WHEN PANDEMIC BLUES BITE
Samantha Amerasinghe takes stock of the coronavirus and looming recession
These are extraordinary times. At the beginning of this year, there were many reasons to be optimistic. Positive developments on the trade front, fewer Brexit related uncertainties and strong consumer spending especially in the US guided most economists to forecast steady growth.
But COVID-19 has turned optimism into despair. Year 2020 is on track to be one of the worst for the global economy in a century.
It’s hard to grasp the scale and scope of the novel coronavirus’ global impact. The pandemic has rattled the world, and drawn comparisons with painful periods such as World War II, the 2007/08 financial crisis and the 1918 Spanish flu.
UN chief António Guterres has warned that a global recession “perhaps of record dimensions” is a near certainty. The question is no longer whether a recession is imminent but how deep the downturn will be and how long it will last.
The IMF predicts that the ‘Great Lockdown’ recession fuelled by COVID-19 will be the worst downturn since the Great Depression. It expects global growth to contract by three percent in its baseline scenario, assuming the pandemic fades in the second half of this year.
Meanwhile, the World Bank warns that developing Asia faces the prospect of a ‘third shock’ of poverty to follow the trade war and coronavirus outbreak. In developing countries, it projects annual growth in 2020 to slow to 2.1 percent (baseline scenario) or minus 0.5 percent (worst case scenario), much lower than the estimated 5.8 percent expansion in 2019.
This pandemic is different from past crises as it involves both demand and supply shocks. On the supply side, unprecedented containment efforts (lockdowns and quarantines) to contain the spread of the virus have led to a drop in capacity utilisation and this has had the largest impact on economic activity.
In addition, there’s been a direct reduction in labour supply from unwell workers and increased mortality. Disruption to global supply chains has made it difficult for companies to procure what they need, whether this be domestically or internationally.
COVID-19 is exposing the fragility of globalisation.
As policy makers struggle to deal with the pandemic and its aftermath, they will have to rethink globalisation and address the fact that the global economy doesn’t work as they thought it did. Global interconnectedness has led to greater efficiencies but also vulnerabilities.
On the demand side, the loss of income from unprecedented mass layoffs (particularly in aviation, tourism, manufacturing and retail), fear of contagion and heightened uncertainty will make people wary of spending.
The resulting deterioration in consumer and business sentiment will spur companies to reduce spending and investment.
It is disconcerting that unemployment in the UK and US could surpass the levels reached during the Great Depression within months.
According to the ILO, over one billion workers (that’s 38% of the global workforce) are at high risk of pay cuts or losing jobs.
Early projections by the OECD and IMF incorporated the assumption that the recovery would follow a sharp V-like pattern – a first quarter hit that’s immediately offset in the second quarter. This was a widely held view before the COVID-19 pandemic intensified but there’s growing recognition that a U-shaped recovery with a prolonged bottom (a Nike swoosh) is more likely.
If severe financial dislocations exacerbate the global economic fallout, the risk of an L-shaped recession – a steep decline in economic growth followed by a slow and uneven recovery (similar to the Great Recession) – might play out. But a depression with several years of steep economic contraction is highly unlikely.
The downturn will be sudden and sharp. Moreover, the depth of the contraction and speed of eventual recovery would depend on effective implementation of policy responses in the months ahead.
The good news is that the right response by policy makers, companies and individuals can limit the downturn, shorten its duration, and contribute to a stronger and more sustainable recovery.
Governments and central banks around the world have unleashed substantial fiscal and monetary stimulus for national economies reeling from COVID-19.
Measures taken by the US Fed include cutting interest rates by 150 basis points, US$ 700 billion in asset purchases and a two trillion dollar stimulus package to help hard hit industries. Central banks in the world’s largest economies – i.e. the Fed, the ECB and Bank of Japan – have also implemented aggressive monetary policy easing measures.
Emerging markets face a far greater challenge as their fiscal space is more constrained and they need multilateral support.
The IMF stands ready to use its US$ 1 trillion lending facility to help developing nations struggling with the economic impact of the pandemic. Over 80 countries have requested financial aid. Without such measures, the world economy would likely end up in a depression.
Regardless of the response, the effects of COVID-19 will be felt for decades to come. But in adjusting to this ‘new normal,’ we should recognise that every crisis presents an opportunity for change… for the better.
Better pandemic preparedness, more investment towards improving public healthcare systems, and curbing reckless and senseless mass consumerism is a reasonable price to pay to defend humanity against future contagions.