By Aoife Doyle

Lockdowns, restrictions and national stimulus packages, all words we had never strongly correlated with health epidemics. However, the Covid-19 pandemic changed everything. It was a global shock like no other, involving simultaneous disruptions to both demand and supply in an interconnected world economy. Analysis of governmental responses to the pandemic has been framed to strike a balance between protecting its citizens’ health and protecting the economy. Despite poorer countries’ economies suffering the most, wealthier countries have faced their own challenges despite greater resources. In many countries, national restrictions aimed to protect lives, such periods of stagnated economic activity have reaped havoc on the global economic health. Two years on, it is clear that some countries managed to protect their population’s health and economy.

At the pandemic’s start, understandably, the first economic policy response was to: do something, do it big and do it fast. Governments were in the dark, unaware of the longevity of the virus, and had to act. The UN’s Framework for the Immediate Socio-Economic Response to the COVID 19 Crisis warned that “the pandemic is far more than a health crisis: it is affecting societies and economies at their core“. Responses varied across the globe, but the main target of each country was to harness the best macroeconomic policy to ensure the economic effects of the virus were short-lived. Countries injected billions of pounds in fiscal stimulus packages, interest rates cuts and governments battled to protect industries and jobs.

As the months wore on, academics and researchers provided analysis of the economic impact of Covid-19. The measures implemented by governments globally have shattered the core sustaining pillars of modern world economics. A few months into the pandemic theories of V-shaped, U-shaped, and L-shaped recovery were whispers of hope. As restrictions eased, economists predicted optimistic recoveries for many countries, with significant increases in economic activity in the last two quarters of 2020 and smaller increases in 2021. Retrospectively, we know now that these theories were blind to further lockdowns caused by virus mutations. Further variants of the coronavirus halted progress, reversing growth, and ceasing trade. However, the decline in economic activity in subsequent lockdowns was far less severe than the first lockdown as consumers and businesses had adopted over the year.

Taiwan’s swift decision to shut its borders during the very early days of the pandemic earned it a low death rate and sense of normality that made it the envy of the world. During 2021 the country experienced its steepest economic growth in more than a decade, fuelled mainly by brisk growth in the export sector and heavy investments in capital expenditures. Whilst the supply crisis for goods such as semiconductor chips impeded growth in various economies, such vigorous demand benefitted Taiwan, which holds a 63% share of the global semiconductor market. Taking only strong export performance into consideration skews the view of Taiwan’s economy. Continuous low private consumption indicates growth imbalance, but gradual opening of Taiwan’s society in 2022 will allow consumption to grow. The next year will see slower, but not lower, growth in Taiwan.

Argentina has delivered a strong economic recovery even with their cards seemingly stacked against them. Already in a recession when the pandemic hit mainly due to former Presidents economic mismanagement, the current Fernández government were tasked with introducing a dependable economic program. GDP growth in the country is estimated to have been 10% for 2021 – almost twice the forecast for the US. Even with a countercyclical recovery, the country’s public finances have improved due to more progressive tax rates on wealth and corporate income and the debt restructuring of 2020. Argentina is still experiencing the effects of the speculative portfolio capital that poured in during former President Macri’s term. Much of this was trapped by that administration’s capital controls, resulting in constant pressure on the parallel exchange rate. In a world still battling Covid-19 and despite the significant progress in Argentina’s economy, the government still has significant hurdles to overcome to alleviate Argentina’s debt worries. Increasing global financial uncertainty and a recent spike in Omicron cases suggests 2022 will be a very significant year in Fernández’s tenure. 

So, what is the diagnosis for global economic health now? The overwhelming consensus is positive, with 2022 bringing better economic conditions despite heightened risks for developed and emerging markets. Increased inflation, rising over 2021 partly because of disruption to global supply chains and a surge in energy prices, will squeeze household spending and potentially rein in economic growth. This high inflation (4.9% globally) coupled with the Omicron variant worries global financial markets. Developing countries will be especially vulnerable to economic damage from fighting inflation. As such, widening disparities within and between countries will see a two-speed recovery and risks stalling global economic progress.

China, an economic powerhouse, is expected to frontier the global economic slowdown in 2022, as growth rates fall. Despite an apparent decline, such growth rates are above 2020 levels, indicating a rebalancing period and a slow recovery process. The World Bank cut its 2022 forecast for GDP growth from 5.4% to 5.1%, which could market the second slowest pace of growth for China since 1990. Renewed domestic Covid outbreaks could cause further disruptions to economic activity. The highly leveraged property sector experienced a slump during 2021, with Evergrande shares suspended from trading, any further downturns could have significant reverberations across the economy. As a result of these economic headaches, President Xi Jinping and top leaders have marked “stability’ as their top priority for 2022. 

Another risk to global economic recovery is Covid-19 vaccine inequality. The Global Dashboard for Vaccine Equity found that low-income countries could have added $38billion (USD) to their combined GDP forecast for 2021 if they had comparable vaccination rates as high-income countries. Such imbalance will bear a lasting and profound impact on socio-economic recuperation in low- and lower-middle-income nations without urgent action to secure equitable access for every country. When richer countries have spent trillions on policies to bolster flagging economies, they must remove barriers to vaccine manufacturing so doses can be distributed equitably. Only then can a genuinely global economic recovery take place.

Many of the challenges economies are currently facing are not new problems. Governments have become accustomed to the surprises the virus has created. There is increased demand for combined efforts to quell risks countries are experiencing. 2022 will see strong and confident governments prosper and force decision-makers to evaluate their decisions against the health of their people and their economy.

The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.