Global economy to contract by 3.8% in 2020 and recover by 4.5% in 2021 – Rabobank

The global economy appears to be more resilient than expected, an effective vaccine is available and is being rolled out globally, and 2021 will see a Biden administration that is expected to bring more stability on the geopolitical front. This allows room for cautious optimism though there are still some substantial risks out there such as the rising share of zombie firms and the increasing debt overhang, economists at Rabobank inform.

Key quotes

“We have revised our economic forecasts upwards and expect the global economy to contract by 3.8% this year (up from -4.4%) and grow by 4.5% in 2021 (up from 4%) and 4% in 2022. We expect all major economies to shrink in 2020, with the exception of China, where we expect a positive print in 2020.”

“President-elect Joe Biden will (almost certainly) become the 46th president of the United States in January. We have calculated that Biden’s spending plans would result in higher economic growth of the US economy compared to our baseline scenario, thanks to higher productivity growth via innovation, and investment in human capital. The flip side of Biden’s policy is that public debt is expected to rise to somewhere between 164% and 170% of GDP, substantially higher than the 147% projected in our baseline scenario.”

“Recent research by Bloomberg based on financial data of 3,000 listed US companies shows that 20% of the examined companies are zombie firms. The share of zombie firms among SMEs is likely even higher. By providing credit and capital to firms hit hard by the corona crisis, governments might have averted pain in the short-term; however, the downside is that this credit and capital is not being allocated towards more productive parts of the economy.” 

“The US zombie firms examined by Bloomberg have been ramping up on debt by USD1,000 B. A recent study by the Fed shows that heavily leveraged firms experienced less favorable patterns in employment, assets and investment in the aftermath of the global financial crisis compared to firms with lower debt levels. Given these results, the authors conclude that the surge in debt as a result of the COVID-19 crisis might result in a 10% decrease in growth for firms in industries hit hardest by the pandemic.”