The COVID-19 has obviously not been good for the global economy. Even the nations that are relatively unscathed by the virus have taken economic damage in the form of decreased global commerce. So it is no surprise that the World Bank has turned pessimistic on global growth. The World Bank's most recent Global Economic Prospects report projects a decade of lower growth. Here we'll look at why the World Bank is worried about a lost decade and what it means for the markets.
- The World Bank is projecting a lost decade in global growth.
- Countries have loaded on unprecedented debts in response to the pandemic, limiting their fiscal response ability for future shocks.
- Barring successful policy shifts or technological advances, growth will be muted. However, the prospects will vary widely from nation to nation.
From Low to Lower
It seems long ago, but in 2019 there was real concern that a trade war between the United States and China could roll back global trade and lead to more explicitly protectionist policies. Those fears, along with aging populations and low productivity growth, were already depressing economic projections. So the World Bank's outlook was already muted in previous reports before COVID-19 came along and punched a hole in global commerce and national finances.
Now the World Bank expects global growth to expand 4% in 2021 and 3.8% in 2022, which sounds decent except for the fact that those years will still be down 5% and 6%, respectively, when compared to pre-pandemic projections. To put it simply, there will be a modest rebound this year and next, but we are still far off the modest target we were expecting prior to the pandemic.
Widespread Fiscal Weakness
The World Bank report references the decade of lackluster growth following the global financial crisis and predicts a similar fallout around the pandemic. One of the main causes of expected weaker growth is the precarious financial situation that most nations find themselves in due to fiscal maneuvers taken to backstop the economy during lockdowns.
The report estimates that global government debt was already at 83% of global gross domestic product (GDP), and it is expected to reach 100% of global GDP in 2021. While this debt is necessary in many cases to support economic activity and minimize human costs, this growth in debt is continuing at a time when total global debt (private and public) in 2019 was already at a historic high of 230% global GDP.
The percentages are large, but the actual numbers are even more difficult to fathom. Right now, the United States is on the cusp of another trillion-dollar stimulus package that is adding to what was already a response many times larger than the 2007–08 financial crisis. The U.S. was already $10 trillion in last June, and many countries have similarly ballooning obligations as the pandemic drags on. Having stretched the fiscal policy framework so far to combat the pandemic, many nations will find that they have very little dry powder left. Some, inevitably, will be pushed into new financial crises as a result of their large debt and degrading fiscal positions.
Another theme in the World Bank report is the gaps that are opening wider as a result of the pandemic. Education has been disrupted worldwide, people are seeing earnings gains vanish, and whole economies leveraged to industries like tourism or dependent on global value chains have taken outsized hits. The World Bank recommends investments and institutional reform as a general tonic to restore growth, but this is a tall order for the most affected nations that find themselves fiscally strained.
Put bluntly, poor countries haven't been able to easily shift to a virtual education model or invest in the infrastructure needed for a robust public health response. That said, this same issue also applies to lower-income households in the richest nations, as they have been more negatively affected by COVID and lockdowns. So inequality gaps are growing internationally and domestically, undoing progress from previous decades.
What Does This Mean for Investors?
The report is quite sobering and makes a good case that we will indeed see subdued global growth for the next decade. The World Bank allows that effective policy or major technological advances could improve the forecast, but the probability of that happening in the near term is small. None of this will come as a surprise to investors, but how it actually affects the market remains to be seen.
A lot of the pain projected in the World Bank report was taken out on the market in March 2019. The market arguably oversold on the pandemic, and it may well now be overbought on the projected rebound. That is, after all, how the market works.
Investors large and small are all trying to anticipate the short- and medium-term fallout of events faster than the next person. We are still in the pandemic, but many stocks and exchange traded funds (ETFs) are acting like we are already past it. Whether they will still be riding high in 2022 if and when muted global growth depresses bottom lines is far in the future even for the markets.
The Bottom Line
The World Bank report is far from encouraging, but it is important to remember that it is looking at the outlook for the whole globe. Within the lower global growth figures, there will be significant variation from nation to nation. The report already noted something that was recently confirmed—China managed to grow despite the pandemic, being the only major economy to do so in 2020.
This is the reality of the economic gaps around the world. Some countries will indeed have a lost decade, but others will be racing ahead as soon as they put the pandemic behind them. This uneven recovery will, of course, create opportunities for investors to pick broad winners on a national scale as well as specific companies within those economies.