Global economy recovery after crisis largely depends on state policies
30 April 2020. PenzaNews. As a result of the COVID-19 pandemic, the global economy is projected to contract 3 percent in 2020 and grow by 5.8 percent in 2021, says the International Monetary Fund World Economic Outlook published in the middle of April.
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It also says that “there is extreme uncertainty around the global growth forecast.”
“The economic fallout depends on uncertain factors that interact in ways hard to predict. These include, for example, the pathway of the pandemic, the progress in finding a vaccine and therapies, the intensity and efficacy of containment efforts, the extent of supply disruptions and productivity losses, the repercussions of the dramatic tightening in global financial market conditions, shifts in spending patterns, behavioral changes (such as people avoiding shopping malls and public transportation), confidence effects, and volatile commodity prices,” the IMF notes.
The report figures show US projection of a fall of 5.9% in 2020, and then growth of 4.7% in 2021. In China, according to the IMF, this year there will be no recession, despite the global crisis, the economy will grow at 1.2%, and at 9.2 % next year. In the euro area, experts predict an economic downturn of 7.5% for the current year and 4.7% for the next.
According to the Media, by the end of last week, the United States and the European Union had approved two new large packages of financial assistance measures. Thus, an additional 500 billion dollars was allocated to overcome the consequences of the coronavirus pandemic in the US. The EU leaders approved a program of 540 billion euros, but could not agree on the work of the economic recovery fund. At the same time, according to some experts, even these measures may not be enough to compensate for the record decline in GDP.
Commenting on the current state of affairs, Harun Ozturkler, economy researcher, associate professor of Economic and Administrative Sciences at the Kirikkale University, noted that it is impossible to make a single number forecast for global output and employment loss.
“We do not know how long pandemic will last, how effective the containment efforts will be, and when the researchers will come up with a vaccine and a treatment medicine. However, under different scenarios we can make projections about the time path for the global economic loss. If the pandemic ends in about one quarter, then the recession will be V-shaped, that is, there will be large losses in output and employment for two quarters but the growth will rebound and return to its original trend quickly. In case of a two quarters lasting pandemic, the recession will persist for four quarters and be U-shaped. In this case, although growth path will be resumed there will be permanent output and employment losses. On the other hand, if the pandemic lasts for a year or more, then recession will be L-shaped lasting for two or more years. Specifically, if there is going to be a second wave, or the vaccine and treatment are found later than expected, then we may face further worsening in global economic losses due to structural damages to labor and capital markets, and broken production chains globally. In this case, long term growth path of the global economy may shift downward permanently,” the economist explained.
According to him, about 90% of firms globally are micro-firms, and together with small enterprises their total share reaches 95%.
“Micro and small firms produce about half of the global output and generate more than half of the global employment. However, these firms have very limited access to financial markets. Also because of these firms’ operational capabilities are limited, they have been the most heavily affected from the pandemic. […] In order to preserve global productive capacity, governments must do whatever it takes to support SMEs through fiscal policy,” the expert said.
In his opinion, monetary measures in this crisis can only be accommodative policy tools.
“Governments can pay the wages of the workers in these firms. Also, governments can play the role of last buyer and buy those firms’ output. Basic goods and services bought that way can be distributed to the most affected and fragile segments of the societies,” Harun Ozturkler explained.
From his point of view, this pandemic may also lead to a number of positive transformations, in particular, spur advancement and adaptation of new technologies in both production and consumption processes, help countries to spare more resources for environmental protection and health care, and lead to a more cooperative global international political order.
Fabio Masini from Department of Political Science at University of Roma Tre, Vice-President Italian Council of the European Movement, Managing Editor History of Economic Thought and Policy, Managing Director International Centre on European and Global Governance, also expressed the opinion that crises are always a two-sided coin, bearing risks and opportunities.
“The world was already in need to provide collective-supranational public goods, both at the continental and the global level: energy transition, struggle against climate changes, health-care systems [..]. There is a great opportunity to tackle these issues collectively, in an innovative and effective way, turning to more sustainable production and consumption patterns,” the expert said.
In his opinion, countries recovering from a pandemic will be asymmetric.
“The monetary and fiscal stimuli shall have an asymmetric impact on counties with different macroeconomic performances and indicators. This is likely to bear long-term consequences for the global geo-political and economic balance of power, whose directions are currently still unforeseeable,” Fabio Masini noted.
From his point of view, governments should provide for various support measures, both from a closer and a longer perspective.
“In the short run, the key issue is to provide unlimited liquidity to face the emergency. All major Central Banks seem to be up to this task; governments – at least some of them – seem to be not. In some cases, the financial support to the economy is trapped in beaurocratic wheels that might delay the recovery,” the analyst said.
“In the medium and long run, the key point is to restart the economy with productive investments, […] and restore confidence in the global markets for both trade and financial recovery. From this point of view, an unprecedented coordinated (targeted to highly innovative investments) demand push in the whole world would be the optimal solution, but problems of international collective actions might jeopardize these attempts,” Fabio Masini added.
In turn, Philip Hanson, Emeritus Professor of the Political Economy of Russia and Eastern Europe, University of Birmingham, reminded that in case of a V-shaped recovery, world output grows by 5.8% in 2021.
“But there is no guarantee that the pandemic will be so short-lived; it may take longer to overcome or exhibit a temporary improvement followed by a second peak. In that case an alternative IMF projection is of a fall of 6% globally this year and 8% next year,” the expert added.
In his opinion, one of the difficulties for policy-makers is that our scientific understanding of the coronavirus is severely limited.
“With no drug cure or vaccine and confusion about testing and the tracking of coronavirus contacts, we cannot reliably prescribe the best economic treatment. So far, it would appear that the priorities in resource allocation should be research into the virus, testing for diagnosis and tracing of contacts. Early and rigorous lockdown seems to be desirable,” Philip Hanson said stressing that asymmetrical, non-simultaneous spread of the virus on the planet can make international restrictions long-term.
Meanwhile, Nobuhide Hatasa, Professor, Osaka University of Economics and Law, suggested that we should be prepared to take at least one year in order to completely fight against the virus.
“The most effective solution at this moment is to develop and produce vaccines and medicines for COVID-19 as early as possible, and until that time people are urged to stay at home as long as possible and governments are required to implement long-term and large-scale economic policies as extensive as possible in order to financially support needy persons and vulnerable companies,” the expert said.
According to him, one of the highlights of the pandemic is that it showed the vulnerability of even such advanced countries with well-maintained health and medical systems as the US and Japan.
“What we should do for the future similar risk after this pandemic is over are four things. First, the international society should cooperate in investing more on the development of medical technologies and capacities so that valid vaccines and medicines for a new infection are to be ready for people and patients hopefully within several months or so. Second, we should more focus on creating a smart society in which ICT, AI, robots, and remote-control systems can be utilized at anywhere including work offices, schools, hospitals, public utilities, shops, and entertainment facilities. This will help reducing the opportunities of physical contacts with people and the risk of acquiring an infection while minimizing the shrink of economic activities,” Nobuhide Hatasa said.
Moreover, according to him, each government should reconsider more effective containment strategies.
“These are strategies regarding the movement restriction of people, control of economic and social activities, segregation of patients, and management of testing in addition to further improving its health and medical systems comprehensively including prevention, inspection, care, and treatment for the next new communicable disease. It also needs to prepare for the detailed systematic economic measures which make it possible to provide prompt financial support during the height of the crisis and to achieve a V-shaped economic recovery after the disaster while putting more efforts into promoting the application of ICT,” the analyst explained.
“Finally, I should not forget to mention that there still exist several countries whose authorities keep tight control over information although they accept relatively free cross-border movement of people, goods, and capital. This unbalanced degree of freedom […] was one of the major pitfalls that made the COVID-19 virus moved out of the site of the first outbreak. We should wisely recognize that a cover-up of true information related to human life could be the same extent of threat as an infectious virus itself in this globalized and connected society,” he added.
According to Kent Matthews, Professor of Banking and Finance at Cardiff Business School, the economic situation in the world was difficult even before the outbreak of coronavirus.
“China was already slowing down, Europe was stagnant, and the UK growth forecasts were marked down as Brexit factors had begun to bite. Only the US was showing signs of growth fuelled by a monetary stimulus that would have shown up its inflationary nature after the presidential election in November. Now US GDP is forecasted to fall 25% in Q2, and the UK anything between 15% and 25% in the same period,” the expert said.
In his opinion, the crisis is a classic supply-side shock and quite unlike the Global Financial Crisis of 2008–2009 or the Great Depression of 1930–1933.
“The key difference being that in the previous two global crises, it was a massive fall in demand. In the current crisis demand has been shored up by a loosening of fiscal policy. Liquidity and the flow of income has been buoyed by various countermeasures […]. The effect will be a strong stagflation that sees a sharp negative growth and a spike in inflation,” he suggested.
Analyzing the situation in the UK, Kent Matthews noted that the Bank of England will need to resist the temptation to monetise the fiscal deficit by allowing it and the banking system to fund the extra fiscal policy.
“That means at some point interest rates will have to rise and QE reversed so that bond rates rise. Failure to keep monetary control could result in an inflationary spiral that would take much longer to control than the COVID-19 virus,” he explained.
According to him, the global economic recovery is completely dependent on the governments of countries that have introduced restrictive measures.
“China has shown the way. Whether the economic recovery is ‘V’ shaped, ‘U’ shaped or a ‘long square root’ symbol depends on how soon the lockdown is removed. No matter what happens, there will be some loss of capacity and the economy will not recover to its projected pre-crisis growth path any time soon,” Kent Matthews concluded.