International outlook for 2021.

• Author: Mafi-Kreft, Elham

Introduction

Last year we forecast a global output growth of about 3% for 2020. But a microscopic virus came into the picture and instead of growth in economic activity, we are experiencing a global recession of a magnitude not seen since World War II.

The International Monetary Fund is estimating that by the end of 2020 the global economy will have shrunk by 4.4%.

The numbers forecasted today may not be relevant tomorrow because the pandemic (our greatest obstacle to the recovery) is something that we have never experienced in modern times. As long as the virus circulates unchecked, growth is compromised. At any moment, a resurgence of COVID-19 infections and subsequent tightening government restrictions can threaten to drag the world into an even more prolonged recession.

Our group, at the Indiana Business Research Center, is cautiously optimistic that our estimate of a 5% global recovery in 2021 will be just enough to erase the 2020 global drop in output.

United States

In the second quarter of 2020, the U.S. Bureau of Economic Analysis recorded macroeconomic statistics never seen before. From April to June, the year-over-year decline in U.S. GDP was 9%. To put that in historical perspective, in the second quarter of 2009, GDP contracted by 3.9% during the global financial crisis. In April 2020, the U.S. Bureau of Labor Statistics recorded a record unemployment rate of 14.7%, as more than 20 million Americans abruptly lost their jobs. It could take years to return to the 3.5% unemployment rate the U.S. recorded in February 2020, because no one really knows what the post-pandemic economy will look like. Corporate default rates are increasing and more than half of the small business owners surveyed by the U.S. Chamber of Commerce worry about having to permanently close their businesses.

Clearly, the pandemic has created extraordinary circumstances and new challenges for policymakers in the United States and around the globe. It has affected aggregate supply and aggregate demand simultaneously. This two-sided market shock has consequently intensified the need for greater and more coordinated interactions between monetary policy and fiscal policy to try to minimize the economic harm.

In regard to the monetary policy, the Federal Reserve lowered its policy rate to near zero and increased its holding of U.S. securities to help keep consumer credit available and borrowing costs low. Additionally, in order to continue to support the nation's recovery, the zero-interest rate policy was announced to last through 2023. In regard to fiscal policy, the U.S. Congress voted for the CARES Act that provided help to families and businesses. But at the time of this writing...