Review and Outlook of World Economy in 2021

The year 2021 witnessed a rapid recovery of the global economy following its largest recession since World War II. The development of vaccines， the increased vaccinated population and the strengthened prevention and control at all levels have worked together to weaken the impact of the COVID-19 pandemic on the world economy. Meanwhile， the fiscal and monetary policies launched by various countries， especially the major economies， in response to the pandemic have also boosted the economic recovery to varying degrees. The instability of the COVID-19 situation and side effects of response policies together with various problems existing before the pandemic and the direction and intensity of future policy adjustment of major economies have constituted the basic factors affecting the trend of the world economy in 2022.

Review of world economic situation in 2021

Firstly， major economies recovered significantly. According to The World Economic Outlook of the International Monetary Fund （IMF）， the total global gross domestic product （GDP） in 2020 was 84.7 trillion US dollars， with an economic growth rate of -3.1%. In contrast， the IMF predicts that the global economy will grow by 5.9% in 2021， with 6.0% in the United States， 8.0% in China， 5.0% in the euro zone， 2.4% in Japan and 9.5% in India. Actually， China’s GDP grew by 8.1% in 2021.

Secondly， global employment remained stable and prices rose moderately. According to the World Employment and Social Outlook by International Labour Organization， the global unemployment rate in 2021 was 6.3%， of which the unemployment rates in low-income， middle and low-income， middle and high-income and high-income countries were 5.3%， 5.9%， 7.0% and 5.8% respectively， slightly lower than that in 2020. In 2021， the consumer price index （CPI） of developed economies was expected to be 2.8%， while that of emerging markets and developing economies was expected to be 5.5%.

Thirdly， global trade and cross-border investment rebounded remarkably， and commodity prices rose as a whole， with increased volatility. According to the data of the World Trade Statistical Review of the World Trade Organization （WTO）， the global commodity trade volume in 2020 was 15.58 trillion US dollars， registering a year-on-year decrease of 8.0% and a year-on-year decrease of 5.3% after excluding price and exchange rate changes. The global trade in services amounted to 4.91 trillion US dollars， a year-on-year decrease of 20%. It is estimated that the global commodity trade volume will increase by 8.0% in 2021， with a year-on-year increase of 5.7% in the first quarter， the largest increase since the third quarter of 2011. The global foreign direct investment （FDI） is estimated to increase by 10% to 15%， with 15% to 20% in developed economies and 5% to 10% in developing ones. The actual foreign capital used by China during January and July in 2021 totalled 672.2 billion yuan， increased by 25.5% over the same period of the previous year.

Major constraints on world economic development

I. Risks of inflation and deflation co-exist in global economy.

It is an indisputable fact that most economies in today’s world suffer an increasing pressure of inflation. The injection of a large amount of liquidity results in a sharp increase in money supply， which is bound to trigger a significant rise of prices while the output level and circulation speed remain roughly unchanged. At present， the U.S. Federal Reserve implements a 120 billion US dollars monthly bond purchase plan， while the European Central Bank’s 1.85 trillion euros Pandemic Emergency Purchase Programme will be implemented at least until March 2022. The total balance sheet size of the three central banks in the United States， Europe and Japan is 25 trillion US dollars. The central banks of major economies pursue super loose policies with low or even negative interest rates. In addition， the labour supply shortage caused by the impact of the COVID-19 pandemic and other factors on the supply chain is raising the prices while promoting the wage level.

The ongoing inflation is only temporary of course， and there might be the same risk of deflation. Although the money in circulation increased sharply， the speed of circulation slowed down significantly， which offset the driving of the circulation increase on the rise of prices. The rising unemployment rate， the loose labour market and the low utilization of equipment have provided possibilities for expanding supplies. The market still holds a pessimistic expectation of the future economic trend. As of October 19， 2021， the global negative-interest-rate bonds still valued 11.6 trillion US dollars， accounting for nearly one fifth of the global investable bonds. Major economies have abundant measures and bigger space to control inflation. It is also predicted in an IMF report that the price pressure faced by most countries will subside in 2022， and the short-term pressure on the inflation trend of major developed economies， in spite of being high， will ease in the medium and long run. However， the price pressure will persist in some emerging markets and developing economies.

II. The instability of monetary policies in developed economies may affect emerging markets and developing countries.

The U.S. Federal Reserve announced in August 2020 that it would seek to achieve its long-term target of 2% average inflation rate， which means that the “balance” of the future inflation can be used to compensate for the “difference” in the past. By that， an additional room for monetary policy could be created through raising the tolerance of inflation in a limited space for reducing interest rate， so as to deal with the increasing risk of deflation. Subsequently， the European Central Bank changed the mid-term inflation target from “below but close to 2%” to “2%” in July 2021. On November 3， 2021， the Federal Reserve announced that it would begin to reduce the bond purchase scale by 15 billion US dollars in the middle of the month， followed by a double-reduction in December， and it is expected to end bond purchase in mid-2022. That can be seen as a sign of the U.S. monetary policy shift. In addition to bond purchasing， the Federal Reserve can also raise interest rates and reduce the size of its balance sheet， the so-called “shrinking the balance sheet”. Given that asset prices are historically high， fragile and sensitive， and the supply shock that currently pushes up prices will be alleviated in 2022， once the implementation speed， strength and timing of the exit policy of relevant developed economies fail to be right， it is probably to lead to vibrating asset price and reversing investors’ expectations， which will bring about bankruptcy tsunami and even stagflation.