A new approach

The coronavirus pandemic has resulted in a near total shutdown of social and economic activity in all parts of the world. As countries move to reopen the economy, governments must develop a resilient and adaptive strategy and make adjustments as new information emerges.

BY VARIOUS MEASURES, 2020 is turning out to be the worst year that humanity has faced in many decades. The world is in the midst of a pandemic that has already claimed over 500,000 lives, sickened millions of people, left millions more unemployed, and is certain to afflict millions more before it ends. The magnitude and speed of collapse in activity that followed is unlike anything experienced in our lifetimes.

The world has been put in a great lockdown, and while some countries continue to implement necessary quarantines and social distancing measures to contain the COVID-19 pandemic, others are attempting to get people back to work safely despite continued concerns. Over 75% of countries are now reopening while at the same time the pandemic is intensifying in many emerging markets and developing economies. Notably, in the absence of a vaccine, the strength of the recovery is highly uncertain and its effect on sectors and countries uneven.

As restrictions begin to ease, it is important to keep in mind that not only will the path to economic recovery look different from country to country, it remains highly uncertain and vulnerable to a second wave of infections. Rest assured, restarting the economy without sparking a new wave of infections will require luck and more importantly, a concerted and coordinated effort by all stakeholders in the public, private, and non-profit sectors.

In short, the complexity of restarting economies across the world will entail more than just opening businesses, using hand sanitizers, and limiting the number of customers. Strengthening healthcare systems and supporting people and businesses to help adapt to a postCOVID world will be extremely crucial. After all, the coronavirus crisis is like no other, and a lot is still not known about its medium-term and long-term impacts on people’s lives and livelihoods. Moreover, our collective future depends on the epidemiology of the virus and the development of vaccines, all of which are currently hard to predict.

There is no doubt that the pandemic is driving a macroeconomic crisis around the world. In the US and elsewhere, heavy job losses are driving unemployment figures to levels not seen since the Great Depression. Already, lockdowns have led to the largest rises in unemployment since the 1930s. Notably, while it took several months for unemployment to reach its peak in other crises, the economic shock materialized within weeks. The weekly number of jobs lost in the US alone continues to exceed any pre-COVID-19 records. The situation is quite similar in other developed economies and far worse in emerging and developing economies.

Leaders in the developing world have made it abundantly clear that they cannot sustain lockdowns without risking economic catastrophe, especially for their poorest citizens. As a result, the go-to strategy has shifted from commanding people to stay indoors at all costs to openly accepting some illness and death to try to limit the damage to livelihoods and the economy.

And with little prospect of a vaccine becoming widely available in 2020, more and more countries are looking at two scenarios: one in which the virus is brought under control and one in which a second global outbreak hits before the end of 2020.

According to the OECD, if a second outbreak triggers a return to lockdowns, world economic output is forecast to plummet 7.6% in 2020, adding that at its peak, unemployment in the OECD economies would be more than double the rate prior to the outbreaks, with little recovery in jobs in 2021. On the other hand, if a second wave is avoided, global economic activity is expected to fall by 6% in 2020 and OECD unemployment to rise to 9.2% from 5.4% in 2019.

While Europe’s GDP is expected to drop by 11.5% in 2020 if a second wave breaks out and by a little over 9% if a second wave is avoided, GDP in the US will take a hit of 8.5% and 7.3% respectively, and Japan 7.3% and 6%. Meanwhile, emerging economies such as Brazil, Russia, and South Africa face particular challenges due to highly strained health systems, adding to the difficulties caused by a collapse in commodity prices. According to the OECD, their economies will plummet by 9.1%, 10%, and 8.2% respectively in case of a double-wave scenario, and 7.4%, 8% and 7.5% in case of no second outbreak. China’s and India’s GDPs will be relatively less affected, with a decrease of 3.7% and 7.3% respectively in case of a second outbreak and 2.6% and 3.7% if a second wave is avoided.

In both scenarios, there will be an initial, rapid resumption of activity, but the real recovery will take its due time because it will take a long time to bring output back to pre-pandemic levels. Moreover, the crisis will leave long-lasting wounds in the shape of a decline in living standards, high unemployment rates, and weak investment. In particular, job losses in the most-affected sectors, such as leisure, tourism, hospitality, will hit low-skilled, young, and informal workers.

Overall, the COVID-19 crisis has hit all sectors of the economy. And while many firms are generating zero revenues while the lockdown is in place, they still have to pay salaries, rents, and interest. As financial pressure on businesses increases by the day, a large number of previously healthy firms may find themselves unable to reopen once the crisis is over.

To prevent this possibility, officials in advanced economies are rolling out the biggest fiscal and monetary policy packages than most economists have ever imagined. In the US, President Trump announced a USD2-trillion relief package, providing USD1,200 to qualifying Americans to cover costs incurred by the pandemic and subsequent economic slowdown. This is on top of trillions of dollars already promised through other lending and stimulus efforts.

Similarly, the Australian government has made a commitment to provide wage subsidies of AUD1,500 every two weeks. As for Canada, the government has guaranteed CAD2,000 every four weeks for up to 16 weeks for all workers affected by the pandemic.

Germany and other European countries were also swift to pass their stimulus programs, including a promise from the European Central Bank (ECB) to spend EUR1 trillion on Eurozone bonds. In June 2020, Chancellor Angela Merkel announce a EUR130 billion stimulus package to help kick-start the economy, extending aid to sectors that have been hit badly by the pandemic. Similar strategies have been followed elsewhere, in both advanced and emerging economies.

These programs are injecting much-needed liquidity; however, they are not resolving the issue of insolvency. The gap between low revenues and mounting costs must be addressed. Moreover, fiscal efforts to contain the crisis are pushing deficits to levels that were last seen during World War II, which is spurring fears that the crisis is spiraling into either a depression or a debt crisis.

While the intensity of the crisis isn’t in question, it is a long way from a macroeconomic shock. The massive infusions of cash from central banks around the world will definitely help in the short term, but new approaches will be required sooner than later in order to tackle a health crisis, a financial crisis, and a collapse in commodity prices all at once.