I was invited recently to a meeting at one of the Central European Embassy’s to discuss some of the events across the pandemic and the state of the global economy.
These discussions are always a debate and subjective to one’s individual analysis, will all the global economists there were public health pandemic playbooks that were being followed with varying degrees of adherence, there was no economic playbook for this either.
The worst day of the covid-19 pandemic, at least from an economic perspective, was Good Friday. On April 10th, 2020 lockdowns in many countries were at their most severe, confining people to their homes and crushing activity. Global GDP that day was 20% lower than it would otherwise have been.
Since then, governments have lifted lockdowns. Economies have begun to recover. Analysts are penciling in global GDP growth of 7% or more in the third quarter of this year, compared with the second.
That may all sound remarkably v-shaped, but the world is still a long way from normal. Governments still continue to enforce social-distancing measures to keep the virus at bay. These reduce output—by allowing fewer diners in restaurants at a time, say, or banning spectators from sports arenas. People remain nervous about being infected. Economic uncertainty among both consumers and firms is near record highs—and this very probably explains companies’ reluctance to invest.
Calculations by Goldman Sachs, a bank, suggest that social-distancing measures continue to reduce global GDP by 7-8%—roughly in line with what The Economist argued in April, when we coined the term “90% economy” to describe what would happen once lockdowns began to be lifted. Yet although the global economy is operating at about nine-tenths capacity, there is a lot of variation between industries and countries. Some are doing relatively—and surprisingly—well, others dreadfully.
Take the respective performance of goods and services. Goods have bounced back fast. Global retail sales had recovered their pre-pandemic level by July, according to research by JPMorgan Chase, another bank. Armed with $2trn-worth of cash handouts from governments since the virus struck, consumers across the world have stocked up on things to make it bearable to be at home more often, from laptops to dumbbells, which partly explains why world trade has held up better than economists had expected. Global factory output has made up nearly all the ground it lost during the lockdowns.
And with all these considerations PwC has recently published a report that sets out their latest long-term global growth projections to 2050 for 32 of the largest economies in the world, accounting for around 85% of world GDP.
The key results state that the world economy could more than double in size by 2050, far outstripping population growth, due to continued technology-driven productivity improvements.
One of the most promising and commonly evoked vistas of the future centers on the dazzling potential of new technologies.
From that perspective, many of today’s profound problems, such as unemployment, malnutrition, disease, and global warming could be solved through the clever application of breakthroughs in computer science, genetic engineering, nano-device construction, and new materials creation. These hopes are not unlike those of a century ago when the development and diffusion of technologies such as electricity, the radio, and the internal combustion engine promised a new era of human well-being. With the benefit of hindsight, however, it is clear that realizing the potential of late 19th century new technologies required major economic and social transformations.
Extending breakthroughs beyond the inventor’s lab, imagining new applications, realizing broad diffusion of initially unfamiliar technology, and achieving deep integration of cutting-edge techniques – all of these processes were both protracted and difficult. In the end, many landmarks had to be changed, from where and how people lived to what and how firms produced. This in turn entailed the overthrow of old patterns, entrenched expectations, and accepted “common sense” notions – not to mention established management theories and hardened political realities.
What is striking is that similarly dramatic transformations, economy- and society-wide, seem once again to be a realistic prospect. Although there have certainly been other periods in recent history when the outlook for humankind was filled with promise, the current conjuncture constitutes one of those rare moments when a confluence of diverse and numerous developments generates new, potentially radical opportunities.
These are not a foregone conclusion, for the necessary policies are highly ambitious and only just on the horizon for decision-makers. But The Future of the Global Economy: Towards a Long Boom? the fact remains that humanity could reap huge rewards if it is ready to undertake equally significant changes. Two factors largely account for that unconventionally strong conclusion – one is methodological, the other conjunctural.
First, the analytical method adopted here for exploring long-term possibilities is neither partial nor linear, characteristics common and justified for shorter-term forecasting. A systemic and interdisciplinary approach is what enables the identification of opportunities for more radical evolutionary and intentional transformations.
Secondly, on the basis of this methodology, it becomes apparent that the current historical conjuncture – with its specific technological, economic and social developments – holds the seeds that could blossom into a period of above-average growth. Some may attribute the sense of exceptional opportunity to end-of-century jitters and obligatory optimism by governments at the launch of a new millennium.
Such skepticism is only natural. However, the assessment offered over the following pages tends to confirm the view that the historical door is now open to both a dramatic wave of socio-technical dynamism and the rapid pace of expansion that characterizes a long boom.
In the shorter term, the global economy is set to expand 5.6 percent in 2021—its strongest post-recession pace in 80 years. This recovery is uneven and largely reflects sharp rebounds in some major economies—most notably the United States, owing to substantial fiscal support—amid highly unequal vaccine access.
In many emerging markets and developing economies (EMDEs), elevated COVID-19 caseloads, obstacles to vaccination, and a partial withdrawal of macroeconomic support are offsetting some of the benefits of strengthening external demand and elevated commodity prices. By 2022, global output will remain about 2 percent below pre-pandemic projections, and per capita income losses incurred last year will not be fully unwound in about two-thirds of EMDEs.
The global outlook remains subject to significant downside risks, which include the possibility of large COVID-19 waves in the context of new virus variants and financial stress amid high EMDE debt levels. Controlling the pandemic at the global level will require more equitable vaccine distribution, especially for low-income countries.
The legacies of the pandemic exacerbate the challenges facing policymakers as they balance the need to support the recovery while safeguarding price stability and fiscal sustainability. As the recovery becomes more entrenched, policymakers also need to continue efforts toward promoting growth-enhancing reforms and steering their economies onto a green, resilient, and inclusive development path.
The recovery is envisioned to continue into 2022, with global growth moderating to 4.3 percent. Still, by 2022, global GDP is expected to remain 1.8 percent below pre-pandemic projections.
Compared to recoveries from previous global recessions, the current cycle is notably uneven, with per capita GDP in many EMDEs remaining below pre-pandemic peaks for an extended period.
In advanced economies, the rebound is expected to accelerate in the second half of 2021 as a broader set of economies pursue widespread vaccination and gradually reopen, with growth forecast to reach 5.4 percent this year—its fastest pace in nearly five decades. Growth is projected to moderate to 4 percent in 2022, partly as fiscal support in the United States begins to recede absent additional legislation.
The global recovery could prove more robust and broad-based than expected and sustain a long boom. For instance, the policy-supported surge in global growth in 2021, coupled with faster and more equitable global vaccination, could catalyze a self-sustaining period of rapid growth in which the private sector becomes a powerful engine of growth starting in 2022. In effect, strong pro-cyclical policy support would trigger a process of “reverse hysteresis” in which a robust cyclical upturn lifts long-run growth prospects.
In particular, this scenario envisages that technological adoption would accelerate, along with rising investment and labor force participation, causing the potential output to strengthen.
Starting in the first quarter of 2022, total factor productivity growth in advanced economies would accelerate to levels similar to those seen during previous episodes of productivity surges, as corporations deepen their use of digital technologies and work from home policies adopted during the pandemic.
Knowledge spillovers and faster installation of new productive capital would also raise productivity in other countries. h At the same time, this scenario assumes that EMDE policymakers, faced with high levels of sovereign debt and slowing long-run growth prospects, implement growth-enhancing reforms, including reforms to strengthen economic governance, diversify economies reliant on commodities or tourism, and facilitate the reallocation of resources towards more productive activities.
This comprehensive package of reforms would raise EMDE’s potential output growth gradually starting in 2022. Consumer confidence would surge, anchoring strong private consumption growth as consumers rapidly draw down their savings.
At the same time, rising potential output and well-anchored inflation expectations would help keep inflationary pressures in check, allowing advanced economy central banks to keep monetary policy accommodative for a prolonged period. In turn, continued monetary accommodation would support investment and consumption by alleviating debt service burdens and supporting asset prices.
Growth in advanced economies would remain near 5 percent in 2022 before slowing to a still-strong 3.1 percent in 2023. The investment- and productivity-driven growth in advanced economy growth would have greater spillovers to EMDEs, boosting export demand while ensuring that global financial conditions remain benign. As a result, EMDEs would experience a robust expansion, with growth averaging over 5 percent in 2022 and 2023—0.6 percentage points higher on average than in the baseline scenario. Overall, global growth would be notably stronger, averaging 4.4 percent over 2022-23 compared to 3.7 percent in the baseline scenario.
One further consideration is ESG investing with an emphasis on private finance and investment towards long-term value creation. There are forward priorities and actions for market participants and policymakers to address such shortcomings, particularly around the urgent need for consistent, comparable, and verifiable ESG data.
Current market practices, from ratings to disclosures and individual metrics, present a fragmented and inconsistent view of ESG risks and performance. ESG ratings and investment approaches are constructive in concept and potentially useful in driving the disclosure of valuable information on how companies are managed and operated in reference to long-term value creation. To this end, investors looking to manage ESG factors, particularly large diversified institutions, typically rely on external service providers of indices and ratings as a cost-effective means to guide the composition of ESG portfolios.
However, the lack of standardized reporting practices and low transparency in ESG rating methodologies limit comparability and the integration of sustainability factors into the investment decision process. The link between ESG performance and financial materiality is also ill-defined, with little evidence of superior risk-adjusted returns of ESG investments over the past decade.
This fragmentation and incomparability may not serve investors in assessing performance against general ESG goals, or targeted objectives such as enhanced management of climate risks. The relationship between Environmental (“E”) scores and carbon emission exposures is highly variable within and between ratings. In some cases, high “E” scores correlate positively with high carbon emissions, due to the multitude of diverse metrics on different environmental factors and the weighting of those factors.
This illustrates the broad challenges in ESG investing, but also the specific difficulties facing investors looking to consider both financial and environmental materiality. It also underlines how current ESG tools cannot be relied on to manage various climate risks, or to green the financial system, at a time when these are rising priorities for investors and policymakers alike.
Fiduciaries such as asset managers and boards should be managing material ESG risks in a way that supports long-term value creation – but are not necessarily getting the data and information they need to do so.
The OECD’s global survey of pension funds and insurers reveals the growing consideration of ESG risk factors in portfolios, the extent to which such institutional investors rely on external ESG data and service providers, and reiterates the challenges mentioned above in reference to investor experiences. These challenges extend to infrastructure financing, where the investment horizons of institutional investors and the nature of the assets increase exposure to longer-term sustainability risks.
For corporations, managing and disclosing ESG performance and related risks are no different from their interest in managing and disclosing other material information as a key function of corporate governance.
Effective disclosures are important to the communication of forward-looking, financially material information, but practices remain at an early stage. Inconsistent disclosure requirements and fragmented ESG frameworks mean both institutional investors and corporates encounter difficulties when communicating ESG-related decisions, strategies, and performance criteria to beneficiaries and shareholders respectively.
This in turn makes it hard for beneficiaries to assess how their savings are used, and for companies to attract financing at a competitive cost that fully considers ESG factors. There is also an implicit ESG scoring bias in favor of larger companies and larger, advanced markets, which could affect the relative cost of capital and corporate reputation of companies outside of these groups, which is due in part to the high cost of ESG disclosure.
Banks are also looking to scale up ESG integration in lending transactions but also face capacity, competition, and data challenges. Given the scale and significance of lending and underwriting activities globally, stronger due diligence in reference to ESG risks would help align global capital with activities that avoid negative impacts on society and the environment and enhance resilience in the financial sector, including climate-related risks. To this end, banks would benefit from enhanced ESG risk management practices and sustainability reporting in their lending activities, and the development of metrics and methodologies to facilitate meaningful measurement of ESG risk.
Governments have levers available to drive better ESG outcomes as both enterprise owners and as investors. Around one-fourth of the largest global companies are entirely or largely state-owned enterprises (SOEs), and these companies can and should serve not only long-term value but also the fulfillment of widely held public policy priorities, including sustainability measures. SOEs tend to have higher ESG scores than private companies, but this is not a given and depends in part on state ownership policy. A case study into the energy sector demonstrates how state ownership has sometimes been an obstacle to sustainability goals, such as the low-carbon transition, because of political concerns over the value of energy assets.
If left unaddressed, challenges in ESG investing could undermine investor confidence in ESG scores, indices, and portfolios. Developments and progress in ESG practices to date are promising, and they have the potential to be valuable, mainstream tools to manage risk, to align incentives and prices with long-term value, and to lessen the impact of future shocks like climate impacts or future pandemics. They can also be a valuable input into policymaking, by better articulating what the market can and should deliver in terms of public outcomes, and what kind of further government intervention is needed to meet stated policy objectives. Taken together, the chapters of this Outlook conclude more needs to be done to fully harness this potential.
There are clear priority areas for policy action in facilitating fit-for-purpose data and disclosures in ESG investing. Greater attention and efforts are needed by regulators and authorities – including through guidance and regulatory requirements – to improve transparency, international consistency, alignment with materiality, and clarity in strategies as they relate to sustainable finance. This extends to the appropriate labeling of ESG products, with information that delineates the financial and social investing aspects of ESG investing.
At the same time, existing frameworks and policy instruments can drive better ESG outcomes and provide a solid foundation for reform. Closer adherence to, and wider implementation of, OECD standards, policy guidance, and international best practices can already address some of the challenges described in this Outlook, especially around the assessment of risk and disclosure of material information. Key examples include the G20/OECD Principles of Corporate Governance, the OECD Guidelines on Corporate Governance of State-Owned Enterprises, and the Guidelines for Multinational Enterprises and accompanying guidance, with specific guidance on Responsible Business Conduct for Institutional Investors and Due Diligence for Responsible Corporate Lending and Securities Underwriting.
Close engagement and cooperation between jurisdictions and with the financial industry are needed to strengthen the policy environment and drive better outcomes in ESG investing. Regulators of large jurisdictions with developed financial markets are already engaging on these very topics, and making good progress. However, capital markets are global in reach, as are many of the environmental, social, and governance factors ESG practices seek to assess and manage. Therefore, global principles are needed to help establish good practices that acknowledge regional and national differences, while ensuring a constructive level of consistency, transparency, and trust.
Final thought; businesses have spent much of the past nine months scrambling to adapt to extraordinary circumstances. While the fight against the COVID-19 pandemic is not yet won, with a vaccine implementation in sight, there is at least a faint light at the end of the tunnel—along with the hope that another train isn’t heading our way.
2021 will be the year of transition. Barring any unexpected catastrophes, individuals, businesses, and society can start to look forward to shaping their futures rather than just grinding through the present. The next normal is going to be different. It will not mean going back to the conditions that prevailed in 2019. Indeed, just as the terms “prewar” and “postwar” are commonly used to describe the 20th century, generations to come will likely discuss the pre-COVID-19 and post-COVID-19 eras.
For business leaders, this is an urgent call to action, too. It’s now that strategic moves will be made to propel companies ahead of these megatrends; it’s now that the direction will be set for years to come; and it’s now that many organizations, “unfrozen” by the pandemic, are ready to adapt to the new requirements for future success. Plenty of business leaders are already eagerly stepping up to help shape our societies and build a new age of health and prosperity for all. Many more will have to join the fight.
This is a true strategy moment for governments and businesses alike, a chance to set the switches for the next decade, there really is no playbook, and for some, this could be a long boom, for others it could well be failure. Depending on their choices, the outcomes could not be more different.
The trauma of this pandemic will be with us for a long time to come. The big question for humanity is whether we can now turn this crisis into a pivotal moment, where we harness the innovations, the new insights, and the crisis-fortified determination to improve the world. The time for these choices is now. It’s up to all of us whether we will move into the 2020s with a new paradigm for safeguarding lives and livelihoods: a new age of health and prosperity for all.
As Jimmy Dean once said: “I can’t change the direction of the wind, but I can adjust my sails to always reach my destination.”