12 February 2021

The Outlook for an Economic Recovery: Region-by-Region

The past year has been one of the most challenging periods for the global economy in recent decades. While the final results from 2020 remain to be revealed for many key economies, it is clear that the global economy suffered losses that were greater than any it had suffered since the Second World War more than 75 years ago. However, these losses were anything but equal. In fact, there were great regional disparities when it comes to the performance of the global economy during the pandemic. Furthermore, it appears that these disparities will remain in place for some time to come, and could yet widen further as the pandemic continues. This makes it challenging to forecast the health of the global economy in the coming months and years, and makes it imperative that we analyze the prospects for the economy on a region-by-region basis.

First, let’s look at the health of the global economy at the moment. It is important to remember that, for most of the previous decade, the global economy was expanding at a remarkably steady, and healthy, pace of between 3.4% and 3.8% per year, the single-most consistent period of economic growth in recent decades. However, the global economy entered into a slowdown in 2019, before the world had ever heard of Covid-19. With Europe headed for a recession and a trade war raging between the United States and China, global economic growth was already in a period of deceleration when the Covid-19 pandemic emerged in early 2020. Of course, the pandemic has had a massive impact on the global economy, one that resulted in an estimated 4.1% decline in global economic output last year.

To better understand the current state of the global economy, and its prospects for a recovery, let’s look at the economy on a region-by-region basis.

East Asia: If there was any question that the global balance of economic power was shifting to East Asia, then the past few years have laid to rest any doubts. Even as Japan’s economy has struggled to generate much growth, almost every other major economy in this region has outperformed their peers from other regions. During the pandemic, some economies, such as China, South Korea, Vietnam and Taiwan, managed to export their way to better-than-expected results, although a few economies in this region did suffer major declines in output. Looking ahead, it appears that not only are most East Asian economies poised to mount a strong recovery, but that this region will grow faster than any other over the coming year.

North America: The United States and Canada have generally outperformed other developed economies in recent years, growing significantly faster than Europe or Japan during this period. However, the US was hit hard by the Covid-19 pandemic and this had a significant impact on many key sectors of the North American economy. Nevertheless, the 3.5% contraction recorded by the US in 2020 was a better result than had been expected, thanks to the strength of the US’ high-tech industry and a surge in government spending. In the coming year, North America is expected to stage a stronger economic recovery than most other regions, reflecting the overall strength of both the US and Canadian economies.

Europe: Most major European economies have struggled to generate much growth at all over the past two decades. In 2020, Europe was battered by the pandemic, both in terms of the human cost and its impact on the region’s economy, which is heavily dependent upon trade and investment ties outside of the region. In fact, major European economies such as Italy, Spain, France and the United Kingdom all suffered massive contractions in 2020. As we look to the future, the struggle to roll-out Covid-19 vaccinations is dampening the near-term outlook for growth in Europe, while many factors suggest that long-term economic growth is likely to prove elusive for many countries in this region.

Latin America: In recent years, no region has recorded more disappointing economic results than Latin America, as each of the region’s largest economies has suffered from a series of major crises. In 2020, many Latin American countries were brought to a standstill by the pandemic, which caused massive disruptions to the region’s economy. In fact, economic output in Latin America has fallen to a level that was last seen eight years ago, reflecting just how poorly the region has fared of late. Looking ahead, most Latin American economies are expected to return to growth over the near-term, but any growth is likely to be well below the region’s potential, widening the gap between Latin America and most other regions.

Sub-Saharan Africa: Not long ago, Sub-Saharan Africa appeared to be in a position to overtake East Asia as the world’s fastest-growing regional economy. However, the combination of lower commodity prices and economic mismanagement combined to result in much lower rates of economic growth in recent years than had been expected. While the region did not suffer as large of outbreaks of Covid-19 as most other regions over the past year, its economy was nevertheless impacted by the pandemic. Worse, it is very likely that disruptions related to the pandemic will persist much longer in Sub-Saharan Africa than in other regions due to the very slow rollout of Covid-19 vaccinations across this region.

Middle East and North Africa: Lower oil prices and a high degree of political instability have resulted in most countries in the Middle East and North Africa recording much lower rates of economic growth in recent years, with only a handful of more diversified countries in the region performing relatively well. During the pandemic, most countries in this region have suffered some economic setbacks, although these have not been as severe as those in most other regions. In the coming months and years, the performance of most major economies in this region will be determined by the direction of oil prices, while most governments will continue to focus their efforts on policies aimed at economic diversification.

South and Central Asia: Many countries in South and Central Asia had been among the fastest-growing economies in the world in recent years, led by India and Bangladesh. However, the Indian economy ran into trouble well before the Covid-19 pandemic, and was then battered by the severe lockdown measures that were imposed by the Indian government in the early stages of the pandemic. While the pace of providing vaccines to this region’s massive population is likely to be slow, it is expected that higher levels of economic growth will return to most leading economies in this region in the coming months and years, and it might yet prove to be the world’s fastest-growing region in the years ahead.

It is clear that the regional economic growth disparities that have already widened considerably in the 21st century will continue to do so in the wake of the Covid-19 pandemic. In fact, some of these disparities will be widened by the longer-term impact of the pandemic itself, as some regions and some industries find that the losses they incurred during the pandemic will be more difficult to recoup in the post-pandemic world. We saw the same thing happen in the wake of the Global Financial Crisis, where less competitive regions such as southern Europe and Latin America lost ground to more competitive regions, most notably East Asia. Therefore, it is becoming apparent that we are in the midst of a period where, for all but a small number of regions, the generation of economic growth is becoming increasingly challenging, leading to an overall higher degree of regional inequality when it comes to economic growth.