Coronavirus lockdown poses unique threat to global growth
• World has tackled other crises by stimulating activity, but what when economies are frozen?
Before trying to figure out the potential consequences of the coronavirus pandemic on our economy and markets, there are two fundamental questions that need to be answered: what are we really facing, and how is it likely to end?
The quick answer to both questions — the only answer we can be sure of right now — is that no-one can possibly know. Not yet, anyway.
But, while fully acknowledging that “the economic crystal ball has never seemed murkier”, Kate Andrews does as good a job as any in looking at potential answers in this week’s issue of The Spectator magazine.
Here is a precis compiled from a few extracts:
“We have seen crashes before, recessions and depressions, but nothing such as this. None of the old rules makes sense. If this were a normal recession the remedy would be simple: encourage people to go out, spend money and boost the economy. But today’s public health concerns require the government to repress the economy, while trying to keep it afloat at the same time.
“The new reality has destroyed our already limited ability to make economic forecasts. Now we’re all flying blind.
“All economic indications suggest we’re midway through the sharpest economic contraction in history. Things will get worse before they get better. And while economists hope for a V-shaped recovery, no-one knows when ‘normal’ will be possible again. The drive, innovation and resourcefulness people are showing during this crisis must continue well into our recovery. But it will also take luck. If we’re lucky, this might not last for as long as is feared; a sudden medical breakthrough might limit the lockdown to weeks rather than months; the economy could come roaring back. Just as this disaster seemed to spring from nowhere, so too might the cure, which would confine Covid-19 — and its topsy-turvy economics — to the history books.”
Andrews also touches on a third key question: what are the long-term effects likely to be? In her answer lies the spectre of a worst-case scenario:
“Government policies are lifeboats for private sector businesses and employees, who are suffering from a mandatory shutdown of all normal activity. But the cost is taking us over the edge of what we know, into uncharted monetary and fiscal territory. Remember how nervous everyone was about printing money? There has been no time for debate this time round.
“Is much-feared inflation now an inevitability? We’ll find out soon enough. The whole response to Covid-19 is based on a big assumption: that markets will keep on lending to the government so that it can do whatever is needed. But what if they don’t? What if the credit supply chokes up, and we’ve printed as much money as we dare? Right now, the strategy is to hope that this question never arises.” T wo more questions for our times: how important is economic growth and how vital is it that it’s not interrupted? The answer to the first question can be found from former banker and author Satyajit Das at Edge.org:
“Growth underpins every aspect of modern society,” says Das. “Economic growth has become the universal solution for all political, social and economic problems, from improving living standards, reducing poverty to solving the problems of over-indebted individuals, businesses and nations.”
F Scott Fitzgerald identified this fatal attraction in his 1929 novel The Great Gatsby:
“Gatsby believed in the green light, the orgiastic future that year by year recedes before us. It eluded us then, but that’s no matter — tomorrow we will run faster, stretch out our arms farther.”
As Das goes on to explain:
“Low or no growth is not necessarily a problem. It may have positive effects, for example on the environment or conservation of scarce resources.
“But current economic, political and social systems are predicated on endless economic expansion and related improvements in living standards.
“Growth is needed to generate higher tax revenues, helping balance increased demand for public services and the funds needed to finance these. Growth is also needed to maintain social cohesion.
“The prospect of improvements in living standards, however remote, limits pressure for wealth redistribution.”
“So long as there is growth there is hope,” expounded Henry Wallick, a former governor of the US Federal Reserve, “and that makes large income differential tolerable.”
ALL INDICATIONS SUGGEST WE ’ RE MIDWAY THROUGH THE SHARPEST CONTRACTION IN HISTORY