Chairs sit stacked inside a closed cafe in Paris, France. Photo: Bloomberg
The pandemic is posing many challenges to governments, with millions affected and more than 160,000 dead. The world economy cannot significantly recover unless and until testing is widely available – so businesses can rehire those with immunity – and an effective vaccine is widely available, though this is probably a year off at least.
In the short term, with locked-down businesses and social distancing, economies are suffering major downturns. The impact will be severe, possibly into the medium term. Isolation measures are causing an enormous reduction in domestic demand in many countries, and a huge dip in savings.
Consumption of everything but the bare essentials will slow for at least several years. Many will have to borrow the maximum on their credit cards just to pay for food, clothing and shelter.
Once economies begin to recover, governments are expected to encourage domestic consumption. Manufacturing has fallen in many countries, with factories closed and workers furloughed. No economy is immune.
US macroeconomic data is showing negative growth. Italy, Spain, and even Germany and France are sinking into recession. Optimistically, Germany’s economy is expected to shrink by 1.9 per cent in the first quarter, and 4.2 per cent for the full year.
Almost all regions will suffer double-digit declines in exports and imports this year; the World Trade Organisation predicts a best-case reduction in world trade of 13 per cent, and a worst case of 32 per cent.
China’s first-quarter GDP shrinks for the first time since 1976 as coronavirus cripples economy Africa, the Middle East and Commonwealth of Independent States could see exports decline this year and beyond. Demand for petroleum products is expected to fall precipitously because of the worldwide recession caused by Covid-19 and the Russian-Saudi Arabian tension over production.
Fortunately, there are now better safety nets in the US and European Union, and the world banking system, in most cases, is in far better shape. Still, Covid-19 has caused mass shutdowns of businesses and manufacturers throughout the US and Europe.
Landslide victory for South Korean ruling party in world’s national election during the pandemic Faced with the coronavirus public-health emergency, some governments, such as in Singapore, Taiwan, and South Korea, have responded promptly and effectively. Others are beginning to provide substantial funds to counter and control the spread of the disease, with financial and economic measures designed to stabilise their economies and employment.
These include tax reductions, subsidies for certain sectors, lower interest rates, and shoring up investment in infrastructure. In the short term, these measures can help absorb the shock and may stabilise the economy. But even with trillions of dollars being poured into the US economy, it is difficult to offset a situation where most factories, shops and restaurants are closed, 15 million or more are out of work and many businesses are likely to fail if the shutdown lasts beyond the end of the month.
Tourism is dead, along with air transport and car traffic. There is no evidence in Europe or the US that financial stimulus is overheating the economy. Rather, it may well be insufficient, and US Congress is debating a second stimulus of around US$500 billion.
In the long term, virtually all economies will be affected, with the path to recovery long and complicated. Spending habits could switch towards saving, threatening domestic consumption in the medium, and perhaps long, term.
Major purchases such as cars and expensive travel may take several years to fully recover, as will a return to 2019 output levels. Businesses will find essential loans hard to obtain, particularly in developing countries, and many will go bankrupt.
Tracking the massive impact of the Covid-19 pandemic on the world’s airline industry in early 2020Longer term, many countries, particularly the US, will diversify their supply lines to diminish dependence on a handful of countries, whether for pharmaceuticals, services or petroleum. Governments may well force enterprises to do so too. Policies may be adapted to reform health care systems and educational sectors, or not.
Many countries will accelerate the adoption of industrial and import substitution policies despite possibly prolonging the worldwide reduction in trade, keeping poor countries in recession for longer.
Industrial policies could include localisation targets, such as setting advisory or mandatory domestic and international market shares to be held by local technology and production, or state funding for industry development – subsidies, tax breaks, government procurement favouring domestic suppliers, and governmental direction of foreign investment and technological imports.
Trump halts US funding to World Health Organisation at height of coronavirus pandemic
In the longer term, such government interference does not bode well for the world trading system. It will favour large, rich countries able to extensively subsidise their industries, such as China, the US and even the EU, and where enterprises can obtain the funds to accelerate the replacement of human workers with robots.
Additional trade conflicts between countries seem likely, particularly among the US, China and India, and within regional groupings such as the EU and the United States Mexico Canada Agreement signatories.
A period of “economic Darwinism” may well follow. Of course, the accuracy of these depressing estimates are anyone’s guess, but it is virtually certain that most world economies will never be the same.
David A. Gantz is Samuel M. Fegtly Professor Emeritus, University of Arizona College of Law and Will Clayton Fellow for Trade and International Economics at the Centre for the United States and Mexico/Baker Institute. Bashar H. Malkawi is director of knowledge at H.H. Dubai's Ruler Court, Government of Dubai Legal Affairs Department, and was previously dean of the College of Law at University of Sharjah, UAE
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