A new Global Economic Conditions Survey (GECS) by ACCA (the Association of Chartered Certified Accountants) and IMA® (Institute of Management Accountants) finds “swift and strong” recovery in global confidence in the second quarter of 2021, returning global activity to the pre-pandemic level of late 2019.
The GECS, the largest regular economic survey of more than 1,000 senior accountants and finance professionals from around the world, has consistently captured the true scale of the global recession caused by the coronavirus pandemic, tracking the drop in confidence since the beginning and a new outlook in confidence triggered by the combined effects of vaccines and the fiscal stimulus. You can read the full report here.
This GECS points to the global economy gathering momentum through the second half of this year. While global confidence dipped slightly in Q2, this occurred after the biggest jump in confidence in the 10-year history of the survey last time.
At the same time, there is a divergence in recovery between advanced and emerging economies. Advanced economies are benefiting from rapid progress on vaccinations and spending of accumulated savings that are allowing a return to more normal economic conditions. Yet, many emerging market economies continue to face economic weakness, as limited vaccinations allow further waves of COVID infections. The GECS highlights this divergence with buoyant regional surveys in North America and Europe but much weaker ones in South Asia and Africa.
Among the other key findings:
- The key global activity indicators, such as orders, recorded further improvement in the Q2 survey and are now above the level in Q4 2019, the period immediately before the pandemic began.
- Overall, the world economy has now recovered to its pre-pandemic size. This has been driven by rapid growth in the United States and China, the two biggest economies; there are many economies still with plenty of ground to make up.
- The two “fear” indices – measured by concern that customers and suppliers may go out of business – both declined in the Q2 survey, confirming that the extreme uncertainty created by the COVID-19 crisis has fallen back towards more normal levels.
- The GECS index of concern about operating costs increased in the latest survey and is now at its highest level since Q3 2019. But concern remains below the level that would point to a sustained big rise in inflation.
Respondents across regions expect a modest increase in inflation over the next five years, but a significant minority in North America expect much higher inflation. In all regions, at least two-thirds of respondents expect inflation to be slightly or much higher than now.
Compared with the Q1 2021 survey, there has been a marked increase in inflation expectations in North America, while in Western Europe, there are expectations of a modest increase in inflation over the next five years.
“To a large extent, the rise in inflation will be temporary, the result of collapsing demand last year, followed by a strong rebound that has resulted in rapid increases in commodity prices and supply shortages in some sectors,” said Michael Taylor, Chief Economist at ACCA. “The rise in inflation can therefore be seen mainly as a welcome reflection of a strong recovery in demand that has resulted in supply shortages and a rebound in commodity prices, both of which are likely to prove temporary. For now, at least, underlying inflationary pressures are generally subdued.”
Raef Lawson, Ph.D., CMA, CPA, IMA vice president of research and policy, noted that for 2021, global Gross Domestic Product (GDP) growth is likely to approach 6%, an exceptionally strong rebound after the 3.5% fall last year. This growth will be concentrated in advanced economies where levels of vaccination are now such that social distancing restrictions can be relaxed and economic conditions return to normal. Lawson said, “This is a global pandemic, which needs global action to safeguard the health of populations and their economies – in the short and long term. For IMA and ACCA, there is a clear link in doing this to the UN SDGs, specifically Goal 1 to end poverty everywhere and Goal 8 decent work and economic growth.”
“In addition to rapid deployment of effective vaccines, advanced economies have been able to deploy massive fiscal support measures that have maintained household disposable incomes, supported businesses, and prevented large rises in unemployment. Buoyant housing markets have supported consumer spending. This means that as economic conditions move towards normalization, economies are likely to recover very rapidly,” Lawson said, yet noting that, “In many emerging markets, vaccinations have made little progress, leaving them vulnerable to renewed waves of COVID-19 and variants with consequent restrictions that curtail economic recovery. This pattern seems likely to persist well into 2022.”
North America/United States
The survey indicates a very strong recovery in North America through the second half of 2021. Confidence remains very high although it fell back slightly after an extremely strong bounce in the Q1 survey. The orders and employment indices both increased further and reached their highest level on record. Continued progress with vaccinations, allowing economic conditions to return to normal, and the huge U.S. fiscal stimulus are driving recovery in the region.
The U.S. economy is likely to grow by around 7% this year as COVID cases decline and vaccinations continue. Already, second quarter GDP growth is likely to be close to the 7% annual rate, aided by a strong rebound in consumer spending. This would imply that the level of activity had returned to its pre-pandemic level seen at the end of 2019.
Growth may even strengthen during the second half as employment continues to recover. A return to more normal economic conditions is being boosted by a massive fiscal stimulus which by itself may add over three percentage points to GDP this year. Additionally, despite a recent spike in inflation, the Federal Reserve is set to keep monetary policy very accommodative with interest rates close to zero.
In the U.S. (as well as UK), house prices are rising at the fastest rate in around 15 years, which is echoed by strong upward trends in many other regions. In the U.S., there has recently been a divergence between house prices and rents with rental growth slowing at the same time as house prices accelerated. The report notes that if rental growth were to pick up to reflect higher house prices, this would push inflation up by around 0.5 percentage points at a time when inflation has already spiked on the back of higher food and fuel prices.
As the US economy recovers and unemployment falls, a recovery in demand for rental properties and rental growth is likely. Higher US interest rates would clearly have much wider implications elsewhere in the global economy, especially indebted emerging markets.
As advanced economies recover, buoyant housing markets will help return activity to pre-pandemic levels by stimulating household consumption, especially on durables. This will help limit or even eliminate long-term economic damage, so-called “scarring.” But rapidly rising house prices cannot persist indefinitely. Strong economic growth boosted by housing markets will ultimately require higher interest rates to prevent overheating and significantly higher inflation.
Lawson cautioned, however, that “health and economic risks are considerable. For as long as COVID-19 remains widespread in parts of the world, there is a chance of a vaccine resistant variant emerging and spreading, forcing renewed lockdown measures with consequent economic harm.”
He added, “It is important that fiscal support is not withdrawn prematurely, potentially causing a setback to recovery in private demand. In addition, there are concerns that the current spike in inflation will prove more long-lasting than is currently assumed by most central banks, including the U.S. Federal Reserve. The global economic outlook would darken considerably if U.S. interest rates had to be increased significantly in coming months to deal with an incipient inflation problem.”
Fieldwork for the Q2 2021 survey took place between June 1 and June 15, 2021, and attracted 1,100 responses from ACCA and IMA members, including more than 100 CFOs.