The global recovery may have already peaked

We were just getting used to the idea of a global economic recovery, an expansion replete with eye-popping numbers seen once every few decades. Too bad it may have already peaked.

Trouble appears to be lurking just beneath the surface of the International Monetary Fund's forecasts showing a hale state of affairs in big commercial powers. Global gross domestic product will gain 6% this year, a projection unchanged from April, according to the IMF's update of its World Economic Outlook. That would still be the best result in four decades and quite the bounce from a collapse of 3.2% in 2020.

Why not just accept positive news where we can get it? Given the rapid spread of the Covid-19 delta variant, this is likely as good as it gets. It's also a shift in tone after months of upgrades from international institutions, investment banks and industry outfits. As the IMF was putting finishing touches on its report, Germany's Ifo Institute said Europe's premier gauge of business confidence unexpectedly slipped this month. South Korea, a big technology exporter generally considered a pandemic-era economic star, reported slightly disappointing growth in the second quarter while consumer optimism dipped in July.

Whether the world expansion is pausing for breath or running into more serious headwinds matters greatly. The fight against Covid isn't won, making it a particularly inopportune time for any slowdown. 

The IMF also offered a sobering view about how this rebound has been dispersed. Advanced economies such as the US and Europe, not so long ago derided for sclerotic rates of growth, are doing better than many emerging markets formerly famed for outsize returns. America is predicted to notch its best growth this year since Ronald Reagan occupied the White House. The UK got the biggest bump among major economies and is tipped to expand 7%. China continues to do fine, though even there, things look off the boil. GDP will climb 5.7% in 2022, down from 8.1% this year, the IMF reckons.

Blame delta and sub-par vaccination rates for the dour emerging markets prognosis, along with the superior fiscal and monetary firepower available to the West and Japan. Much of Southeast Asia is struggling, and Indonesia has become the global hotspot for infections. India's prospects were also marked down. 

Like most central banks, the IMF expects the spurt in inflation will be temporary, reflecting the velocity of the overall economic bounce and bottlenecks that a jump in demand has created. The implicit question is, with the expansion possibly peaking and delta raging, would it be a mistake for policy makers to pull back on stimulus? The window may be closing for the normalization of interest rates — if it was ever truly open. With the pandemic untamed, it makes sense to slow-walk the end of near-zero rates and quantitative easing. 

Even in Britain, given a big check-mark by the IMF, the case for much of a rise in borrowing costs is questionable. Gertjan Vlieghe, a departing member of the Bank of England's Monetary Policy Committee, urged caution in a farewell speech Monday. "The delta variant is still causing health and economic damage, both in the UK and in the rest of the world," he told the London School of Economics. "It will remain appropriate to keep the current monetary stimulus in place for several quarters at least, and probably longer. And when tightening does become appropriate, I suspect not much of it will be needed."

Delta can spoil economic performance in developed nations, too. Policy makers the world over had come to see Australia as a kind of laboratory for success. It looked like the country was on track to return to that happy state of nirvana after roaring out of the Covid-induced recession late last year. The Reserve Bank even announced the start of tapering its bond purchases. Yet the virus has reemerged as a threat after a botched vaccination rollout. Sydney's lockdown has been extended another month, the premier of New South Wales state announced Wednesday.  The taper looks like toast before it even got going, economists say.  

Even those with ability to print money aren't in charge during this cycle. The disease is. It would be churlish to deny the benefits of a bumper year, for all its flaws and unevenness, but peak recovery doesn't mean problem solved. Far from it. 

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

Disclaimer: This opinion first appeared on Bloomberg, and is published by special syndication arrangement