For the global economy, a sinister slog tempered by new hopes

Almost a year after the start of a pandemic that ravaged the global economy as not long since the Great Depression, the only clear path to improving fortunes is to contain the virus itself.

As the United States suffers its most endemic transmission to date and major countries in Europe are once again stranded, the outlook remains grim for a meaningful global recovery before the middle of next year, and much more long in some economies. Substantial employment growth may still take longer.

Significant hope has emerged this month in the form of three candidate vaccines, allaying fears that humanity may be subjected to years of intermittent and wealth-destroying lockdowns. But significant hurdles remain before vaccines restore any semblance of normality. Further testing needs to be done and extensive supplies need to be manufactured. The world must navigate the intricacies of distributing a life-saving drug amid a surge of nationalism.

The very concept of normality now seems to be called into question. Even after the coronavirus is tamed into something familiar and manageable like the flu, will people used to staying away from others return to restaurants, malls and places of entertainment in the same number? With videoconferencing established as a replacement for business travel, will companies pay as much as before to put it on planes and in hotels?

Calculating the prospects for a strong economic recovery involves grappling with questions of a human nature. The Depression imbued a generation with a tendency to economize and an aversion to risk. If the frugality continues this time around, it would have profound and lasting economic consequences: consumer spending typically accounts for two-thirds of economic activity in countries like the United States and Great Britain.

“If you’re a business, you might be a little more reluctant to hire staff,” said Ben May, global economist at Oxford Economics in London. “You could be content with overtime for a while. Households could behave more cautiously. If this is the case, you run the risk of economic scarring later. “

Long-term damage in addition to recent economic devastation would add to the inequality that has been a central feature of recent decades, as people better educated, more skilled, and with access to the stock and real estate markets have reaped the gains of the world. ‘expansion, while others struggled.

The pandemic has made the world even better. He has focused his deadly force on blue collar workers, for whom human interaction is a necessity, hitting people who work in warehouses, slaughterhouses and frontline medical facilities. Professionals able to work from home preserved their security as well as their income.

The industries facing the greatest recovery challenges – airlines, hotels, restaurants and retail – are the main employers of low-skilled workers, and especially women.

At a time when companies are under pressure to diversify their workforce, the likelihood that many people will continue to work from home threatens to hamper the entry and advancement of women and minorities. Stepping into established ranks and changing the culture isn’t a process best done on Zoom.

This could limit economic dynamism. “Growing inequalities are terrible for economies because consumption is reduced,” said Ian Goldin, professor of globalization and development at the University of Oxford and author of “Terra Incognita: 100 cards to survive the next 100 years ”. “A smaller part of your economy is able to buy your goods and services.”

What has been most directly contested is the popular notion that the global economy may simply endure a deep freeze to contain the pandemic and then rebound, almost as if nothing had happened. The idea was that public largesse could support workers and keep businesses alive during the short, brutal recession needed to quell the virus, before commercial life resumes.

This kind of thinking was the basis for forecasting a so-called V-shaped recovery: the astonishing collapse of major economies in the first half of the year was supposed to be followed by an equally astonishing recovery.

But the global economy doesn’t come with an on-off switch. After a marked improvement at the end of the summer, the surge in virus cases destroyed the promising scenario. The tensions of the disaster – from failed businesses and high unemployment to disrupted education – seem likely to last, potentially for years.

When the new coronavirus first gained attention in China earlier this year, it raised serious concerns about a global shock. China was the world’s second-largest economy and a voracious buyer of goods and services, ranging from raw materials like soybeans and iron ore to Apple’s latest gadgets. Its factories produced electronics and clothing, chemicals and construction materials, auto parts and household appliances. The disruptions in China will certainly reverberate outward.

The threat intensified as the virus spread across Europe, ending commercial life in Italy’s industrial heartland, then spreading to factories across the continent. As the pandemic assaulted Europe, then North and South America, governments have ordered businesses shut down to stop the virus. The economic collapse turned out to be more intense than the global financial crisis a dozen years earlier.

World leaders took inspiration from this episode’s manual, freeing up billions of dollars in credit through central banks and direct government spending. European countries have effectively nationalized wages to avoid layoffs. The United States offered increased unemployment benefits. All of this allayed fears of a cascading series of bankruptcies and a potential financial crisis.

After initially covering the epidemic, China has mobilized aggressively to contain it. Its factories have come back to life and its 1.4 billion people have resumed spending, making China a rare engine of growth in the global economy.

In Europe, the apparent containment of the virus during the summer months along with the lifting of government restrictions has prompted people to get out of their bunkers, take vacations, eat out and raise optimism for a recovery.

Between July and September, most major economies experienced dramatic expansion. The United States grew by more than 7% from the previous quarter and Germany by more than 8%. The United Kingdom grew by almost 16 percent and France by 18 percent. Such performances were adopted by some as proof that economies would recover as soon as the virus was gone.

The conditions seemed ripe for solid spending. Unlike in the aftermath of the global financial crisis, when households were grappling with crushing debts – especially in the United States – many households in major economies are now strapped for cash, given the tax-imposed savings regime. lockouts.

“You have a lot of money pushed back,” said Kjersti Haugland, chief economist at DNB Markets, an investment bank in Oslo. “It’s definitely a rebound scenario.”

Yet the exuberance of summer also seems to have made the population vulnerable. Crowded French cafes and the British have returned to pubs. Americans despised masks as a supposed affront to civil liberties. The virus has started to spread, triggering a new round of lockdowns that have dashed hopes for recovery this year.

Most economists assume that Europe will experience a contraction in the last quarter of the year. The UK economy is expected to shrink by more than 11% this year, according to Oxford Economics, and will struggle to fully recover before 2022. Among the major worst-performing economies is India: its economy has contracted by 7%. 5% in three months. ended in September compared to a year earlier, according to government figures on Friday.

The global economy will contract by 4.4% this year, according to the forecasts of the International Monetary Fund in its latest assessment. Global trade is on track to decline 9% this year, according to an assessment by the United Nations Conference on Trade and Development.

Next year, the global economy is expected to grow by 5.2%, according to the IMF, but that would still leave it only 0.6% more than in 2019. Unemployment will remain high. Poor countries would continue to suffer from a drop in the income sent home by migrant workers. Malnutrition would increase.

In the United States, the defeat of President Trump by Joseph R. Biden Jr. sparked optimism that a sustained and serious attack on the pandemic would now be carried out. But the prospect of the incoming administration being constrained by Republican Senate control – pending two ballots in Georgia – reduces the likelihood that the government will agree on a solid spending package to stimulate the economy.

The questions for next year are about how quickly the vaccines will reach the bloodstream of the masses. The three contenders so far, from Pfizer, Moderna and AstraZeneca, have produced a credible vision of the end of agony. But the economic pain has become so intense that its effects may linger.

Infusions of relief from central banks have supported strong and fragile companies. Many of the weak will eventually succumb, especially as aid is withdrawn, which will cost jobs. The pandemic has accelerated the fight against globalization which could prompt multinational companies to manufacture more products in their home market, while reducing costs through automation – limiting job and wage growth.

Poor and developing countries have entered the pandemic in the face of alarming debt levels. The aid promised by international institutions like the International Monetary Fund and the World Bank has proved disappointing. Private creditors have refused debt relief.

Some argue that the pandemic should be the driver for new business models that create jobs through a transition to green energy while distributing the gains more equitably.

“What I’m allergic to right now is the notion of backtracking, of bouncing back,” said Goldin, the Oxford economist. “It’s the status quo that got us where we are.”

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