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What else could go wrong for the global economy before this year ends

Global economy faces new risks -- winter wave of coronavirus, end of govt support for workers & bank moratoriums, US-China tensions, US presidential election.

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Bloomberg: The world economy’s rebound from the depths of the coronavirus crisis is fading, setting up an uncertain finish to the year.

The concerns are multiple. The coming northern winter may trigger another wave of the virus as the wait for a vaccine continues. Government support for furloughed workers and bank moratoriums on loan repayments are set to expire. Strains between the U.S. and China could get worse in the run-up to November’s presidential election, and undermine business confidence.

“We have seen peak rebound,” Joachim Fels, global economic adviser at Pacific Investment Management Co., told Bloomberg Television. “From now on, the momentum is fading a little bit.”

That sets up a delicate balancing act for governments. They’ve injected almost $20 trillion in fiscal and monetary support, in an effort to get the economy as far back to normal as is feasible in a pandemic, and can point to plenty of successes.

In the U.S., unemployment fell sharply in August and the housing market has been a bright spot. China’s steady recovery is cited by optimists as a guide to where the rest of the world is headed, while Germany is posting some decent industrial data too. And emerging markets are getting a breather from the dollar’s decline.

Also read: First into the Covid slump, China now proving to be the economy fastest to recover

Long slog

But keeping up the momentum on all these fronts won’t be easy. It would likely require policy makers to top up their stimulus efforts, at a point when some are looking to cut back instead. And for all the scientific progress with vaccines, they won’t be available anytime soon on the scale needed to bring the virus under tight control — a key condition for business-as-usual.

Meanwhile, there are headwinds. On labor markets, for example, government aid helped to drive an initial rebound — which may have been the easy part. Next up is the long slog of retooling businesses, reallocating resources, and retraining workers in industries that are no longer viable. That kind of restructuring could play out for some time.

Already this month, some of the world’s best known industrial brands have signaled job cuts are on the way.

A.P. Moller-Maersk A/S is planning a major overhaul that’s set to affect thousands at the world’s biggest container shipping company. Ford Motor Co. is cutting about 5% of its U.S. salaried workers, and United Airlines Holdings Inc. will eliminate 16,000 jobs next month as it shrinks operations.

There are other worrying signs too.

In China, which contained the virus months ago, consumers remain reluctant to spend and the nation’s biggest banks just posted their worst profit declines in more than a decade as bad debt ballooned.

U.S. lawmakers continue to haggle over more fiscal stimulus, which may be needed to sustain the recovery in the world’s largest economy.

Adding 1.4 million jobs in August was “a big step in the right direction,” said Ryan Sweet, head of monetary policy research at Moody’s Analytics. But the economy needs to maintain that kind of pace, he said, and “without fiscal stimulus that will be hard to do.”

‘Not looking good’

In Europe, gauges of activity are fading, and factories are trying to cut costs as weak demand and price cuts squeeze profit margins. While France and Germany have extended their furlough programs, the U.K. plans to end its version in October, potentially putting millions of jobs at risk.

Japanese Prime Minister Shinzo Abe, who announced his resignation last month on health grounds, warned in a press conference that “winter is coming” and the nation will need to gird to contain the virus.

Stock markets are vulnerable to disappointment in economic numbers in the coming months amid a gradual curbing of emergency fiscal support.

“In terms of valuations, we’ve got to look beyond just what happened this week to the longer term,” said Catherine Mann, global chief economist at Citigroup Inc. “And the longer term is not looking good right now in terms of support for consumption, and therefore business investment and growth in the U.S. economy.”

Overshadowing everything is the continued spread of the virus, with flare-ups around the world.

Even when a vaccine is devised, making it available worldwide on the necessary scale is going to take time, according to Warwick McKibbin of the Brookings Institution and Australia National University. His models suggest that the virus could cost the world economy some $35 trillion through 2025.

“You have to get quite a lot of the population vaccinated before the economic costs start to come down,” he said.- Bloomberg

Also read: Conspiracy theories made a comeback during Covid, but you can stop their viral spread


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