Despite disruption from the COVID-19 pandemic last year, 2021 has brought high expectations for economic recovery across the globe. One of the silver linings is the accelerated application of vaccines and rising vaccination rates, combined with greater policy support of major economies, adding fuel to the stable recovery of the global economy. As stated by Geoffrey W.S. Okamoto, the global economy could grow at the pace of 5.5%, as estimated by IMF this January. But economic incentives in the United States and other countries are likely to accelerate economic growth.

However, the global economic recovery remains unstable and unbalanced, and various potential risks brought by the pandemic should not be underestimated. The road to global economic recovery is still full of risks and challenges.

First, the progress of the global economic recovery remains unbalanced. During the pandemic, developed economies have implemented ultra-loose fiscal and monetary policies, playing a key role in stabilizing the economy and financial markets. In contrast, emerging markets have seen a slower economic recovery with limited policy space due to their financial or debt constraints. Even in developed countries, the asymmetric impact from the pandemic and the redistribution effect exacerbate income disparities and social inequalities. The growing trend of a K-shaped recovery could lead to rising populism and reverse globalization, and slow the global economic recovery.

Second, the issue of vaccine penetration and effectiveness cannot be ignored. Only the pandemic ends everywhere both in developed and developing countries, it will end across the globe. However, developing countries are likely to obtain vaccines by 2022. Variants of the virus will also affect the effectiveness of vaccines. Martin Wolf highlighted that the distribution of vaccines remains a question even in high-income countries, with vaccine distribution in the EU lagging behind, for example.

Third, the world should be wary of the spillover effect from monetary policies in major economies. As noted by Wang Yiming, the unlimited easing policy of the Federal Reserve intensifies global excess liquidity, driving massive short-term capital to pour into emerging markets and appreciate local currencies. If the economy of the United States rebounds better than expected, and the Federal Reserve tightens monetary policy, there could be substantial capital outflows from emerging markets, an asset price slump and capital market turmoil.

Finally, rising commodity prices will push up inflation expectations. The global economic recovery and resumption of demand growth, combined with easing liquidity, are raising commodity prices dramatically and the yield on 10-year US Treasury notes has also risen significantly. Once inflation expectations are confirmed, monetary policy will be forced into reverse, which could accelerate the rise of potential risks.

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