Review and Outlook of World Economy in 2021

The year 2021 witnessed a rapid recovery of the global economy following its largest recession since World War II. The development of vaccines， the increased vaccinated population and the strengthened prevention and control at all levels have worked together to weaken the impact of the COVID-19 pandemic on the world economy. Meanwhile， the fiscal and monetary policies launched by various countries， especially the major economies， in response to the pandemic have also boosted the economic recovery to varying degrees. The instability of the COVID-19 situation and side effects of response policies together with various problems existing before the pandemic and the direction and intensity of future policy adjustment of major economies have constituted the basic factors affecting the trend of the world economy in 2022.

Review of world economic situation in 2021

Firstly， major economies recovered significantly. According to The World Economic Outlook of the International Monetary Fund （IMF）， the total global gross domestic product （GDP） in 2020 was 84.7 trillion US dollars， with an economic growth rate of -3.1%. In contrast， the IMF predicts that the global economy will grow by 5.9% in 2021， with 6.0% in the United States， 8.0% in China， 5.0% in the euro zone， 2.4% in Japan and 9.5% in India. Actually， China’s GDP grew by 8.1% in 2021.

Secondly， global employment remained stable and prices rose moderately. According to the World Employment and Social Outlook by International Labour Organization， the global unemployment rate in 2021 was 6.3%， of which the unemployment rates in low-income， middle and low-income， middle and high-income and high-income countries were 5.3%， 5.9%， 7.0% and 5.8% respectively， slightly lower than that in 2020. In 2021， the consumer price index （CPI） of developed economies was expected to be 2.8%， while that of emerging markets and developing economies was expected to be 5.5%.

Thirdly， global trade and cross-border investment rebounded remarkably， and commodity prices rose as a whole， with increased volatility. According to the data of the World Trade Statistical Review of the World Trade Organization （WTO）， the global commodity trade volume in 2020 was 15.58 trillion US dollars， registering a year-on-year decrease of 8.0% and a year-on-year decrease of 5.3% after excluding price and exchange rate changes. The global trade in services amounted to 4.91 trillion US dollars， a year-on-year decrease of 20%. It is estimated that the global commodity trade volume will increase by 8.0% in 2021， with a year-on-year increase of 5.7% in the first quarter， the largest increase since the third quarter of 2011. The global foreign direct investment （FDI） is estimated to increase by 10% to 15%， with 15% to 20% in developed economies and 5% to 10% in developing ones. The actual foreign capital used by China during January and July in 2021 totalled 672.2 billion yuan， increased by 25.5% over the same period of the previous year.

Major constraints on world economic development

I. Risks of inflation and deflation co-exist in global economy.

It is an indisputable fact that most economies in today’s world suffer an increasing pressure of inflation. The injection of a large amount of liquidity results in a sharp increase in money supply， which is bound to trigger a significant rise of prices while the output level and circulation speed remain roughly unchanged. At present， the U.S. Federal Reserve implements a 120 billion US dollars monthly bond purchase plan， while the European Central Bank’s 1.85 trillion euros Pandemic Emergency Purchase Programme will be implemented at least until March 2022. The total balance sheet size of the three central banks in the United States， Europe and Japan is 25 trillion US dollars. The central banks of major economies pursue super loose policies with low or even negative interest rates. In addition， the labour supply shortage caused by the impact of the COVID-19 pandemic and other factors on the supply chain is raising the prices while promoting the wage level.

The ongoing inflation is only temporary of course， and there might be the same risk of deflation. Although the money in circulation increased sharply， the speed of circulation slowed down significantly， which offset the driving of the circulation increase on the rise of prices. The rising unemployment rate， the loose labour market and the low utilization of equipment have provided possibilities for expanding supplies. The market still holds a pessimistic expectation of the future economic trend. As of October 19， 2021， the global negative-interest-rate bonds still valued 11.6 trillion US dollars， accounting for nearly one fifth of the global investable bonds. Major economies have abundant measures and bigger space to control inflation. It is also predicted in an IMF report that the price pressure faced by most countries will subside in 2022， and the short-term pressure on the inflation trend of major developed economies， in spite of being high， will ease in the medium and long run. However， the price pressure will persist in some emerging markets and developing economies.

II. The instability of monetary policies in developed economies may affect emerging markets and developing countries.

The U.S. Federal Reserve announced in August 2020 that it would seek to achieve its long-term target of 2% average inflation rate， which means that the “balance” of the future inflation can be used to compensate for the “difference” in the past. By that， an additional room for monetary policy could be created through raising the tolerance of inflation in a limited space for reducing interest rate， so as to deal with the increasing risk of deflation. Subsequently， the European Central Bank changed the mid-term inflation target from “below but close to 2%” to “2%” in July 2021. On November 3， 2021， the Federal Reserve announced that it would begin to reduce the bond purchase scale by 15 billion US dollars in the middle of the month， followed by a double-reduction in December， and it is expected to end bond purchase in mid-2022. That can be seen as a sign of the U.S. monetary policy shift. In addition to bond purchasing， the Federal Reserve can also raise interest rates and reduce the size of its balance sheet， the so-called “shrinking the balance sheet”. Given that asset prices are historically high， fragile and sensitive， and the supply shock that currently pushes up prices will be alleviated in 2022， once the implementation speed， strength and timing of the exit policy of relevant developed economies fail to be right， it is probably to lead to vibrating asset price and reversing investors’ expectations， which will bring about bankruptcy tsunami and even stagflation.

It is noteworthy that after the tightening of monetary policies in the United States， the European countries and other developed economies， the emerging market economies will face quite a number of major risks. Firstly， many countries have adopted the so-called “modern monetary theory”， which means that the government does not have to live within its means， but spends in the way of creating money， and fiscal expenditure comes before the income. However， the foundation of this theory will collapse as soon as the interest rates rise. Secondly， in the face of the supply shock caused by the COVID-19 pandemic， the developing economies adopt varied response measures， and the policy difference often becomes one of the risk sources. Thirdly， the emerging markets and developing countries depending on energy imports get very different profit and loss results from those depending on energy export when facing the policy shift， and the price fluctuation caused by the tightening of monetary policy will undoubtedly increase the differentiation among different economies. The growth rate of foreign debt of low-and-middle-income countries has exceeded their gross national income （GNI） and export growth rate in the past decade. At present， their foreign debt balance has reached 8.7 trillion US dollars. Once the monetary policy of developed economies enters the track of rising interest rates， their debt burden is bound to increase， which is very probable to result in contract breach by enterprises or even state governments. If the relevant fiscal and monetary policies are changed， it is likely to bring about the appreciation of the US dollar， which will lead to the risk of currency mismatch， and eventually lead to the currency crisis and financial crisis.

III. The supply chain disruption and the so-called “decoupling” policy have brought a negative impact.

The past year has witnessed the world suffering from the disruption of supply chains， featuring the shortage of chips， insufficient energy supply， poor shipping and soaring freight rates. The Drury shipping index， a measure of container costs， rose 291% in September 2021 on a year-on-year base， and the freight of the busy routes from East Asia to Rotterdam， the largest port in Europe， reached six times of that of the previous year. The coal price has tripled and the price of the natural gas has quadrupled over the past year. The surge of energy prices goes together with the disruption of the supply chain. Besides repeated pandemic outbreaks and faster-than-expected economic recovery， another major factor is that the world fails to afford insufficient investment in the oil field. The investment in oil and gas dropped by 20% in 2020. The resilience of the supply chain has become a hot topic in the past two years. For enterprises， the tense trade relations between major economies， the failure of the multilateral trading system， the frequent occurrence of climate and natural disasters and frequent cyber-attacks have all increased the possibility of supply chain disruption from different perspectives.

At the national level， the increasing degree of economic interdependence， once seen as the source of geopolitical stability， is now regarded as a fatal weakness， because the high concentration of supply means high dependence for forces with ulterior motives， involving the so-called “national security”， which matters the gaming among major powers. For instance， the United States and some other countries have successively introduced or plan to introduce a series of policies aimed at improving the self-sufficiency rate or localization rate to encourage the return of manufacturing industry or diversify the supply chain. Some people in those countries even openly advocate the so-called “decoupling”， which is mainly aimed at China. A typical example is that the U.S. President Biden signed executive order 14017 of “American Supply Chain” on February 24， 2021， instructing the government to conduct a comprehensive review of key supply chains in the United States to identify risks， address vulnerabilities and formulate strategies for resilience improvement.

Although from the perspectives of enterprises and major country gaming， the global supply chain has both reasons and signs to develop in the direction of anti-globalization， at least the reality in 2021 does not support this judgment， especially the data related to China. The main reason is that China has adopted a sustained and firm opening-up policy and has a huge market. According to the survey made by the American Chamber of Commerce in Shanghai and PwC China in September 2021， 78% of the 338 respondent companies said they were “optimistic or slightly optimistic” about the their business outlook in the next five years， an increase of nearly 20% over the same period in 2020， while the companies feeling “pessimistic” accounted for 10% of those surveyed， lower than the 18% of the previous year.

IV. The hegemony of the US Dollar is declining.

The US dollar has long occupied the central position of the international monetary system， and the U.S. Treasury bonds have been the only fundamental collateral in the world for a long time， reflecting the global demand for strong， liquid and safe currencies or safe assets. However， with the exposure of institutional functional defects related to the U.S. policy stability， financial credibility and cultural openness， the Trump administration blindly adheres to “America first” and the emergence of alternative “safe assets” （including non-governmental digital payment system）， the once unshakable position of the US dollar started to tremble. The total amount of global foreign exchange reserves at the end of 2020 was 12.7 trillion US dollars， and the proportion of world foreign exchange reserve assets in US dollars had fallen to 59%， the lowest in 25 years. Meanwhile， the European euro accounted for 21% of global foreign exchange reserve assets， returning to the level in 2014. The share of Japanese yen assets rose to 6% for the first time in 20 years， and the share of Chinese yuan was 2%. According to Mr. Rogoff， former chief economist of the IMF， the current signs of the international monetary system are similar to the “Triffin Dilemma” faced by the Bretton Woods system in the 1960s. That is， on the one hand， the United States needs to provide the liquidity of the US dollar for the world through trade deficit. On the other hand， in order to stabilize the value of the US dollar against gold， the United States needs to maintain trade balance or surplus. However， it is hard to achieve both. Mr. Rogoff further points out that there are striking similarities between the current relationship between Asia and the US dollar and the situation in Europe from the 1960s to the early 1970s. The collapse of the Bretton Woods system made most European countries realise that the trade among the European countries is more important than that between Europe and the United States. At the turn of summer and autumn in 2020， the EU launched a European recovery scheme of about 750 billion euros， the key point of which is that the vast majority of the funds involved will be raised by the EU through the issuance of EU bonds denominated in euros. The substantial steps taken in EU financial integration not only mean the improvement of the EU’s ability to arrange emergency financial transfer， but also signifies that EU bonds will become a new risk-free or low-risk asset other than U.S. Treasury bonds. As the world only source collateral， U.S. Treasury bonds has for the first time encountered a real potential competitor since World War II.

V. Climate change and aging population have intensified.

We still need to find right solutions to deal with the reasonable connection between emission reduction and development as well as between energy transformation and normal economic operation. The 26th session of the United Nations Conference of the Parties to climate change （cop26） was held as scheduled on November 1， 2021. However， the world top three greenhouse gas emitters are far from reaching a consensus on how to reduce their dependence on fossil fuels without excessively damaging their economies. The focus of debate among countries lies on “carbon leakage”， which means that importing high-carbon products without imposing carbon tax will rob the market of domestic enterprises that have already paid carbon emission tax. This not only frustrates emission reduction efforts， but also damages domestic enterprises. As a result， a carbon regulation tax is required. However， that may hinder global carbon emission cooperation due to difficult consensus. Some people even worry that different climate change policies of major emitters may trigger a trade war.

Population as a medium-and-long-term variable will have a significant effect in the short term once accumulated to a certain extent. Whether in terms of age structure or fertility rate， the industrialised countries or economies have generally entered an aging society. In sharp contrast， some developing countries are witnessing the population explosion. Africa with the fastest population growth has a total population of 1.3 billion， which is expected to increase to 2.6 billion by 2050. A high proportion of young people can produce demographic dividends， but the harvest of the dividends still requires the continuous accumulation of human capital， the improvement of savings rate and investment rate， the reform of system and mechanism that can significantly reduce transaction costs and uncertainty， social stability， sustainable development of ecological environment and other conditions.

VI. The relationship between major powers is increasingly reflected in the gaming of confinement and anti-confinement.

The Biden administration has returned to American-style “multilateralism” and united its allies and partners with a more positive attitude， in hope of shaping the rules in the fields of environment， labour， trade， investment and technology with its strength that accounts for half of the global GDP， so as to prevent China from dominating future technologies and industries， and finally lock its competitors in the middle and low end of the global supply chain or value chain. This confinement policy will also run through the whole process of cooperation between the United States and China in areas with converged interests， such as climate change， nuclear non-proliferation and global health and security. It is one of the key focuses for the U.S. confinement to promote the formulation of economic and trade rules restricting China within the framework of WTO. Under the leadership of the Biden administration， the G7 has formed a consistent or similar position on WTO reform. It is predicted that the United States may promote relevant agendas on dispute settlement mechanism， “special and differentiated treatment”， market economy status， policy transparency and other issues.

Apart from uniting its allies and partners to set up regulations on the international stage， another important way for the United States to realise confinement is to achieve its goals through domestic legislations. On June 8， 2021， the U.S. Senate passed the 2376-page U.S. Innovation and Competition Act of 2021. Consisting of the “CHIPS Act and ORAN 5G Emergency Appropriations” and four bills， namely the Endless Frontier Act， the Securing America’s Future Act， the Meeting the China Challenge Act of 2021， and the Strategic Competition Act of 2021， the U.S. Innovation and Competition Act of 2021， directly targeted at China and involving a wide range of contents， many of which have broken through the bottom line of bilateral relations， has shown an obviously strengthened suppress on China.

As China-U.S. economic and trade relationship is the most important bilateral economic and trade relations in today’s world， maintaining its healthy and stable development is not only in the interests of China and the United States， but also in line with the common expectations of all countries in the world. Faced by the U.S. confinement， China’s basic strategy is to actively participate in， promote and lead the process of global governance reform while firmly safeguarding its own sovereignty， security and development interests. China will actively participate in and lead the reform of global governance system with the concept of fairness and justice， and firmly safeguard multilateralism. China will increase its opening-up in an all-round way， promote the liberalisation and facilitation of trade and investment， steadily expand institutional opening-up such as rules， regulations， management and standards， and create new advantages in international cooperation and competition.

Development trend of world economic trend in the coming period

The trend of the COVID-19 situation will directly affect the future performance of the global economy in the short run. Historically， the impact gradually declines in two years of lasting major pandemic. With the progress of prevention means and the continuous maturity of prevention strategies， the pandemic situation is more likely to be gradually controlled or evolve into ordinary influenza. However， it’s needed to be pointed out that if the huge gap between the developed economies and the low-income countries in vaccination rates cannot be eliminated， the global economic recovery will be blocked， and the cumulative loss of global GDP in the next five years may reach 5.3 trillion US dollars.

Apart from the above-mentioned issues worth special concern， the medium-and-long-term factors that will still restrict the robust， sustainable and balanced growth of the global economy in the next few years also include the slow growth of labour productivity， the suspension of the appellate body of WTO as a multilateral trading system and the difficulty in reaching consensus in reform negotiations， the long-term loopholes in financial supervision， and the rise of economic nationalism， in particular resource nationalism. In addition， network security， which is closely related to economic activities， has always been a huge threat.

Risks， challenges or constraints do exist， but it is also true that the global economy as a whole is returning to the track of medium-and long-term development. The first half of 2021 witnessed strong economic recovery of major economies， while the overall growth slowed down with differentiated growth rates in the third quarter. Globally， although different economies show different recovery speeds， most developed economies will retrieve their previous losses. In the short run， the biggest risk facing the world economy is probably still policy risk. If major developed economies fail to adopt appropriate monetary and fiscal policies to deal with inflation and maintain recovery， there will be volatile and sharp decline in asset prices， stifle fragile recovery， and the economy may be pushed into the channel of stagflation， eventually affecting the emerging economies and developing countries. It cannot be ruled out that the exchange rates of the U.S. and European capital markets and some emerging economies may be significantly adjusted by more than 20% in 2022. In the medium and long run， the world is still on the track of medium-and low-speed growth. The world economic growth rate will be roughly maintained at 3% to 3.5% in the next three to five years. Of course， there will be significant differences in the growth rates of countries and regions.

Zhang Yuyan is Academy Member of Chinese Academy of Social Sciences （CASS）， Director and Research Fellow of Institute of World Economics and Politics， CASS