Credit Manager Magazine 9/2021

35 CREDIT MANAGER MAGAZINE WRZESIEŃ / SEPTEMBER 2021 Where is the global economy now? If you want to know where to go, it’d be useful to know where are you now. How else are you going to tell which direction to go? This can be very well said about the global economy right these days – everyone knows where they want to go but we are not sure where we really are. Przemysław Kwiecień, PhD, CFA Head of Research at X-trade Brokers DM S.A. The COVID pandemic brought two impor- tant developments to the global economy – enormous policy interventions and acceler- ation in technological changes. This second aspect is more of a structural nature and to- day I will focus more on the first, cyclical one. The mainstream view is that we are recover- ing from the pandemic, this recovery has been briskier than feared and while could be hampered by returning virus variants, gen- erally we are trending towards more stable – and durable – economic growth. This as- sumes we have just witnessed a recession and therefore the new (and hopefully lengthy) economy cycle has begun. But is that really the case? A quick recovery from the pandemic reces- sion was possible thank to huge increases in public debt. Recessions are painful because they are de- structive. Demand declines, causing business failures and unemployment. But this opens ground for new business and paves the way for a fresh cycle. That way inefficient agents are eliminated from the field, allowing for productivity growth. The problem is that none of that happened in 2020. Yes, unem- ployment soared sharply but mostly due to administrative restrictions that forced busi- ness to halt their operations. Because gov- ernments forced companies to limit their activities, they felt obliged to compensate them. The effects are clear when we look at the fiscal metrics. Debt to GDP ratios surged from high single percentage points in de- veloping nations (often relying on external financing) to more than 20 percentage points for US and Japan in 2020 alone. Incidentally, US is at the extremes of economic interven- tionism. The aid packages drove personal incomes to the extent where they are high- er than they would be should the pandem- ic never happened! Not surprisingly, strong demand followed. In the United States, retail sales is currently some 25% above levels from early 2019 which is way above pre-pandem- ic trend. Other developed economies see a more measured rebound in demand but in most cases it’s already above early 2020 levels. At the same time, the supply side is facing is- sues. The complexities from 2020 lockdowns are being compounded by fresh restrictions, especially in Asia, leading to parts shortag- es and cost increases. The semiconductors issue is the flagship one but actually the list of problems is very long and contains things like surging commodity prices (a by product of super expansive monetary policies), sky- Source: Own study, Macrobond “Recessions are painful because they are destructive. Demand declines, causing business failures and unemployment. But this opens ground for new business and paves the way for a fresh cycle.” EDUCATION