Coronavirus will lead to recession and economic slowdown

Category: Economics

Although no one saw an economic recession coming from the hand of a virus, it is still the chronicle of an announced crisis. On the horizon of the world economy plans the loss of a trillion dollars, at best. Overcoming this crisis will require not only macroeconomic measures, but also corrective policies and institutional reforms aimed at building robust, sustained, equitable and climate-friendly growth.

The coronavirus crisis is first and foremost a threat to public health, but it is also, and increasingly, an economic threat.

The COVID-19 earthquake will trigger a recession in some countries and a slowdown in global annual growth below 2.5%, often taken as the recession threshold for the world economy, according to the latest report from the Conference of the Nations United for Trade and Development (UNCTAD).

The resulting impact on global income compared to what forecasts had projected for 2020 will be around $ 1 trillion, at best, and $ 2 trillion, at worst.

“The duration and depth of the crisis will depend on three variables: how far and how fast the virus will spread, how long it will be before a vaccine is found and how effective policy makers will be in mitigating the harm to our health and our physical and economic well-being”, indicate the experts.

The uncertainty surrounding each of these variables adds to the individuals’ feeling of anxiety, which is a fourth variable that will determine the results of the crisis.

Two ways out of the crisis

There are two possible ways out of the economic consequences of the shaking of the new coronavirus: the usual one, until the next crisis, and the assumption of political leadership that straightens the economic-social and economic-environmental structural failures of the world economy.

The consensus opinion is that this crisis has the potential to alter what was a hesitant, but well-aligned global recovery, which had been established during the second half of 2017, thanks to a series of policies aimed at nullifying threats to economic confidence renewed, which in turn had supported a series of optimistic growth forecasts for the coming years.

From this perspective, if the outbreak is short-lived, a familiar combination of monetary policies (ideally limited to cuts in the central bank rate but possibly with some less orthodox measures to lower long-term interest rates) and fiscal stabilizers Automatic machines should be enough to save the day, with the recovery assuming the “V” shape that followed, for example, the crisis caused by the SARS virus in 2003.

However, if the crisis is to last longer, probably due to disruptions on the supply side of the economy through paralysis of production networks and reduced profit margins, hopes for recovery will hinge on more sustained liquidity injections and coordinated by central banks, more active fiscal policies and renewed efforts to boost free trade and foreign investment-

In that case, the recovery will likely assume a U-shape, as happened with the oil failures of the 1970s, with some serious economic downturns on the way, but with the organizing principles of the world economy preserved… until the next crisis.

Structural measures

“No one saw this coming, but the biggest story is a decade of debt, deception, and political drift,” said Richard Kozul-Wright, director of globalization and development strategies at the conference.

For a second exit from the crisis, the economic consequences related to the virus are less with time and confidence and more with a question of political leadership and coordination necessary to stop the waves of economic pathogens released by the crisis and that can sink an already fragile world economy highly dependent on financial architecture.

Losses of consumer and investor confidence are the most immediate signs of the spread of contagion, but deflation in asset prices, weak aggregate demand, rising debt, and deteriorating income distribution pose greater policy challenges.

The East Asian financial crisis could offer parallels, but that crisis occurred when China had a minor economic footprint and advanced economies were in reasonably good economic shape, which is not the case today.

“From this alternative perspective, an effective response to the economic consequences of COVID-19 will require not only active and specific macroeconomic measures, but a series of corrective policies and institutional reforms necessary to build robust, sustained, equitable and climate-friendly growth., which would reduce the chances of a subsequent economic collapse, “says the report.

Slow growth, extreme inequality and recurring shocks: the new abnormal norm

The past decade has been marked by a growing sense of economic anxiety due to a rapid recovery in the north and a general slowdown in the south that have been threatening the world economy since the 2008-2009 financial crisis ; combined with increased market volatility, a fractured multilateral system, and reduced room for political maneuver.

Behind this lies a longer period of slow growth and investment, marked by intermittent booms and busts, and underpinned by the rapid accumulation of private debt, stable prices, and low interest rates, which emerged long before the financial crisis in advanced economies and has characterized much of the rest of the global economy since then.

Slow growth and increased economic anxiety have been closely associated with an unprecedented rise in inequality in almost all countries, reflecting a combination of wage repression, corporate rent-seeking and concentration of wealth.

The cycles of financial boom and bust generated by attempts to overcome slow growth through monetary easing and financial deregulation “have exacerbated the stagnation link of inequality by creating distortions on the supply side and reducing potential growth”, experts observe.

During booms, the financial sector tends to displace real economic activity while cheap credit misallocates capital, diverting resources to low-productivity sectors, such as real estate and an economy bordering on informality.

What it takes to get out of this crisis

According to the United Nations Conference on Trade and Development , central banks are not in a position to resolve this crisis on their own.

“An adequate macroeconomic policy response will require aggressive fiscal spending with significant public investment, and social assistance support targeting negatively affected workers, businesses, and communities,” according to the analysis.

All this “will require the international coordination of these programs.”

UNCTAD recognizes that calls for increased public spending always generate fears of waste and financial problems in the future.

These fears ” are inappropriate in the face of massive spending due to macroeconomic mismanagement, such as fiscal austerity that slows growth and erodes tax revenues, bailouts of private banks by central banks, fossil fuel subsidies and the scale of evasion and international tax evasion ”, the document indicates.

Reducing some of these expenses would be enough to launch a Global Green New Deal that includes improvements in public health systems.

Governments that are willing to do “whatever it takes” to stabilize the economy have to increase spending until private sector demand and employment return to healthy growth rates.

The lessons of the past decade are clear: the combination of aggressive monetary policy and timid fiscal interventions leaves private investors in a “wait and see” limbo and encourages speculative spirit.

In the current crisis, there is also the additional risk that a slow fiscal response could increase the high risk of contagion. Governments must give a clear signal that public debt concerns are secondary to public health concerns.

Calls to relax fiscal positions should not be limited by the argument that higher spending is ineffective if companies face bottlenecks in their supply chains.

While there are bottlenecks, the real constraint facing the global economy is a lack of spending, especially investment in physical and social infrastructure, as well as publicly funded research and innovation. Furthermore, technical progress and productivity growth is slowed by low spending in these areas.

Reduce inequality

Addressing economic inequalities should be a central part of the policy response with an acknowledgment of benefits in both the short and long term.

Growing inequalities over several decades have eroded the purchasing power of most households since long before the Covid-19 outbreak, and now pose serious obstacles against a solid recovery after the outbreak.

By supporting job growth, government spending also stimulates wage growth. Stricter labor market regulation is also important as it supports income (for example, with minimum wages), income security (for example, with pensions, unemployment insurance and sickness benefits) and the ability to earn an income (For example, with health care, education, and more provisions).