Before the outbreak of the Covid-19 pandemic in late 2019, global economic growth had already been on a downward trend, slowing from a peak of 3.8% in 2017 to 3.0% in 2019 – weighed down by rising trade tensions between the US and China, and the lagged effect of the US Federal Reserve’s (US Fed) policy tightening in 2017-18.
The slowing growth prompted the US Fed to start cutting its key policy rate in July 2019, while the European Central Bank (ECB) decided to embark on a small quantitative easing (QE) programme in November last year.
Back then, RHB Group Research believed that the monetary policy easing should have enabled the global economic cycle to be extended, perhaps, for another two years, even though it was already close to the tail end of the cycle.
But the back swan Covid-19 pandemic struck, causing the global economy to plunge into a deep recession in 2020, ending the global economic cycle after 10 years of expansion.
In this respect, RHB believes that the global economy could be entering a new growth cycle, which may last another seven to 10 years as we move into 2021.
To be sure, the International Monetary Fund (IMF), on June 24, projected the global economy will bounce back to record a growth of 5.4% in 2021, after slipping into a deep contraction of 4.9% estimated for 2020.
However, RHB warns that downside risks still looms, as any unexpected event such as another black swan could end the cycle early. One of the downside risks has been the building up of debt in emerging markets and developing economies due to the low borrowing cost burden.
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“In our view, as long as borrowing costs continue to stay low, the rising debt issue remains manageable,” says RHB.
“Also, we have seen a financial asset bubble continue to balloon, and an unexpected sharp rise in inflation that forces central banks to hike rates more than expected could poke the bubble, resulting in a devastating impact on the global economy,” it adds.
Overall, RHB shares IMF’s projection that the global economic growth is likely to recover in 2021, with the rebound likely to be premised on a Covid-19 vaccine discovery and policy stimulus undertaken by central banks and governments across the globe.
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RHB expects a vaccine to be approved in 1H2021 and a broad-based deployment to take place in 2H2021.
Nonetheless, the global economic recovery is likely to take place in two speeds – countries that have contained the virus well should recover faster, while countries where the spread is still serious are likely to be slower and lagged.
“On this note, we believe China is likely to take the lead in global economic recovery, in this new global economic growth cycle post Covid-19. This is due to better containment of the pandemic in the country, resulting in businesses and consumers becoming increasingly confident to spend. This, in turn, would make the Government’s fiscal stimulus more effective in reviving the economy,” says RHB.
China has also been promoting domestic consumption. The “inward looking” efforts have yielded positive results, and a momentum has been built up, resulting in the share of private consumption rising from 34.3% of GDP in 2010 to 38.5% in 2018.
“Along with a pick-up in global economic growth led by China, we believe Asean’s exports are likely to recover in 2021, after a hard hit in 2020. This, together with policy measures to stimulate domestic demand, suggests that economic growth in ASEAN-5 countries is likely to bounce back in 2021,” says RHB.
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Hence, Asean-5’s real GDP is expected to record a growth of 6.3% in 2021, a recovery from a contraction of 4.1% estimated for 2020.
Singapore’s growth is forecast to rebound from its low base. Thus, RHB has revised upwards its real GDP growth forecast for the country to a 5.9% y-o-y growth for 2021, compared to its earlier projection of 4.3% growth.
“In the absence of stimulus spending and an improvement in revenue, we envisage the Singapore Government’s fiscal position to return to a surplus in FY2021, after recording a budget deficit of -14.6% of GDP estimated for 2020,” adds RHB.
