FREE

H2'21 Macroeconomic Outlook - On the cusp of recovery

2021 was the year everyone looked forward to; a year of increased vaccine rollouts as the world begins its countdown to herd immunity. While advanced economies have begun the race on a strong note, resurging outbreaks have placed emerging economies on the back foot. Sitting on an armoury of fiscal and monetary stimulus, advanced economies have more than enough to tackle both the health and economic crises. As a result, many of these countries have more vaccine supplies and policy support than they need, leading to labour shortages in some, as stimulus checks keep wallets alive, while emerging economies grapple with rising unemployment and weak purchasing power.

Amid the uneven availability of vaccines, infectious variants are springing up in emerging and developing economies, raising the risk of severe virus spread. As more people are being vaccinated, the world is at a cusp of recovery, and concerted efforts would be required to avoid infectious variants from slipping the world into a double-dip recession. Nevertheless, recovery is underway, anchored by favourable base effects, ample fiscal support, ultra-dovish monetary policy, and infrastructural commitments.

As the world emerges from pandemic troughs, inflation has been revived by reflationary measures and a renewed commitment to a global greener economy. Despite the conspicuous inflationary threat, monetary authorities in advanced economies are not batting an eyelid, as they are convinced on the transitory trajectory of the current inflationary path. Amid the accommodative stance on the global stage, many emerging economies have had the leeway to adjust their policy rates. While rate hikes have been delivered to respond to inflationary pressures, most Central Banks have remained accommodative.

In Sub-Saharan Africa, the path to recovery is rather gloomy, as new waves of virus spring up and containment measures are reinstated. While South Africa and Kenya had to deal with such waves in the first half of the year, Nigeria has not seen severe waves. Nonetheless, the region could require more support as fiscal slippage risks rise, given the run-up to elections in the second half of the year. While some economies depended on their central banks to run their economies in 2020, the region could consider multilateral support to cushion the impact of the pandemic on their economies and wade off the risks of monetary deficit financing.

As fiscal authorities navigate their multiple dilemmas, economic recovery could remain the prime monetary objective. While we have seen reforms in the external sector, extended weakness in the Naira could persist unless appropriate measures are implemented to check arbitrage and boost investors’ confidence.