A new report from IHS Markit projects global real gross domestic product (GDP) to increase 5.7 percent in 2021 as global economic expansion moves forward through headwinds from the Covid-19 Delta variant.
IHS Markit’s “World Flash” for August noted that global real GDP reached a new high in the second quarter, completing a year-long recovery from the Covid-19 recession. Western Europe rebounded from its double-dip recession, while the United States and mainland China sustained robust growth. These gains offset setbacks in India and parts of Southeast Asia and Latin America.
Sara Johnson, executive director of global economics at IHS Markit, who penned the report, said while growth momentum is slowing with the spread of the Delta variant, global expansion is moving forward. After a 3.4 percent decline in 2020, world real GDP is projected to increase 5.7 percent this year and 4.5 percent in 2022, led by strong recoveries in consumer spending and business investment.
This month’s IHS forecast of global growth was revised downward 0.1 percent for 2021 and 0.2 percent for 2022, mostly owing to a less robust performance in the United States. Global growth will settle to 3.2 percent in 2023, Johnson forecast, as pent-up demands are satisfied, and fiscal and monetary stimuli are withdrawn.
“The resilience of the global economy amid a lingering pandemic suggests that the world is learning to live with the COVID-19 virus,” Johnson said. “In North America and Western Europe, which account for nearly half of world GDP, a return to strict lockdowns that directly impede economic activity is unlikely. In these regions, vaccination rates are relatively high and rising, reducing the risks of severe illness or death.”
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“People have confidence that a resumption of pre-pandemic activities, with some precautions, is relatively safe,” she added. “Consumers and businesses have adapted in ways that allow them to continue to spend and produce, including online shopping, use of delivery services, work from home, and new health and safety measures. Thus, the likely response to a rise in infections is a slight reduction in travel and activities that involve social interaction. International travel restrictions may be extended, delaying recoveries in tourism-dependent areas.”
Regions with low vaccination rates face greater risks from the Delta variant of Covid-19, the report noted. Outbreaks in Asia Pacific have led to new containment measures, disrupting production and trade in a region that accounts for 37 percent of global merchandise exports. In contrast, new infections have sharply declined in South America, facilitating economic recovery and the flow of commodity exports.
In Africa, the spread of the Delta variant could put the region’s health facilities under pressures, but extensive activity restrictions are unlikely, IHS said.
In the U.S., “economic expansion is durable,” Johnson said. In the second quarter, real GDP grew at an annual rate of 6.5 percent quarter on quarter. Strong gains in consumer spending and business fixed investment were partially offset by declines in residential investment, federal purchases, inventory investment and net exports. In the August forecast, annual real GDP has been lowered 0.5 percent to 6.1 percent in 2021 and 0.6 percent to 4.4 percent, in 2022. The revisions reflect a lower growth path through the end of 2021 based on less inventory investment amid supply bottlenecks and more cautious consumer spending in response to the rise in COVID-19 infections.
But the U.S. expansion remains on solid footing, Johnson said, driven by “unprecedented fiscal and monetary support, continued release of pent-up demand and restocking of depleted inventories.” On top of that, employment is surging and job openings remain at record levels. Near-term market imbalances will push consumer price inflation up to 4.2 percent in 2021, before improving supply conditions will reduce it to 2.4 percent in 2022, according to IHS. The Federal Reserve is expected to ease its asset purchases in the months ahead and start raising the federal funds rate in 2023.
Western Europe’s consumer-led growth spurt is expected to continue. The easing of Covid-19 containment measures, improving labor markets and household savings accumulated during the pandemic have unleashed a surge in consumer spending. Eurozone real GDP increased 2 percent in the second quarter.
After a 6.4 percent decline in 2020, eurozone real GDP is projected to increase 5 percent in 2021, 4.3 percent in 2022 and 2.1 percent in 2023, IHS said.
China’s economic growth is resuming a long-term slowdown, Johnson said. Although the scale of the Covid-19 outbreaks is relatively small, the Chinese government’s zero tolerance policy has markedly curtailed economic activities. IHS Markit analysts expect subpar growth near 5 percent in the second half of 2021.
“Should the economy decelerate sharply, the Chinese government will inject fiscal and monetary policy stimulus,” the report stated. “The country’s real GDP growth is projected to slow from 8.5 percent in 2021 to 5.8 percent in 2022 and 5.5 percent in 2023.”
Asia Pacific’s manufacturing hubs are the current hotspots for Covid-19 with the spread of the Delta variant in the region aggravated by relatively slow progress of vaccination campaigns outside China, IHS noted. Consumer spending, tourism, industrial production and exports have been adversely affected.
“Supply chain disruptions and shipping delays persist,” Johnson said. “Pandemic-related production cuts in Southeast Asia have exacerbated input shortages and cost pressures…In the container shipping industry, a series of shocks–the Suez Canal closure in March, partial shutdowns of Chinese ports, the suspension by Union Pacific on rail shipments from the West Coast to Chicago in July and the ongoing backup of ships off of Los Angeles-Long Beach–have had cumulative effects, extending delays and driving shipping rates sharply higher.”