The term ‘Coronavirus’ has very quickly become a ubiquitous addition to the vocabulary of the human race. What originated in Wuhan, China in December 2019 has, in less than six months, now resulted in a global health crisis unlike any other in the post-WWII period. With over 1.5 million cases and 100,000 deaths, governments worldwide have banned public gatherings and stopped all non-essential economic activity in an attempt to contain the spread and impact of the pandemic.
Within a couple of months, the global economy has come to a grinding halt. Businesses and households have had their operations shut down or movements restricted, resulting in an economic freefall the likes of which has not been seen in decades. According to Bloomberg, the global economy is currently contracting at an annualised rate of 0.5%, a stark contrast to the IMF’s projected 3.4% growth in global GDP for the year 2020. In the US, more than 17 million people have filed for unemployment; the UK has registered more than 1.2 million new benefits claimants; and in Japan, there is a forecast of $7 billion in losses stemming from the postponement of the 2020 Summer Olympics alone. The rest of the global economy tells a similar tale both in the magnitude and severity of the economic impact of the pandemic.
Governments in the developed world, faced with a global pandemic that necessitates restrictions on the movements of citizens, as well as an impending economic crisis, shelled out massive stimulus packages in a bid to alleviate the stress felt by businesses and consumers alike. A $2 trillion dollar package in the US, an initial £350 billion rescue package by the Conservative government in the UK, China’s proposed $400 billion rescue package, the Abe administration’s $1 trillion package— equal to 20 percent of annual GDP. The message from the world’s leading nations is clear; this economic crisis is unlike no other in recent memory— it demands action. And governments have indeed acted. However, much uncertainty surrounds the effectiveness of the global economic response and whether the economic downturn that the world has plunged into will be short-lived or, as others fear, the start of a global economic recession. Furthermore, if the economic downturn is not short-lived, could this also mean the start of a global debt crisis?
The stimulus packages proposed by many governments around the world are unprecedented to say the least. The US stimulus package passed in March and the rescue package announced by the Chancellor of the Exchequer are on a scale never seen before, but how long will these measures be viable for? With no set date as to when exactly lockdown measures around the world will be relaxed, businesses and individuals will face considerable distress trying to stay afloat.
The general consensus is that, in the absence of a viable vaccine that will be available at the start of 2021 at the earliest, herd immunity— where the less vulnerable of the population become infected with a pathogen/disease and build up immunity to it, reducing the spread of the disease— will be the main way that the pandemic will fade away. Social-distancing measures are necessary in order to reduce the potential number of patients in hospitals, preventing them from being overwhelmed and therefore avoiding a scenario where doctors and nurses will have to make difficult decisions as to who should receive medical care and who should not. The immense uncertainty regarding the length of the crisis and the need for discipline on the part of both governments and their citizens means the lockdown measures present around the world are here to stay in the short term and it will take a considerable amount of time before the world returns to ‘normal’.
In the meantime, the global economy will have to survive a contraction of demand novel in nature, seemingly all-encompassing in its extent, for an unknown length of time. With that said, the economic response from nations such as the UK, USA and Japan has been promising. Governments (in the developed world especially) around the world have begun to understand the magnitude of the effect of Coronavirus on the global economy and are now trying to keep their economies almost frozen in time until the crisis is over. By providing loans to businesses so that they do not go bankrupt and paying for employees’ wages/salaries, companies will not need to lay off their workers and as such, immediately after the crisis, millions of people still have employment and can resume some aspects of their lives and help facilitate economic recovery far much quicker than if governments let businesses fail.
However, there is a sizeable amount of uncertainty around when— and arguably, if— we will return back to a degree of ‘normal’; how long it will take before the global economy enters the recovery stage, where global demand begins to rise again and firms both big and small can generate sufficient revenues to sustain themselves. Prior to the pandemic, there were already issues with the state of the global economy- particularly regarding fears of an impending debt crisis. Global debt exceeded $250 trillion in the first quarter of 2019, with emerging economies reaching a record of $55 trillion (or 170% of their GDP) in 2018 according to the world bank. The global surge of debt is different to previous debt crises in the sense that it is more extensive than its predecessors. Low interest rates post-2009 meant government and private sector lending became more attractive as the cost of borrowing fell. The World Bank in a recent report did warn that the rising debt levels globally were unsustainable. There is no doubt that the coronavirus pandemic will only exacerbate this as revenue streams for both governments and businesses plummet.
The global economy went into this global health and economic crisis with high debt levels and relied on steady business revenues and cash flow (and the taxes resulting from the economic activity) to be able to pay off outstanding debt obligations. The world now faces a substantial drop in consumer demand and supply shocks that will affect the short term revenues of firms and their ability to honour existing debt obligations. Not every nation has the fiscal and monetary arsenal to support their economies in the same capacity as developed economies such as the US, UK or Japan. Many countries— especially emerging economies— rely heavily on exports of manufactured goods or tourism to fuel their economies. Mass unemployment is a real threat to the global economy. Tens— if not hundreds— of millions of people throughout the developing world face the very real prospect of joblessness, many of whom are at serious risk of falling into poverty. What this means is, either for a few months or even a few years, their spending power will be significantly reduced. Less spending on the part of consumers will likely result in economies globally, but in emerging markets especially, taking a considerable amount of time before they return to pre-Corona levels of consumer spending and recover from the forthcoming global recession. In a world that has thrived on global trade, if governments and private borrowers are unable to honour their existing debt obligations, this may spark an international debt crisis that will be a further obstacle to global economic recovery.
The onset and impact of the pandemic is one that could not have been accurately foreseen by governments worldwide given the circumstances surrounding the spread of the virus. Generally, they now acknowledge the extremity of the crisis that they face and are attempting to address problems faced in their countries to a satisfactory standard. But the state of the economy prior to the pandemic is of particular importance. Although one can be forgiven for questioning the effectiveness of economic packages initiated by governments worldwide, the measures are necessary. Without these measures we risk a genuine economic catastrophe that would potentially dwarf the Great Depression of the 1930s. With that said, in the aftermath of this crisis, there needs to be serious discussion on the issue of global debt and the sustainability of global economic growth more generally.
The pandemic has demonstrated, amongst other things, that in our globalised economy we are dependent on each other. Our actions and reactions are inextricably linked. In order for global economic growth to be more sustainable, the spending practices of consumers, firms, and governments must be re-evaluated in order to make the global economy more robust and enduring to the challenges that an evermore interconnected world presents in the 21st century.