By Rashna Mahzabin
After the hit of COVID-19, the global economy has already been under a sudden shock. To curb the spread of the coronavirus, authorities around the world implemented lockdown measures that have brought much of global economic activity to a halt; many businesses have been forced to reduce operations or shut down, and an increasing number of people are expected to lose their jobs; companies in the services industry, a major source of growth to many economies, were among the hardest hit in the coronavirus pandemic; manufacturers have also been hit, and world trade volume could once again plummet this year. Though the unprecedented situation has taken the economy in second gear the curiosity lies in how it will look like after the lockdown ends?
EFFECT OF THE PANDEMIC
Many economists have warned that lockdown measures around the world will accelerate job losses — that’s already showing up in unemployment numbers in several economies.
Service Industry in Back Gear
The service industry is a significant source of growth and employment for many nations, including the U.S. and China — two of the world’s biggest economies and shopper markets. Yet, the two nations announced sharp decreases in retail deals as lockdown measures during the pandemic constrained numerous stores to close and kept buyers at home. A flood in online deals revealed by certain retailers, such as Amazon, failing to stem the general fall. Economists cautioned that consumers may not continue buying except only the necessary products even after lockdown measures are lifted. That is evident in the “slow improvement” in retail deals in China considerably after the nation permitted a steady reviving of businesses. A more extensive hit to the service industries has been observed universally, with businesses in the transportation, real estate, and travel and the tourism industries encountering the absolute biggest decreases in movement up until this point.
Slowing Down Manufacturing Activity
Manufacturers, already burdened by the U.S.- China trade war in the last two years, have again come under immense pressure as the coronavirus spreads all over the world. The Covid-19 pandemic initially hit manufacturers outside China that depend on factories in the Asian economic giant for materials and parts — also known as “intermediate goods” — to make their own products. Yet, Chinese factories suspended activities for longer than anticipated as authorities attempted to contain the virus. As more nations force lockdown gauges, a more noteworthy number of manufacturing firms were hit. Some had to briefly close down, while those that stayed open confronted limitations in getting their flexibility of intermediate goods and materials. What’s more, a decrease in demand for products exacerbated the challenges that manufacturers face.
Bad Year for Trade
The World Trade Organization, in its latest forecast this month, said global trade volume could plummet by 12.9% or 31.9% this year — depending on the trajectory of the global economy. Under both scenarios, all regions will suffer double-digit declines in exports and imports in 2020.
The coronavirus pandemic’s hit to economic activity has led many institutions to slash their forecasts for the global economy. The International Monetary Fund, whose assessment of the economy is widely followed, expects the global economy to shrink by 3% this year. Only a handful of economies — such as China and India — are expected to grow in 2020, IMF said. While the fund has pencilled in a rebound of 5.8% growth next year, it said that recovery is “only partial as the level of economic activity is projected to remain below the level we had projected for 2021, before the virus hit.”
ECONOMIC AND FINANCIAL ORDER AFTER PANDEMIC
The COVID-19 pandemic will quicken a change that had just started: a move away from U.S.- driven globalization to more China-driven globalization. The American population has lost confidence in globalization and international trade. Free trade agreements are poisonous, with or without U.S. President Donald Trump. Conversely, China has not lost confidence. There are more profound chronicled reasons. Chinese leaders know that China’s century of humiliation from 1842 to 1949 was its very own aftereffect of lack of concern and a useless exertion by its leaders to cut it off from the world. On the other hand, in the past few decades, the economic resurgence was an aftereffect of global engagement. The Chinese have likewise encountered an explosion of cultural confidence. They believe they can compete anywhere. The United States has two choices. If its primary goal is to maintain global primacy, it will have to engage in a zero-sum geopolitical contest, politically and economically, with China. However, if the goal of the United States is to improve the well-being of the American people—whose social condition has deteriorated—it should cooperate with China. Wiser counsel would suggest that cooperation would be the better choice. However, given the toxic U.S. political environment toward China, wiser counsel may not prevail.
Dissertation of Jobs
After the pandemic, the demand and supply mechanisms in every sector will change. When such a surge of changes come, many jobs get deserted. It has been a talk of the town that many jobs will be lost and many new jobs will come or the structure and faces of jobs will change slowly and whoever can not keep up with it will lose their job. Unfortunately, the time has been speeding us after the pandemic. There will be a heavier engagement in IT in all sectors, people who are service driven will think of new ways and those who do not match the new narration or cannot adapt will have to leave, one-on-one engagements will be less. Many low-wage, low-skill, in-person service jobs, especially those provided by small firms, will not return with the eventual recovery. However, workers providing essential services such as policing, firefighting, health care, logistics, public transportation, and food will be in greater demand, creating new job opportunities and increasing the pressure to raise wages and improve benefits in these traditionally low-wage sectors. The downturn will accelerate the growth of nonstandard, precarious employment—part-time workers, gig workers, and workers with multiple employers—leading to new portable benefits systems that move with workers and broaden the definition of employer. New low-cost training programs, digitally delivered, will be required to provide the skills required in new jobs. The sudden dependence of so many on the ability to work remotely reminds us that a significant and inclusive expansion of Wi-Fi, broadband, and other infrastructure will be necessary to enable the accelerating digitalization of economic activity.
World War II, 2008 Financial crisis and now the Corona pandemic has become a trigger to a new face of the economic trigger. The most damage will be faced by competitive sectors like retail. Import and export businesses, garments, materials selling businesses trading overseas will take a huge fall. On the other hand, small or new businesses who could not get the time to come to break-even will also face huge losses which will cost businesses shutting down. The surge of new entrepreneurs and startups will see a downfall. Millions of workers, small-business owners, and their families are facing catastrophe. The longer we sustain the lockdown, the deeper the economic scars, and the slower the recovery. We are witnessing the largest combined fiscal effort since World War II, but it is already clear that the first round may not be enough. There are few illusions about the unprecedented acrobatics that central banks are performing. To deal with the accumulated liabilities, history suggests some radical alternatives, including a burst of inflation or an organized public default. If the response by businesses and households is risk-aversion and a flight to safety, it will compound the forces of stagnation. If the public response to the debts accumulated by the crisis is austerity, that will make matters worse. It makes sense to call instead for a more active, more visionary government to lead the way out of the crisis. But the question, of course, is what form that will take and which political forces will control it.
Reaching towards Central Bank
The deepened scar in the economy will make the businesses look at central banks. From the USA to Europe the central banks have acted up to take the hit by the hand. With time the dependency may grow more. The downfall is, countries like Bangladesh, may have to liquefy the reserves at a faster pace than other countries. This may cause money inflation in many developing nations and poor nations.
Let’s try to look at four scenarios laid by economists and analysts of how the virus, the lockdown measures and consequently the different economies could evolve.
It assumes that the lockdowns eventually manage to flatten the curve, although not entirely. Given socio-economic tensions and the significant economic fallout, the first European governments decide to begin relaxing the lockdown measures at the end of April. Others will follow in May-June. The return to normality is gradual, and social distancing continues for at least the entire summer.
A proportion of those who can work from home continues to do so for the foreseeable future. Meanwhile, places, where you can socialise (pubs, cinemas etc), begin to open with strict distancing rules in place. Global travel remains restrictive, but a combination of vaccine development, more widespread testing capacity and higher surge capacity within critical healthcare services, means full lockdowns can be largely avoided if the virus spreads again as we approach the northern winter.
As a result, the economic recovery will be u-shaped. Still, most countries will experience a more severe contraction of economic activity than during the financial crisis.
It starts off in much the same way, with a gradual easing of lockdown measures in May and June. However, in this scenario, the virus returns in the autumn and despite more widespread testing efforts and contact tracing, the new spread pushes most economies back into lockdown.
Crisis management is more experienced than in Spring 2020 and containment measures could be more tailor-made, keeping some regions and sectors up and running. For indicative purposes, we’re assuming it will take until April 2021 before the virus is back under control and economies, as well as societies, begin to return to normality. This is a ‘W-shaped recovery’.
GDP growth would be lower in 2020 but higher in 2021 than in our base case scenario. However, it may well take until late-2022 before most economies have returned to their pre-crisis levels.
The Western world follows in the footsteps of China by ending the lockdowns as soon as the curve of new infections has been flattened.
A quick return to normality is assumed to materialise towards the end of April. This scenario also assumes that the virus doesn’t come back again in the winter, either because a larger-than-expected proportion of people have already had the virus and built immunity, or because control measures become much more effective.
Even so, some economic losses would not be offset immediately. But government measures like guarantees, liquidity support and short-time work schemes foster a quick and strong rebound, notwithstanding some differences across countries depending on when the lockdown measures end. This is effectively a ‘v-shaped’ recovery scenario.
In this scenario, most economies would experience a mild recession of some 2-3% year-on-year but growth in 2021 would accelerate, returning most economies to their pre-crisis levels.
Assumptions are that things return to normal from 2Q21, perhaps if a vaccine is developed and able to be deployed over the winter months. The recovery here may be a little faster and stronger than in the other scenarios, as the virus is assumed to be completely under control. This is an ‘L-shaped’ recovery. Needless to say, this is an extreme scenario with lots of economic, social and political turmoil, and one that looks pretty unlikely at this stage.
In this scenario, most economies would experience an unprecedented and almost unimaginable contraction in 2Q20 of around 50% quarter-on-quarter annualised. The year 2020 would go down in the history books as the year with the most severe recession on record, seeing most economies shrinking at double-digit rates for the year as a whole.
The rebound in 2021 would be relatively muted and it would take until 2023 before most economies have returned to their pre-crisis levels.