recovery split disproportionately between the haves and have-nots – those in work and doing well and the unemployed and low-paid struggling to make ends meet. This is where policymakers must be resolute about putting fairer macro-policy measures into play, ensuring that the benefits of cheap credit and fiscal boosts are spread equitably across the recovery curve.

The pandemic has hit labour markets extremely hard in the past six months, with unemployment rates soaring in the major economies, casting a dark shadow over consumer confidence and potential spending power. Policymakers need to redress this quickly.

05:06

Millions of new blue-collar jobs are piling on pressure for many workers in China

Millions of new blue-collar jobs are piling on pressure for many workers in China
China has been reasonably well cocooned, with its jobless rate easing to 5.4 per cent in September almost back to pre-pandemic levels after hitting a 6.2 per cent high in February. US labour markets have recovered sharply in recent months, but September’s unemployment rate of 7.9 per cent is still more than double the 3.5 per cent cyclical low reached before the recession hit.

The jobless rate in Europe has risen more moderately to 7.5 per cent in September, but more worrying is the surge in youth (under-25s) unemployment to 17.1 per cent, raising fears about the risk of longer-term structural unemployment hitting younger people harder.

Hong Kong jobless rate hits 6.4 per cent, highest in nearly 16 years

Rising unemployment is the weak link in the recovery chain and will take longer to repair, requiring much more government resources and extra deficit spending to remedy. Tax cuts will be necessary to ensure consumer demand remains well underpinned in the meantime, but longer-term government investment in welfare spending, retraining schemes and employment subsidies will be needed to soften the blow for labour markets in the longer term.

The simple answer is for policymakers to keep pumping in cheap money with generous fiscal injections to underpin consumer and business confidence and for governments to bury the hatchet on global trade frictions to jump-start world trade. It is a simple formula; if followed assiduously, the global economy will eventually spring back into life.

A V-shaped recovery is not an aberration but part of the journey back towards normal growth again.

David Brown is the chief executive of New View Economics

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