The new global recession and other perspectives on COVID-19
CROSSROADS TOWARD PHILIPPINE ECONOMIC AND SOCIAL PROGRESS - Gerardo P. Sicat (The Philippine Star) - April 1, 2020 - 12:00am

The world economy now finds itself in recession as a major upshot of the coronavirus disease 2019 or COVID-19 pandemic. Economic activity has been badly dislocated in many countries affected by efforts to contain the transmission of the disease.

Harrowing impact of health measures to isolate virus agents on the work place. Initially, efforts to restrict infected travelers reduced the volume of immigration and travel, and caused a drop in world tourism. This, of course, dislocated the airline and travel industry.

Relatedly, jobs and industries supported by tourism in the many subsidiary activities and services sectors of the economy got badly hurt.

Further public health measures to isolate the infected as agents of virus transmission within the local community meant that gatherings and crowds would be banned.

Quarantine and lock-downs of areas and communities assured that the workplace as a whole could be disrupted in profound ways. In the entertainment and sports industries alone, big generators of jobs, workers are suddenly without income.

This sequence of events repeated has been repeated across countries, on each occasion aggravating the impact along a chain of industries.

To save the global economy from a deep recession. Declarations coming from the IMF (International Monetary Fund) and the World Bank last week help to put in perspective the recent pandemic as a big economic issue.

The IMF now declares – through its new head, Kristalina Georgieva – that the global economy is in a recession. It is a deep recession, and it compares in severity with the recession of 2008-2009. It could even be deeper.

In the same breath, the IMF foresees economic recovery in 2021. However, this recovery will depend on the success of measures that countries undertake to contain and defeat the coronavirus pandemic first.

It would also depend on the actions taken by countries and by the world community acting in concert to restore demand and help stimulate confidence and production.

Strong economic measures are needed to make governments, businesses and financial institutions ride and overcome the recession by ensuring that they remain liquid and not insolvent. Governments, businesses and financial institutions must remain capable to pursue their activities.

To prevent a wave of bankruptcies and job layoffs that would make economic recovery more difficult, the IMF supported the $5 trillion stimulus package adopted by major economies to restore confidence and spending in the economy. It further said that such measures would help avoid the erosion of confidence on the “fabric of society.”

The $2 trillion fiscal stimulus package in the United States accounted for a big chunk of this $5 trillion. All in all, this amounts to more than six percent of the world’s GDP (gross domestic product).

Major industrial countries and all other economies are filling up the economic measures with various programs of releasing fiscal and monetary programs to counter and prop up reduced economic activity.

The big economies. The dominant lynchpin of world prosperity consists of the high income economies. They provide the bulk of demand for many industrial products and services that the rest of the world produces.

Many traded goods are produced in the poorer and lower income countries and exported to the high income countries. The developing countries sell a lot of their production to the big economies. However, as they grow, they also begin to consume a large part of their own production for their own needs.

Recovery and growth in the big economies would help immensely the progress of the rest of the world. This would be transmitted through the expansion of trade among countries. Many countries in Europe and the United States (after a long period of growth) are now entering a period of economic recession.

Of course, the US-China trade war is still on. Perhaps the current recession will improve the prospects for solving the global trade war issues too.

All in all, all these large fiscal expenditures will ramp up the levels of fiscal debt to GDP to unprecedented levels.

In times of all-out war, the fiscal power of powerful economies could reach up to a level of 25 percent of GDP. The problem at the end of the war would be a long-term introduction of how to scale the fiscal debt so that it becomes less of a dangerous potential companion to inflation.

Emerging economies. Recent deterioration of economic conditions have affected emerging markets. All are hit, but some are more capable to adjust to the virus infection because they have a stronger base of economic flexibility.

The economic slowdown and contraction in the economies is not yet fully defined. Some economies would keep a low-growth status, but their balance of payments and trade positions would be much weaker. They have been hit by a drop of commodity prices and also a fall in their export demand.

They have suffered heavily from an outflow of capital. The IMF calculates that as much as $83 billion have left emerging economies during the financial downturn.

IMF estimates that as much as $2.5 trillion of new financing would be needed to infuse new growth in the emerging economies as a group. A substantial part of the infusion of money would come from reforms introduced within the emerging economies.

But the world’s financial community, including the IMF and the World Bank, will have a major role to play in providing support for the financial needs of the emerging economies.

The very poor countries. There are many poor countries that would be hurt by the global recession. Some of them are heavily burdened by huge indebtedness and poor economic fundamentals.

They need internal reforms, but they sorely need external support to enable their own reforms to take hold. In the estimate of the World Bank, some of these countries would need to be assisted not only with new money to help them grow, but also to solve their problems of high debt by debt reduction.

Otherwise they will not be able to finance their needs, even to fight the conquest of the coronavirus.

My email is: gpsicat@gmail.com. For archives of previous Crossroads essays, go to: https://www.philstar.com/authors/1336383/gerardo-p-sicat. Visit this site for more information, feedback and commentary: http://econ.upd.edu.p h/gpsicat/

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