The post-Covid boom and the road beyond


by Ioannis Tirkides * for the Cyprus Economic Society

Optimism is on the rise in the global economy for the recovery in 2021-2022, and growth forecasts are revised up. The European Commission now expects real GDP growth of 4.2% in the EU in 2021 and 4.4% in 2022, up from 3.7% it forecast earlier.

Ioannis Tirkides

For Cyprus, the growth forecast for 2021-2022 is between 3 and 4%. The global economic outlook is now better than previously thought, and for good reason, but downside risks may be minimized. Some for good reason, some not. In this article, we’ll take a look at the present and the future, the fundamentals behind the trends, risks, and challenges. We conclude that the recovery is a bit overrated and policymakers should think more than a year or two.

Caution, anticipation and the political will to get through the necessary reforms and restructuring are what will propel us forward sustainably, even if the course is a bit bumpy at first. Changing the growth model as we all believe will not be cheap or easy!

Let’s start with the beginning. The best economic prospects in Europe and elsewhere for 2021 are justified. The political stimulus will be extremely important for another year. Budget deficits, which had exploded in 2020 for good reason, will remain just as inflated in 2021.

In the United States, the budget deficit fell from 6.6% of GDP in 2019 to 16.1% in 2020 and is expected to reach 16% in 2021 as well, according to the European Commission’s spring economic forecast. In the euro area as a whole. The budget deteriorated from a near-equilibrium in 2019 to a deficit of 7% of GDP in 2020 and forecast at 8% of GDP in 2021. A huge fiscal expansion in 2021, coupled with full monetary accommodation, will go a long way in increasing the GDP.

The other factor propelling GDP up is described as endogenous, which means that the recovery will partly take place on its own. Lockdown measures that have been on and off all year round in 2020 mean people are consuming less and saving more. As we normalize now, some of that extra savings will be spent on top of the usual rate, leading to a much faster increase in private consumption. With consumption accounting for about two-thirds of the economy, this will produce a lot of growth for the year.

Data on household savings tell the story. although there are differences from country to country. The household savings rate fell from 12.2% to 18.6% between 2019 and 2020 across the European Union. It fell from 18.4% to 23.5% in Germany and from 10% to 17.5% in Italy, respectively. By comparison, Cyprus is the poor cousin of the group, with the lowest household savings rate in the EU after Greece. Our household savings have been chronically low, having turned negative during the previous recession, then recovered very modestly in 2016-19, going from 3.1% in 2019 to 3.8% in 2020. Which has a negative impact on the current account.

In the end, the recovery in 2021 will be partial, and uneven. The EU as a whole contracted 6.1% in 2020, more sharply in some Member States than in others, and a 4.2% rebound will not fully recover production losses. Some northern countries are likely to return to pre-crisis levels in 2021 but southern countries will not, highlighting long-standing divergences in Europe.

Economic policy and future economic risks

The 2020 fiscal stimulus resulted in a sharp deterioration in public finances. A number of problems thus arise. When should the stimulus be withdrawn? How sustainable are current debt ratios? And is inflation falling?

There is a consensus that for at least 2021 we should keep our foot on the accelerator. Fiscal and monetary policies will adjust as conditions change, but they are expected to maintain an expansionary bias until full recovery is achieved. The stakes of a premature policy reversal are too high, and policies will remain extended longer than the pandemic lasts.

But fiscal policy should be better targeted, to support the most vulnerable sectors of the economy and segments of the population. Fiscal policy should also become more flexible to facilitate the reallocation of resources as economies go through their digital and green transition. This will almost certainly require a change in the composition of income and expenditure, which is not an easy task a priori.

Expansionary fiscal policies and their monetary accommodation can be inflationary. But monetary policy has been overly accommodative for the most part after the 2008 global financial crisis, while inflation has remained subdued. Indeed, structural factors such as globalization, rising income inequalities and credit deleveraging have long depressed aggregate demand. Over the past twenty years, globalization has greatly expanded our production possibilities on a global scale.

Globalization has also helped reduce production costs, as labor-intensive activities have been moved to low-wage jurisdictions. Second, increasing income inequalities in advanced economies, a phenomenon that has been taking shape for about as long as globalization, also helps reduce aggregate demand by transferring more money and wealth to the rich who do not have them. will not spend, and less to the poorest segments. who would spend it if he had it. And then there’s the old classic, ongoing deleveraging also destroys credit over time, this process is deflationary by nature.

Yet supply shortages are everywhere, from basic commodities to microchips to food. These shortages amid sudden surges in demand as we return to normalcy lead to spikes in inflation. These should be temporary. But while the shortages don’t go away as quickly as we’d like to think, the spikes in inflation we now anticipate might not be so temporary.

Public debt has increased in Europe and elsewhere since the global financial crisis. Between 2007 and 2019, the average debt ratio across the EU increased by 15 percentage points of GDP, and then by another 13 percentage points in 2020 alone. It will rise again in 2021. But remarkably, , higher debt ratios are more affordable today than they were fifteen years ago, due to the sharp decline in debt service. In the EU as a whole, debt service has increased from 2.7% of GDP in 2007 to 1.4% of GDP in 2020. Debt sustainability is relative and depends largely on interest rates. interest that stay low longer. It may not be entirely in the hands of central banks for much longer!


The post-Covid boom will come and go, and in the end we will end up where we started. We will have to face what preceded the Covid, the legacy it left under its empire, and prepare for the future. Before Covid, the global economy was slowing, the pace of productivity growth was slowing, and income inequality was increasing.

This combination of events has had a very severe impact on labor markets, creating what is called employment polarization, where job growth is concentrated in the lower end of the market, leading to dissatisfaction. social. We will also have to deal with the legacy of the pandemic, as we have already discussed at length, with much higher debt ratios and severely inflated balance sheets of central banks. Looking to the future, we are at the start of a major structural transformation, driven by digital and green transitions. It will be a long and very transformative process for all sectors of the economy, governments, labor markets and private companies. To be successful, we will need to address the many underlying challenges, prudently and effectively, and above all in an inclusive manner. This is as true for the global economy as a whole as it is for all countries, large and small!

* Ioannis Tirkides is the Chief Economist of the Bank of Cyprus. The opinions expressed are personal and do not necessarily reflect those of the employer.

The article is published in the Cyprus Economic Society Blog section and republished in the Cyprus Mail under a media partnership agreement.

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