The Impact of the Divergent Global Economic Recovery on Key Industries

The IMF, in its April 2021 World Economic Outlook, confirmed that the global economy contracted by 3.3 percent in 2020, which though severe, was below the 4.4 percent slide it projected just six months prior. The better-than-expected outturn is attributable to the extraordinary fiscal and monetary policy initiatives that many countries adopted to mitigate the economic impact of the COVID-19 virus. Governments directed substantial fiscal resources toward the health sector, businesses and households to save lives, protect small enterprises, preserve jobs and provide a cushion for the vulnerable in society, among other things. At the same time, most central banks adopted very accommodative stances, reducing their policy interest rates to record low levels in many cases and rolling out aggressive asset purchasing programmes (bond purchases) where practicable. The aim of these programmes is to facilitate greater lending in the financial sector by boosting system liquidity. As a consequence of these actions, the fall in economic activity, as harsh as it had been, was prevented from being much worse. The IMF suggests that without these sizeable interventions, the contraction in real global GDP could have been three times larger, registering in the vicinity of 10 percent.

With the start of COVID-19 vaccination programmes in late 2020 and their subsequent intensification in early 2021, the outlook for the global economy improved considerably. This optimism is grounded in the hope that the vaccines would develop a level of herd immunity that may drastically reduce the incidence and severity of the virus in an increasing number of nations and thereby, reduce the need for economic restrictions. The improved performance of the global economy will also be aided by continued fiscal support, particularly in advanced economies and accommodating monetary policy, with central banks expected to remain focused on stimulating growth heading into 2022. Overall, the IMF projects global economic activity to expand by 6 percent in 2021, before easing to 4.4 percent in 2022. In terms of the broad categories, advanced economies are projected to grow by 5.1 percent and 3.6 percent in 2021 and 2022, respectively, while emerging and developing economies are anticipated to expand by 6.7 percent and 5 percent during the same periods (Table 1).

Despite this positive outlook, there is a huge cloud of uncertainty still hanging over the global economy. Firstly, the emergence of new strains of the virus in some regions raises concerns over the efficacy of the vaccines as it relates to those variants. This, in addition to the inequitable distribution of vaccines, could prove to be a major hindrance to global economic activity heading into 2022. While most of the advanced economies are taking significant steps to build herd immunity by the end of 2021, their stranglehold on vaccine supplies thus far may have dire consequences for much of the developing world. Not only will such countries have to contend with successive rounds of infections and the unfortunate loss of life, but the related economic strains may limit growth over the next two years. Simply put, until the vaccines become widely available and the bulk of the virus-related strains confronting global health care systems is alleviated, restrictions can only be lifted in pockets. This means that the global economy will continue to face severe constraints. Encouragingly, the US has pledged to donate 500 million vaccine doses to low and lower-middle income countries over the next two years, while some manufacturers are preparing to sell shots on the international market (China has already sold vaccines to several countries). However, despite these developments most developing countries are not expected to achieve herd immunity before 2022.

Table 1: Global GDP Growth (%)

Source: IMF
e – Estimate; f - Forecast

The severity of the economic impact of the pandemic has been divergent when we consider the experience of individual countries. Economies that are reliant on tourism and commodities were hit hardest, especially in the cases where tight fiscal resources limited government’s response. Because such countries do not possess the wherewithal, the extent to which they could have responded to the health crisis and engaged in counter-cyclical spending in 2020, was limited. This of course implies that they have even less capacity to provide any meaningful fiscal stimulus now. Because of these fiscal constraints and limited access to vaccines to this point, the affected economies will recover much slower than advanced nations. In this regard, the global economy is likely to experience a multispeed recovery. Moreover, this could create a situation where actual global growth registers at a level below IMF projections, with several developing economies unlikely to return to pre-pandemic output levels before 2023.

Against this backdrop, one may ask what are the implications for the sectors on which the Caribbean depends, especially tourism? After all, the performance of these sectors, together with how soon the region can build herd immunity, will determine the pace and sustainability of the Caribbean’s recovery. The rest of this article is devoted to how the global tourism, energy and gold industries will likely progress heading into 2022.

Tourism

According to the world Travel and Tourism Council, the industry lost US$4.5 trillion and 62 million jobs in 2020, as tourist arrivals took a 74 percent nosedive. The global tourism industry is not expected to fully recover before 2023, based on the current outlook for the global economy. The sector is expected to be blighted by high unemployment and underemployment in key source markets for some time, while the inability of many destinations to achieve herd immunity in the near future will cause restrictions to linger. Notwithstanding some pent up demand, consumer confidence in the cruise industry and to a lesser extent, air travel is only expected to return gradually. For as long as it remains a credible threat, even in a few regions, the virus will be a significant impediment to the tourism sector. This is yet another argument for a more coordinated and equitable global vaccination programme. In 2021, many prospective tourists from key source markets may choose to visit destinations that are approaching herd immunity and closer to home, for fear of infection or being caught in tightening border restrictions, in the case of a spike in the spread of the virus. It is likely that the tourism sector that emerges in the wake of the COVID-19 virus, may be much different from the standpoint of the measures that would be required to protect tourists and workers in the sector. For instance, the health and hygiene requirements, including temperature scans, vaccine passports, destination and hotel certification may become permanent features of the industry. This means that screening at international ports will become more stringent.

Energy

With improving economic activity and expanding vaccination programmes in several countries, the global demand for energy products has risen appreciably above 2020 levels. For instance, the US based Energy Information Administration (EIA) estimates that global crude oil consumption in April 2021 was 15.8 million barrels per day (b/d) above the levels of the same month a year ago, but still 4 million b/d below April 2019 levels. This increased demand has helped to push oil prices substantially above 2020 levels, with the West Texas Intermediate price averaging US$58.09 per barrel (p/d) in the first quarter of 2021, compared to US$45.34 and US$27.96 in the first and second quarters of 2020, respectively. The rise of prices has also been supported by the ongoing agreement between OPEC and a few other producers (OPEC+ alliance) to cut output by 7 million b/d. In April 2021, Saudi Arabia volunteered to remove an additional 1 million b/d from the market. However, OPEC+ has agreed to gradually reverse the production cuts, starting in May 2021, with 350,000 barrels expected to be returned to the market in that month, followed by another 350,000 in June and 450,000 in July. While this is expected to contain the rise of prices to some extent, EIA projections still place oil prices well above 2020 levels (US$39.17 p/b) in both 2021 and 2022, at US$61.85 p/b and US$56.74 p/b, respectively.

Gas prices, which generally move in the same direction of oil prices, are also expected to benefit from the improved economic conditions. The Henry Hub price, which reflects US energy market conditions, is projected to average US$3.07 per million British thermal units (MMBTU) in 2021, up from US$2.03 in 2020. Prices are expected to fall to US$2.93 in 2022. This outlook is based on the expected growth in US liquefied natural gas (LNG) exports and rising domestic natural gas consumption among residential, commercial, and industrial customers.

Gold

One major effect of the pandemic was that it exerted a tremendous amount of downward pressure on US Treasury yields and the US dollar in 2020, with global equity markets experiencing massive plunges during the height of global lockdown measures. Against this backdrop, the investment demand for gold shot up, prompting the precious metal to trade at record high levels in August 2020 (US$2,067 per troy ounce). However, with the US economy on the rebound in 2021 and treasury yields rising early in the year, gold prices fell in the first quarter to average $1,794 per troy ounce from $1,874 in the fourth quarter of 2020. This occurred amid signs that the decline in the dollar may have hit bottom. Gold and the US dollar normally have an inverse relationship, where a fall in the value of the dollar causes increased investment in gold, thereby bidding up its price. Additionally, the prospect of higher treasury yields represent guaranteed returns to investors, unlike gold, for which returns are realised only by price increases. Therefore, higher yields tend to pull investors away from gold. The reverse is also true. The increased yields in early 2021 were driven by concerns that inflation could rise as the economy recovers from the pandemic. Nevertheless, the Federal Reserve has indicated that it is prepared to tolerate a short-term rise in inflation. There is the view that the increase in inflation could be short-lived, since it is due in part to a release in pent up demand and temporary labour and other shortages related to the pandemic. The effects of these developments are expected to dissipate as the economy continues to grow. The Fed’s statement helped to quell inflationary fears to some extent. It should be noted though, that rates of inflation which are beyond healthy levels (2 percent is considered ideal) for extended periods will apply downward pressure on the value of the US dollar. While gold prices are not expected to return to the highs of 2020, ongoing COVID-19-related uncertainty is likely to produce an environment in which prices remain at encouraging levels for producers heading into 2022, despite some moderation.

The outlook for these sectors is based on the assumption that ongoing efforts to bring the COVID-19 pandemic under control will be successful and global economic restrictions will be increasingly removed in 2021 and 2022. However, we should not be surprised if there are yet a few more twists, as the uncertainty surrounding the virus is still very pervasive. Aside from the emergence of new strains of the virus and the inequitable vaccine distribution among nations, there is a worrying level of vaccine hesitance in some jurisdictions, where supply is abundantly available. This may sprout new rounds of infections and the re-introduction of lockdowns. Until the spread of the virus is brought under control at the global level, key sectors and by extension the world’s economy will continue to register performances that are well below potential.