Global economy expected to grow 5%, China 8.4% in 2021, Korean think tank projects

Posted on : 2020-11-13 17:16 KST Modified on : 2020-11-13 17:16 KST
COVID resurgence hampers recovery, sluggish consumption in Japan limits growth to 2%
Interim US President-elect Joe Biden adjusts his mask after declaring his support for the Affordable Care Act in Wilmington, Delaware, on Nov. 10. (Yonhap News)
Interim US President-elect Joe Biden adjusts his mask after declaring his support for the Affordable Care Act in Wilmington, Delaware, on Nov. 10. (Yonhap News)

South Korea’s Institute for International Economic Policy (KIEP) has predicted that as the COVID-19 pandemic subsides in 2021, the global economy will grow by 5% relative to 2020, with China growing 8.4% thanks to a massive economic stimulus program. The KIEP expects the US dollar to underperform in the global financial market and suggests that the interest rate on South Korean government bonds could rise within a limited range.

The KIEP’s predictions appear in a report titled “Projections for the Global Economy in 2021,” published on Nov. 12. The KIEP said the latest wave of COVID-19 will cause the global economy to shrink by 5.1% this year compared to 2019. That was even more pessimistic than the KIEP’s projection of -2.6% growth in May.

The KIEP explained that the main factors behind the lower prediction are another global surge of COVID-19 in the second half of the year, the lengthening US-China trade conflict, and the disjunction between the financial sector and the real economy.

On the presumption that COVID-19 will retreat next year, the KIEP predicted that the global economy will grow by 5% in 2021, an increase of 10.1 points in the growth rate from 2020.

At the level of individual countries, the KIEP expects China to grow by 2.2% this year and by 8.4% next year.

China likely to continue fiscal expansion, but lack of structural reforms could stunt growth

“The Chinese government will continue to pour money into its COVID-19 response, and investment and consumption will return to normal levels, putting China back on its long-term growth trajectory,” the KIEP said.

These projections assume China’s aggressive adoption of a raft of government programs in 2021, which is supposed to be the first year of the “moderately prosperous society” (xiaokang shehui) promised by the Chinese Communist Party as well as the year when China launches its 14th five-year plan.

Risk factors cited by the KIEP include potential changes to the US’ policy toward China following the presidential election and economic contradictions that could worsen if China puts off domestic structural reforms.

The institute expects the US to see -5% growth this year because of mass unemployment linked to the pandemic, followed by 2.8% year-on-year growth in 2021. The KIEP explained that, rather than actual growth in the real economy, this should be regarded as a relative improvement following the growth rate’s plunge this year.

“The second phase of the COVID-19 pandemic that began in late 2020 will continue to impact the real economy until early next year,” the KIEP projected.

Japan was also projected to experience negative growth of -5.8% this year amid the shockwaves of the pandemic, with a projected growth rate of just 2% in 2021 amid a delayed recovery in domestic consumption. Propensity to consume has declined greatly in Japan in spite of an increase in disposable income with the payment of disaster relief funds.

The KIEP said, “The [Japanese] economy is expected to show signs of recovery next year amid the effects of the Tokyo Olympics, but a recovery of GDP to its pre-COVID 2019 levels is expected to occur from 2022 onward.”

EU sees Great Depression levels of damage with projection of -10% growth

The European Union, where the economic impact of the pandemic has been described as the worst since the Great Depression, is expected to record a steep 10% decline in its growth rate. With no shortage of fiscal resources due to low interest rates despite the high levels of government debt in major countries, the KIEP predicted growth of 3.7% next year on the strength of increased fiscal expenditures and an export economy recovery.

In terms of the international financial market, the dollar was expected to remain weak. The Federal Reserve was predicted to stick to its quantitative easing approach, with large-scale fiscal expenditures predicted from interim President-elect Biden to boost the economy. The preference for safe assets was also expected to decline amid predictions of a global economic recovery.

Definite trends in government bond interest rates for major economies are hard to predict because of lingering factors that may push them in either direction, the KIEP said. Increased issuance of government bonds amid fiscal expansion efforts by major economies and increased expectations of inflation tend to drive up interest rates for government bonds. But as the Democratic Party is likely to lose a Senate majority, volatility could increase even after Biden’s election until additional support measures can be decided on.

By Lee Kyung-mi, staff reporter

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