Future not all doom and gloom
Despite the pessimistic prospects for the world economy in the short term, the long-term outlook is more optimistic
No one could foresee at the beginning of 2020 that around the world shopping malls and restaurants would be closed, schools would be shuttered and people would work from home. However, the new norm of social distancing will not go away unless the pandemic is controlled. Given that the total number of confirmed cases of infection has exceeded 4 million, it is unlikely that the curve of the novel coronavirus outbreak will flatten soon. Countries reopening their economies too soon will not yield a strong economic recovery but instead fuel the pandemic.
Although the world can successfully control the pandemic in the next few months, the chance of V-shaped economic recovery is slim. Global economic growth was weak before the pandemic hit due to the low technological progress after the financial crisis of 2008. The average annual real GDP growth rate for the United States between 2009 and 2019 was only 2.16 percent, far below the average annual growth rate of 3.82 percent between 1994 and 2006. Meanwhile, the average annual total factor productivity (TFP) growth rate in the US during 2009-19 was only 44 percent of that during the previous economic boom cycle. The slowdown in TFP growth reflects that it is getting harder and harder to achieve new technological breakthroughs.
The pandemic is not only a supply side shock that has abruptly disrupted the global supply chains, but also a severe demand shock that has depressed consumption. Uncertainty has also surged sharply.
The International Monetary Fund estimates that world economic growth will plummet to-3 percent in 2020 from 2.9 percent in 2019, a much sharper projected decline than the financial crisis of 2008. Since the outbreak of the novel coronavirus in the middle of March in the US, the number of US citizens filling for unemployment benefits has soared to 33.5 million, equivalent to 22 percent of the working age population, a level only observed during the Great Recession of the 1930s.
However, although it has the highest number of confirmed cases, the US is not the most vulnerable place. It is the poor and populated countries in Africa, South America and South Asia that do not have sufficient medical facilities to cope with the novel coronavirus nor provide a stimulus package to support their economies and guarantee people's livelihoods that are the most vulnerable. Moreover, these economies also face massive capital outflows back to the US, Europe and Japan. The capital outflow has trigged large devaluation of the currencies of countries such as Argentina, Russia, Turkey and Thailand, which in turn may trigger debt and economic crisis in those economies in near future.
Any great global crisis usually has long-lasting effects. The two oil crises in the 1970s led to a decade of stagflation and the collapse of the Bretton Woods international currency system, and the financial crisis of 2008 was followed by a decade of sluggish recovery of the world economy. It takes time to recover from a crisis because many companies go bankrupt and those that survive need time to restore their deteriorated balance sheets and to rebuild their production networks. The uncertainty of the economic outlook also prevents companies and consumers from investment and consumption. Moreover, the job market after a crisis is particularly gloomy and discourages people from searching for jobs, thus the unemployment rate is persistently high, which further depresses consumption and investment.
The room for government stimulus policies to boost the post-crisis economy will be very limited, as many countries have adopted historical large-scale fiscal and monetary policies to battle the pandemic. The G20 has announced trillions of dollars and major central banks have significantly cut their interest rates in the past two months. The US Federal Reserve has not only cut its policy rate to zero, but also adopted unlimited quantitative easing measures to inject liquidity into the global financial markets. Thus, the post-crisis global economy needs to deal with the issues of high government debt and zero interest rates, and there is therefore less room to boost recovery.
The challenge of the pandemic calls for global cooperation. However, this solution is not as obvious as it looks. The US government is blaming China and the World Health Organization for its own failure to respond effectively to the novel coronavirus outbreak, casting another shadow over world economy with the additional uncertainty of US-China relationship. However, despite the pre-existing conflicts, global leaders need to work together to battle the coronavirus and boost the global economy.
Despite the pessimistic outlook for the world economy in the near future, the long-term economic outlook is more optimistic. A crisis destroys somethings but also brings changes and innovations. The stagflation in the 1970s resulted in structural reforms during the Reagan administration, which nurtured the IT industry and led to stronger GDP growth in the enduring decades.
The pandemic is also likely to generate another wave of new technologies, business models and economic policies. For example, it is accelerating the adoption of robots in factories and contactless business and administration models including online shopping and online government services. It is also prompting people to conduct online meetings rather than the traditional and costly face-to-face meetings. The massive online education experiment also creates the opportunity that everyone can receive high-quality education, which breaks the bottleneck of the traditional education system and narrows the inequality of education quality. Lastly, the crisis is also pushing everyone and every government to invest more in people's health, which will power the world economy for many decades to come.
