There are three reasons to fear that the Covid-19 will hit the global economy hard. As a result, the global economy may be on the verge of a recession, the expert said. He further suggests five steps to mitigate the unpleasant consequences. And to act, in his opinion, it is necessary resolutely and immediately.
The Covid-19 epidemic is intensifying, the new coronavirus is approaching pandemic status, and it is very likely that its economic consequences will be very serious. Along with the intensification of the medical response, governments should work to mitigate the impact of the virus on economic growth, employment and quality of life.
There are three reasons to fear that the Covid-19 will hit the global economy hard. First, regional and national restrictions on the movement of people will lead to a reduction in the flow of goods and services across borders and within countries. This is already happening in China, where forecasts of economic growth in the first half of 2020 are sharply reduced. China has the second largest economy in the world, many elements of global production chains are located here, so the slowdown in China has already affected the (decreasing) forecasts of the revenues of large US and European companies.
Secondly, increased uncertainty will lead to lower spending on large purchases from households and small businesses. Already, they are reviewing their vacation and business travel expenses, as evidenced by the fact that more than 200 thousand airline tickets have been returned since the beginning of the year. Car and house purchases are likely to decline as well. And then the business will begin to postpone investments in constructions, machinery and equipment, creating a powerful, negative wave effect in the entire world economy.
Thirdly, if the sharp decline in global stock markets continues, it will hurt the real economy. The fall of markets causes a sense of fear and uncertainty, reduces the size of household wealth and, consequently, consumer spending. In addition, it leads to an increase in the cost of capital for companies, which means a reduction in the number of employees hired and lower capital expenditures. In other words, Covid-19 and the response to this virus can easily lead to global cost reductions and subsequent job cuts, potentially pushing the real economy in all countries to the brink of recession.
Governments have tools to deal with the recession. Low inflation (below the target level for most central banks) means that monetary policy can be mitigated without fear of overheating of the economy. And the ultra-low yield on government bonds allows governments in developed and many developing countries to borrow money and spend it on economic stimulus measures. In any case, government measures should be flexible and easily canceled – in case the epidemic and its economic effect turn out to be less serious than many fear.
So what exactly should governments do? First, they must take measures to stabilize commercial activity, and without delay. Reducing corporate taxes, increasing spending on infrastructure and other measures with a deferred effect seems inappropriate. But it is highly recommended that tax holidays be provided, as well as a reduction in payroll tax, sales tax and value added tax. The idea is to increase disposable income and purchasing power in a few days (rather than months) by sending more money into the hands of middle- and low-income households, who usually spend a larger share of their income. This is – and very wisely – the United States, Great Britain and many other countries did during the Great Recession of 2008-2009 (although many economists, including me,
Secondly, despite the decrease in the effectiveness of monetary policy after a decade of low and even negative interest rates, the largest central banks should announce a new reduction in rates and measures to ensure liquidity. Amid increased fears, the demand for money may rise sharply. Central banks should make it clear, and in advance, that they are ready to meet this demand in excess. As the former president of the European Central Bank, Mario Draghi, demonstrated at the peak of the crisis in the eurozone, the stated readiness to do “absolutely everything” may well become the most powerful weapon in the arsenal of monetary authorities.
Thirdly, in all countries the authorities should legislatively increase and expand the social support of the unemployed, at least temporarily. Like the reduction of regressive taxes, the increase in unemployment benefits transfers the money into the hands of those who are most likely to spend it in the very near future, which will provide the necessary compensation for the reduction of expenses by other participants in the economy.
In the United States, the federal government should provide temporary targeted subsidies to states in severe budgetary difficulties in order to prevent a deficit that could be counterproductive to cover tax increases or spending cuts. This approach also proved to be effective during the last recession, when federal transfers helped reduce state deficits by about a third.
Finally, all governments must immediately increase the cost of health care, which should be made available to those most at risk of coronavirus: the elderly, the poor, marginalized groups, both in cities and in remote, rural areas. The authorities should immediately allocate funds for the creation of units of mobile medical units that can provide assistance to those who otherwise would not be able to access the necessary medical services.
Yes, some commentators will begin to worry about the budgetary consequences of tax cuts and increased government spending. But their worries will not be justified. Low (or even falling) yields on government bonds means that most developed and large developing countries have an incredible opportunity to borrow money at low interest rates. In addition, central banks are ready to accept any amount of public debt that cannot be swallowed by financial markets. And then, all these emergency measures will be temporary and can be canceled when the crisis passes.
A budget deficit is tomorrow’s problem. And today’s challenge is to combat Covid-19 and its harmful effects on the economy. If you do not act decisively and immediately, it will be tantamount to wanting to let the patient die in order to teach him a lesson. Politicalism, defined by a sharp inter-party struggle and a zero-sum game, cannot justify governments’ attempts to evade their fundamental obligations to citizens. Moreover, if this crisis can have at least some positive result, it will be the willingness of politicians to finally put aside disagreements and begin to carry out their work.