How will the world economy emerge from the Covid-19 crisis?

The Covid-19 global spread has brought an abrupt end to an 11-year economic recovery

The Covid-19 epidemics which started in Wuhan at the end of December 2019 has failed to be contained to China and reached the whole world in March 2020 with an epicentre in Europe. An inflection point in the global number of cases and deaths was observed at the beginning of March when the number of cases reached 90,000 and the number of deaths 3,000. From then on, the number of cases and deaths blew up and the line turned exponential. At the end of March, the number of cases reported globally is 500,000 (but many might not be reported) and the number of deaths close to 20,000. The pandemic, after reaching a peak in Asia in February reached a peak in Europe in March and might reach a peak in America in April.

Source: Worldometer 25/03/2020

Italy was the first country in Europe to be deeply affected in its region of Lombardy which has close business connections with China, in spite of a shutdown of airport connections with this country at the end of January. Codogno and ten other towns in Lombardy were put on lockdown on 22 February, and then the whole of Lombardy and eventually the whole of Italy on 10 March. Spain where the epidemic spread quickly had to follow by placing the whole country on lockdown on 14 March and France which still held surreal municipal elections on 15 March, placed the whole country on lockdown on 17 March with all non-essential businesses and schools shut. On 25 March, most of Europe is now on lockdown – including UK since 23 March – with not so strict measures yet in Eastern Europe.

US states of California, Delaware, Illinois, Louisiana, New York, New Jersey, Hawaii, Ohio followed suit. In Australia, the government closed to the borders and individual states closed themselves to people coming from other states. In New South Wales, the government closed all pubs, restaurants, cafés to dine-in clients on 23 March and stopped short of closing schools yet.

These measures have dire consequences on businesses and jobs and brought a sudden halt to the 11-year recovery since the 2008 GFC. Stock markets started tumbling in February and have heavily crashed in March, losing around 30% of their values and it might not be over yet.

Dow Jones Index 2015-2020

The coronavirus-led economic crisis is going to be worse than the 2008 GFC, on a par with the 1929 Great Depression

Now everyone agrees that the economic crisis triggered by this lockdown will be worse than the 2008, 2000 and 1987 crashes, probably on a par with the 1929 Great Depression.

The IMF which considered that this crisis would only cost 0.2% to global GDP in January is now expecting a recession worse than the global -0.7% downturn in GDP that occurred in 2009. The Fund published on 16 March a range of policy steps for central banks to provide liquidity, monetary easing and coordinated action among G7 banks and for governments to ramp up public health expenditures urgently, to provide wage subsidies and broad-based fiscal stimulus.

The OECD, for its part, revised its economic perspectives in its interim outlook on 2 March highlighting the risks to the world economy of the coronavirus outbreak. It only estimated a drop of 0.5% to global GDP then. In a similar way to the IMF, it underlined the importance of effective and well-resourced public health measures, supportive macroeconomic policies and co-ordinated multilateral actions.

However, France which estimated a 1.3% GDP growth for 2020 is now more realistically expecting a -1% drop. S&P is now estimating -1.4% but it might be much worse. The depth of the crisis to come might only be comparable to what happened in the great depression of 1929 that lasted into the 1930s and gave rise fascist governments in Europe and was only solved by Roosevelt’s New Deal as from 1933.

Governments and central banks are reacting but too little and too late

In the face of this unprecedented situation in modern times, central banks and governments have implemented unprecedented measures, following the IMF and ECB advice, but too little and too late. Mostly pro-business conservative governments have resorted to Neo-Keynesian economic measures that they ordinarily condemn.

The US Federal Reserve reduced its benchmark interest rate from 1.75% to 1.25% on 3 March and later announced a range of measures to allow banks to continue lending. The ECB did not reduce its benchmark interest rate as it is already at zero since 2016 but announced on 12 March measures to support bank lending and an expansion of its asset purchase program to €750 billion on 18 March. The RBA, for its part, reduced its cash rate a further 0.25% down to 0.25% after a similar move on 3 March in an extraordinary meeting on 19 March and established a target yield on 3-year Australian government bonds and a term fund facility for the banking system.

The Macron French government is targeting help to small and medium businesses which will be exempt to pay their taxes but also rents and bills during while they are close due to the quarantine but strangely did not offer anything to the unemployed except than delaying the end of their benefits which is the minimum they could expect. The Australian government let businesses lay off people as it announced shutdowns of all except essential stores and venues on 22 March but almost doubled welfare payments to unemployed people for six months. The US government is planning to send a ‘stimulus’ cheque of $1,200 (or $1,500 if the Democrat majority Congress has its way) to most American households.

These measures are exceptional but might still not be enough, especially in the US, and in Europe where more welfare to unemployed people will be needed if the shutdowns and isolations are extended. Right now, economies in most countries are faring at a mere 25% of their normal capacity and it could get worse. Unless more significant supports are provided by central banks and governments, unprecedented recessions could occur with growth rates as low as -10% to -20% of GDP.

In the best scenario, an economic recovery may arise slowly between December 2020 and April 2021

The most optimistic observers estimate that things could start to improve in May as France is planning to reopen their schools on 4 May. But America might have to wait longer, and they have been affected later and Australia might be on a shutdown for a longer period as they are entering winter.

Specialists agree that there might be some respite in June to August as people cannot be left isolated at home for ever but we have to be cautious that a second wave of epidemics could hit then and people would have to go back into isolation in or around September.

At this stage, we can expect things to improve around December 2020, provided that there will not be a third wave of epidemics during the northern hemisphere winter, in which case it could be only in April 2021. Then a ‘coronavirus’ baby boom from so many couples isolated in their home since March might occur and stores might be allowed to open for Christmas shopping, and this will help prompt an economic recovery.

But the post-coronavirus world economy will be different in many ways

However, the world economy will not resume as where it was before the coronavirus crisis. This crisis will have long-lasting and probably permanent effect – hopefully for the good – to the global economy:

1. Airline travel will never resume to the levels it had in the 2010s. Many airlines will go bankrupt as most countries have come into shutdown in March 2020 and most airlines routes had to be stopped. The surviving airlines – mostly national airlines – will have to be supported by governments and will only resume parts of their flight routes gradually. Businesspeople will probably travel much less than they used to as they will get used to meeting online through platforms such as Zoho Meeting, GoToMeeting, Skype or Zoom. Tourists will probably start flying again but it will take time before they fly at the levels they did in the 2010s and also they will probably prefer to travel closer to their homes from now on.

2. Working from home will be much more common. Many businesses will realise they don’t need most of their staff in their office and that will actually save them some money as well as employees will gain in quality of life and time with less commuting.

3. As a result, demand for office buildings will go down as well as probably residential home prices will be affected by the loss of revenues and rising employment. We should therefore see sharp declines on both business and residential real estate markets.

4. People will reassess their consumptions in light of their isolation and the crisis. There will be less demand for social status consumption like cars, travel, outdoor dining, yachts, arts and more for sustainable products like organic food and authentic and long-lasting furniture and objects. Besides, online services like Netflix, Kindle, Apple, Amazon, Google will get a boost during the isolation and will probably keep more subscribers.

5. Many productions will be relocated closer to home, especially strategic ones like medications and hopefully businesses and governments will be cautious at not depending on global supply chains reliant on one single country like China, and as a result, global trade will be reduced.

6. Demand for oil and other fossil fuels will remain subdued with less travel, less commuting, less global trade, and locally produced renewable energy will get a boost.

7. International organisations such as the UN, WHO, IMF, World Bank, OECD should get a greater say in the world economy and politics as governments have demonstrated their blindness, unpreparedness and submission to short-term and particular private interests. They should not advocate austerity measures but rather organise a global restructuring and rescheduling of sovereign debts including remissions to not repeat the mistakes made after the GFC that left hospitals, health and social services unprepared for a sanitary crisis of that magnitude.

8. If sovereign debts are not substantially reduced, inflation will probably come back to adjust debt levels in real term and the goods markets to lower supplies.

However Asian countries like China, South Korea, Japan and Taiwan will paradoxically emerge stronger on the world economy stage as they have been able to manage the crisis logistics better than Western countries, being more prepared, testing as much people as they could and having better isolation procedures as from the beginning of the outbreak.

2020 will stay as a turning point for the global economy. It will mark an end to globalisation and a return to mainly local productions. It is a warning from nature to change in a radical way our unsustainable production modes and ways of life . If they are not changed deeply and if we continue to consume every year more than what the Earth can produce and sustain, we are doomed to experience a much more severe and probably fatal environmental crisis in the years to come.