Is the Global Recovery Over or Just on Pause?

While the delta variant has overturned expectations for growth, Australia’s central bank chief remains optimistic. His outlook could help chart the course for policy makers worldwide.


Reserve Bank of Australia Governor Philip Lowe has a coffee mug in his office inscribed with the words “half full.” Lowe says he’s an optimist about next year, as do many of his peers. They’ll have to make it through 2021 first. 

The global economy is in for a choppy future that may provide few convincing signals about the vitality and duration of the recovery. Just as analysts and investors were beginning to worry that growth was bouncing back too sharply and bottlenecks were adding to inflation concerns, the Covid-19 delta variant has stalled commercial activity. If we aren’t back to square one, we have lost significant ground. That’s making central bankers’ task of reining in monetary accommodation — never easy in the best of times — even trickier. Proceed too fast and growth may be set back or, worse, policy makers have to stage a humiliating retreat. Go too slow and risk overheating, should the lull prove to be only a blip.

The varied approach of central banks around the world in recent weeks shows how difficult this needle is to thread. South Korea hiked interest rates and made clear there are a few more to come. New Zealand blinked on a widely forecast increase but wants to try again soon. The Federal Reserve is still likely to proceed with a cautious reduction in bond buying, but discouraging jobs numbers for August have raised questions about precisely when the process can begin.

Lowe opted Tuesday to split the difference. He went ahead with the RBA’s planned taper of quantitative easing to $A4 billion ($3 billion) a week from A$5 billion, in what economists described as a close call. At the same time, he extended the timeline for the current pace of buying to February; initially the bank planned to review that amount in November. While gross domestic product will suffer a big decline this quarter thanks to lockdowns, the implication is that the fourth quarter will be better. The variant will “delay, but not derail” the recovery, Lowe said. His strategy is a neat way to be consistent with past communication on tapering while kicking the ball into next year. 

We’ll probably see more of these very small steps, followed by a generous amount of wait-and-see. There’s little question the global economy is in better shape than it was a year ago, and far superior to the start of the pandemic. If the stimulus unleashed by global central banks was aimed at preventing a catastrophic financial crisis and nursing businesses and consumers to a recovery, then an important part of what it set out to do has been achieved. For all its severity, the U.S. recession was the shortest on record,  1 though employment remains well below pre-pandemic levels.

So while there isn’t yet a compelling case for adding to accommodation with additional measures, that doesn’t mean it’s the right time to reduce the amount of liquidity pumped in, either. The International Monetary Fund forecasts the global economy will expand 6% this year. On a country-by-country level, momentum has been lost: Goldman Sachs Group Inc. cut its forecast for U.S. growth this year while Morgan Stanley now puts expansion at 2.9% this quarter, down from 6.5%. China is trying to put a floor under a new slowdown. German investor confidence declined for a fourth month in September. Payroll gains in the U.S were the weakest in seven months in August and less than the most pessimistic forecast. It’s inevitable that the recovery would cool from its torrid pace, but this is a tough time to be making decisions about changing direction, even if it’s gradual. Policy makers need to be nimble without being too quick.

Asked in parliamentary testimony last month about the meaning of the phrase on his mug, Lowe said: “There is a great deal of uncertainty about how the economy is going to travel over the next few months and much depends upon the health situation, but the experience here and elsewhere is that, once the health situation is brought under control, the economy bounces back quickly.’’

  1. The National Bureau of Economic Research’s business cycle dating committee, the academic panel that serves as the arbiter of U.S. expansion dates, said in July that key indicators of employment and production “point clearly to April 2020 as the month of the trough.” Many countries define a recession as two negative quarters of gross domestic product. The bureau doesn’t use that definition and instead looks for a significant decline in economic activity, typically lasting more than a few months.

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