Returning to normal by 2021: a dream
The world economy is in total disaster in 2020 due to the Covid19 pandemic. IMF chief, Kristalina Georgieva, said it would be the worst economic crisis in 100 years. However, her once in a 100-year crisis seems to be rather short-lived as the IMF expects a full global recovery next year.
According to its June World Economic Outlook report, the world economy is projected to contract 4.9% in 2020 but will rebound strongly with 5.4% GDP growth in 2021. Therefore, all income loss from the pandemic will be restored. The year 2020 is just a bad dream that will disappear without leaving any trace after midnight on Dec 31.
Others global organisations came up with a similar conclusion. The World Bank in its June publication shows projections of -5.2% growth for 2020 and a rebound of +4.2% in 2021, while the Organisation for Economic Co-operation and Development (OECD) in its September press release reports there would be a 4.5% economic decline in 2020 and robust growth of 5% in 2021. Even the governor of the Bank of Thailand believes that the Thai economy will reach its 2019 level of income in the last quarter of next year.
This is a rather dangerous conclusion as these organisations are signalling governments around the world to focus solely on this year’s economic stimulus policies as things will return to normal next year after the disappearance of the pandemic. Since this is not a long-term problem, structural adjustments will not be necessary.
Is this a fabricated story to give false hope in times of despair? I should not think so. These economists are world-class and they would not intentionally make false projections. The problem, however, lies in their over-optimistic assumptions used in their economic models. For 2021 economic activities to be at the same level of 2019, they would have made three assumptions.
Assumption 1. The level of employment will return to its 2019 level. Any workers who get laid off, were forced to work part-time, or got a reduced salary during the pandemic year of 2020 would have to be re-employed to full time status at full salary. This is estimated to be about 17 million workers or about 2.5% of the total workforce in OECD member countries. If one includes employed workers with reduced working hours and pay cuts, the number could easily be doubled. In practice, is it possible to re-employ 17 million plus workers within a short period of time? Ask yourself.
For Thailand, the Federation of Thai Industries reports that 3.4 million workers are out of work due to the Covid-19 situation, and there is a possibility that 7-8 million Thais could be jobless by the end of the year. All of them would have to be re-employed in 2021 for the Thai economy to regain its 2019 level of GDP. Impossible? If one, such as the governor of Bank of Thailand, wishes to see the return to 2019 levels of income, one must make it possible.
The assumption of achieving 2019 levels of employment is necessary for the economy to be able to consume like it did in 2019. Less consumption means less GDP. This is Economics 101.
However, economists at the IMF seem to have a problem with Economics 101. On the one hand, they project a 5.4% growth rebound next year but, on the other, they project that unemployment rates will remain at a high level of 7.2% which is substantially higher than the unemployment rate of 4.8% in 2019. Perhaps, the IMF should recheck the assumptions made in their economic projects.
Assumption 2. Businesses must re-open and upsize to their 2019 glory days. According to the Ministry of Labour, 4,254 businesses have closed down since October 2019. Of course, countless businesses have been downsizing by closing down unprofitable branches and unnecessary departments in 2020. All these have to be reinstituted so they can re-hire the 7 to 8 million laid-off workers mentioned above. If one says that this is not possible because many establishments have been demolished, factories shut down, and equipment sold, then this is another failed assumption and we can forget the dream of returning to normal next year.
Assumption 3. Banks must generously give out loans like in 2019. Thais do not consume from current income alone as their income barely makes ends meet. They also consume from borrowing, famously known as household debt. In 2019, banks gave out 654 billion baht in loans to consumers. To stimulate the 2021 economy to the level of 2019, banks would have to authorise a similar amount of loans. Never mind that household debt and GDP is already at 80.1% and bad loans are quickly rising.
Or the fact that 7.2 trillion baht (28.2% of total loan portfolio) worth of loans have asked for payment holidays this year, and there is no knowing how many can afford to resume loan payments. Without new loans, Thai consumers will not be able to attain 2019 consumption levels and, if that is the case, the 2021 GDP growth will be 3.88% off target.
For your information, household debt levels actually shrank by 3.6 million baht in Q1 of 2020 as banks were already concerned about Thai consumers’ ability to pay. This was before Covid hit the world in the second quarter.
High debt to GDP level, particularly household debt, is a burning problem around the globe. The World Bank has already warned that global debt is already at its highest in 50 years.
By the end of 2018, emerging economies had gathered debt close to 170% of GDP, particularly in China. This debt to GDP ratio will skyrocket during the pandemic. To hope that banks will allow debt-ridden consumers to borrow at a fast pace again in 2021 is rather unrealistic.
It should be clear by now that any assumptions of returning to 2019 levels can be made on paper to yield favourable economic projections. But the underlying environment of financial and labour markets in the real world is contrary to such assumptions.
This will make “dream” growth projections nothing more than just that: a dream. My advice for 2021: “remaining cautious”.
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Less consumption means less GDP. The IMF seem to have a problem with Economics 101.