The Great Depression of the 1930s left its mark on every society and changed the way we think about life. The Great Recession, which started in 2008 with the collapse of Lehman Brothers, one of the most famous investment firms on Wall Street with a 158-year old history, marked another milestone that brought about phenomenal changes in the global landscape, particularly the US economy. Now, there is increasing fear that the upheaval triggered by the coronavirus pandemic may be leading to another massive round of readjustments as country after country cope with the economic slowdown, job losses, and financial meltdown that can only be characterised as an "economic pandemic". The question on everyone's mind is, how much worse can it get before we see a turnaround and how fast or how slow will it be?
In an earlier op-ed in The Daily Star on March 18, I wrote that many financial economists and investment bankers are afraid that the recovery of business, trade, and market orders from the coronavirus epidemic is more likely to be U-shaped than V-shaped, implying that the economy will move forward at a glacial pace. Seasoned market-savvy commentators such as Deutsche Bank Global Head of Economic Research, Peter Hooper, declared, "No V in other words. The coronavirus epidemic will weaken the US economy, and that weakness will last an uncomfortably long time."
Let it be known, though, that the idea of a U-shaped recovery is but a speculative one or a worst case scenario, since every country is fighting the economic and global fallout with full vigour. The US central bank, the Federal Reserve, rolled out its third emergency credit programme in two days, aimed at keeping the USD 3.8 trillion money market mutual fund industry functioning. The Bank of England cut interest rates to 0.1 percent, its second emergency rate cut in just over a week. The European Central Bank (ECB) launched a host of highly calibrated financial measures to head off a recession, including new bond purchases worth 750 billion Euro (USD 1.17 trillion). Saudi Arabia, Canada, South Korea, South Africa and Australia, among other nations, have also slashed their interest rates to new lows in recent weeks.
Governments of G20 countries have already announced, or are planning to do so soon, several trillion dollars worth of stimulus that are set to boost consumer spending, support failing industries, and increase investment to stave off a deep global recession. China acted swiftly to unleash trillions of yuan of fiscal stimulus and South Korea pledged 50 trillion won (USD 39 billion).
Evidently, the Covid-19 induced downturn has affected every sector of the economy, both in developed as well as in the developing countries. At this stage, it is premature to measure the GDP decline or the rise in unemployment since we are still in the downhill trajectory. The stock market is taking the first hit and share prices have gone down 30 percent in the USA, and major benchmarks in Asia and Europe are falling. Millions are out of work at this moment and billions of people are under lockdown.
How fast the economy can recover from this dystopian scenario will depend on five factors. First of all, the spread and ferocity of the virus have to be halted. As we have seen over the last three months from the experiences in China, Italy, Iran and Spain, everything is not within our control. Fortunately, China was able to finally push down the death rate and new cases with some incredible efforts from its state–run healthcare system and state-controlled administrative system. However, China's social model may not be applicable and relevant for the rest of the world. Italy, with a much smaller population and land mass, faltered because democracy, however imperfect, has its own sets of norms and practices.
Secondly, the role and reach of the government, at the central and local government levels, are very fundamental in this crisis, which is unique. There are no pre-existing scripts to follow and you improvise as you go. The governments of China, US and Italy were caught unprepared, or "with their pants down". Initially, they each tried to suppress evidence, provide false hopes and continued in a state of denial. All governments have by now learnt their lessons and must find a balance between its responsibilities and propaganda.
Thirdly, to halt the spread of the virus, the government and people must agree on drastic steps that do not violate civil liberties. The "containment strategy" as recommended by the World Health Organization might involve forcible imprisonment of healthy people in their homes, and this was practiced in China. Fortunately, Singapore, South Korea and Taiwan brought the transmission of Covid-19 under control without such draconian measures. Therefore, the larger society must play a role in finding the right mix of containment and mitigation policies.
Fourthly, the government has to play a critical role in jumpstarting the economy or priming the pump. As people go back to their jobs, businesses and the self-employed need working capital as well as a well-functioning supply chain. During the downturn, many lost their capital, a big chunk of their retirement funds, and other forms of savings. According to World Bank estimates, the annual global cost of moderately severe to severe pandemics is roughly USD 570 billion, or 0.7 percent of global income. The current Covid-19 pandemic is by all accounts an outlier, which means the economic cost in terms of lost income may well exceed 2 percent of world GDP.
Finally, the current economic crisis demands global collaboration. In the aftermath of the Great Depression, many countries adopted measures that harmed global trade, and followed a "beggar thy neighbour" policy. With the current Covid-19 pandemic potentially triggering a global economic slowdown, leaders are already looking for ways to shore up their countries' economies. UN chief Antonio Guterres, however, warned that a global recession, "perhaps of record dimensions", was a near certainty, and that "this is a moment that demands coordinated, decisive, and innovative policy action from the world's leading economies."
Ultimately, the approaches each country take to stimulate economic growth will have long-lasting effects, so they need to be chosen carefully. The key elements are preparedness, agility in response, and an all-out effort for recovery. As ECB President Christine Lagarde said, "Extraordinary times require extraordinary actions".
Dr Abdullah Shibli is an economist and works in information technology. He is Senior Research Fellow at International Sustainable Development Institute (ISDI), a think-tank in Boston, USA.