“Pandemic Fatigue” Will Likely Keep Global Supply Chains Sluggish, Says IHS Markit

In its latest “World Flash” intelligence report, IHS Markit economists note that the dreaded second and third waves of COVID-19 arrived in late 2020 as any illusion the world can easily control the spread of the virus had largely vanished.

The resurgence was especially pronounced in Europe and parts of the United States, where “pandemic fatigue” has become a formidable challenge for governments.

“Even before the recent surge in infections, we were predicting growth would fade in the closing months of 2020 and the beginning of 2021. That fade is morphing into something worse,” says Nariman Behravesh, chief economist for IHS Markit. “In the case of the Eurozone and the United Kingdom, real GDP will contract in the fourth quarter of 2020, and recovery will be limited in the first quarter of 2021.”

But prospects are a little less dire for the U.S. economy, economists maintain. After the U.S. grows an expected 3.7% in the fourth quarter of 2020, average growth in the four quarters of 2021 should be a mere 1.9%. The outlook is brighter in much of Asia, where the infection rates have remained low.

Other mainstream economists and multilateral organizations such as the International Monetary Fund are calling for more fiscal stimulus. The need to bolster struggling economies has swamped notions of austerity. Unfortunately, institutional and political constraints in Europe, the possibility of a divided government in the United States, and limitations on further budgetary expansion in the emerging world mean hopes for big fiscal stimulus are fading.

Meanwhile, central banks will continue to shoulder the burden of stimulus, economists contend. Despite repeated pronouncements to the contrary, monetary authorities around the world are not “running out of ammunition,” as was amply demonstrated during the 2008–09 global financial crisis and the current pandemic. That said, there are limits to the effectiveness of massive asset purchases and other unorthodox monetary policies, not least because they create considerable distortions in financial markets. Moreover, uncoordinated monetary easing runs the risk of more financial volatility.

“Bottom line: Once again, the near-term global economic outlook has worsened, and the most likely policy mix looks to be suboptimal,” concludes IHS.

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