What will be the recession caused by Covid-19?

US, WASHINGTON (ORDO NEWS) — With each new day, the global financial crisis of 2008 looks more and more like a preliminary rehearsal of the current economic catastrophe. Apparently, the rapid collapse of global GDP that has begun can already argue or even surpass any recessions that have occurred over the past 150 years.

Despite all the tremendous efforts of central banks and fiscal authorities to mitigate the blow, financial asset markets in developed countries collapsed, and capital flees from developing countries at a tremendous speed. A deep recession and financial crisis are inevitable. The key questions now are: how strong this recession will be, and how long it will last.

Until we know how quickly and convincingly the pandemic problem will be resolved, economists are unlikely to be able to predict the endgame of this crisis. The level of scientific uncertainty around the coronavirus is very high, and at least the socio-economic uncertainty about the behavior of people and authorities in the coming weeks and months is also high.

The world is faced with something similar to an alien invasion. We know that human determination and creativity will prevail. But at what cost? At the time of this writing, markets showed a cautious hope that economic recovery would be quick; perhaps it will begin in the fourth quarter of this year. Many commentators point to the situation in China as a promising harbinger of what the rest of the world expects.

But how justified are such views? Employment in China has partially recovered, but it is completely unknown when it will return any close to the level observed before the Covid-19 pandemic. And even if Chinese industry does recover completely, then who will buy all the goods it produces in a situation where the rest of the global economy is sinking? In the US, a return to a level of 70% or 80% of economic potential seems like a distant dream.

America has completely failed to contain the pandemic, although it has the most advanced healthcare system in the world, and it will therefore be very difficult for Americans to return to economic normality before a widely available vaccine appears, and this can happen in a year or even later. Today it is not even clear how the United States will be able to hold a presidential election in November 2020.

So far, the markets are clearly pleased with the large-scale American incentive programs that were absolutely necessary to protect ordinary workers and prevent a market crash. But now it’s clear that much more will have to be done.

If this were an ordinary financial panic, then large-scale measures of state stimulation of demand would be enough to solve the bulk of the problems. But the world is experiencing the most serious pandemic since the outbreak of Spanish flu in 1918-1920. If this time, 2% of the world population dies, then the death toll will reach about 150 million people.

However, the results will probably not be so extreme, given the radical quarantine and social distance measures that are being taken around the world. However, until the pandemic crisis is over, the economic situation will look extremely grim. And even after the economy is restarted, the damage done to business and debt markets will have lasting consequences, especially if we recall that the global amount of debt obligations reached a historically record level even before the current crisis erupted.

Yes, of course, governments and central banks immediately rushed to support many segments of the financial sector, and with almost Chinese thoroughness; and they have enough “firepower” to do much more if necessary. But the problem is that we are faced with a shock not only on the demand side, but also with a severe shock on the supply side.

Demand-supporting measures can help straighten the growth rate of the number of people infected by helping people stay at home, but there are limits to their ability to help the economy in conditions where, say, 20-30% of the workforce will be in self-isolation for a significant part of the next two years.

And I have not yet touched on the topic of the deep political uncertainty that the global recession could provoke. The financial crisis of 2008 resulted in deep political paralysis and an entire crop of anti-technocratic populist leaders. We can expect the Covid-19 crisis to lead to an even more extreme political failure.

The reaction of the US healthcare system to the pandemic was catastrophic, due to a combination of incompetence and negligence at many levels of government, including the highest. If the situation continues to develop as it is now, then the death toll from the virus in New York City alone may exceed the death toll in Italy.

Of course, you can imagine more optimistic scenarios. After mass testing, we could determine who is sick, who is healthy, and who has already acquired immunity, and therefore can return to work. Such knowledge would be priceless. But again, due to improper management at many levels and erroneous priorities that have been put for many years, the United States now has a catastrophic lack of capacity to conduct such testing.

Even without a vaccine, the economy could return to normal relatively quickly if effective treatment was soon found. But without mass testing and a clear understanding of what exactly will be considered the “norm” in a couple of years, it will be difficult to convince a business to start investing and hiring employees, especially when you consider that the business expects a tax increase when it all ends.

It is possible that the stock market losses are so far smaller than the losses of 2008 only because everyone remembers how quotes soared back during the subsequent economic recovery. However, if that crisis was really just a rehearsal of the current, then investors should not expect a quick rebound.

In a few months, scientists will know much more about our microscopic invader. As the virus spreads rapidly across America, American researchers will have direct access to data and to patients, and they will not have to rely solely on Chinese data from Hubei. And only when this invasion is rebuffed, we can hang a price tag on the economic cataclysm provoked by him.


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