It is now over a year since the COVID-19 pandemic struck, plunging the global economy into a historically deep recession. A timely, forceful and concerted policy drive on the part of monetary, fiscal and prudential authorities was able to prevent the worst, the Bank for International Settlements (BIS) writes in its Annual Economic Report. Starting in the second half of 2020, the global economy rebounded more strongly than anticipated. The main engine of growth, according to the BIS, was private consumption. Contrary to expectations, demand returned swiftly once containment measures were relaxed. For 2020 as a whole, however, world gross domestic product (GDP) still declined by some 3.4%. At the time the report was written, it had more or less returned to its pre-crisis level.

Highly uneven economic recovery

According to experts at the BIS, recovery has been very uneven across countries and economic sectors, mainly reflecting the evolution of the pandemic and hence the stringency of containment measures. They state that the euro area has lagged behind the other major industrial jurisdictions, and that the emerging market economies (EMEs) – China aside – have fared worst. In particular, EMEs relying heavily on international tourism were badly hit. Looking at the various economic sectors, it can be seen that manufacturing and therefore trade in goods have rebounded strongly. Residential construction has followed suit; by contrast, services have done considerably worse on account of lingering mobility restrictions.

Fiscal support in the form of transfers, loans and guarantees for firms and households has been critical to economic recovery, the BIS report reads. Monetary policy has also played an important part by creating exceptionally easy financial conditions.

BIS attributes responsibility to policymakers

The BIS report acknowledges that the global vaccination campaign has progressed very unevenly and that new contagion waves can be expected. “While the recovery has been faster and stronger than anyone would have imagined a year ago, we are not out of the woods yet. Policymakers need to carefully manage the risks arising from this economic and policy divergence and set a solid foundation for long-term growth,” cautioned Agustín Carstens, General Manager of the BIS, as the report was presented.

The BIS lists three factors as holding the key to the future development of the global economy: the path and impact of fiscal policy, the path of consumption, which has rebounded surprisingly strongly so far, and the size of firms’ potential credit losses together with the wave of insolvencies that they would bring with them, which has not yet materialised. Its report maps out three scenarios and their impact on the global economy based on how these and other factors develop. The central scenario assumes a comparatively smooth recovery with a temporary increase in inflation. In the second scenario, large fiscal stimulus and a drawdown of accumulated savings result in stronger growth but also higher inflation and a substantial tightening of global financial conditions. In the final scenario, meanwhile, growth lags behind expectations as the virus proves harder to control.

Monetary policy can only provide support when it comes to mitigating inequality

“Long-term trends in inequality result from structural forces that are beyond the reach of monetary policy,” said Claudio Borio, Head of the Monetary and Economic Department at the BIS, at the unveiling of the report. The publication concludes that policies fostering more equal opportunities or redistributing income are best suited to counteracting the impact of these long-term forces on income and wealth inequality. Monetary policy does not have adequate tools to offset the long-term distributional consequences of evolving structural factors. However, what it can do is foster a more equitable society by tackling inflation as well as macroeconomic and financial instability in fulfilment of its mandate, the report continues. High inflation disproportionately erodes the income of households at the bottom of the distribution, while recessions disproportionately hurt the poor through unemployment spells.