What initially seemed localised is worldwide and economic pain will go on for longer than first thought.
In this opinion piece the writer believes global recession is imminent and there will be recovery but it will take time and only after much damage has been caused. How do you think this will impact on the South African government's planned infrastructure spend?
Prepare for the coronavirus global recession
Travel bans. Sporting events cancelled. Mass gatherings prohibited. Stock markets in freefall. Deserted shopping malls. Get ready for the Covid-19 global recession.
Up until a month ago this seemed far-fetched. It was assumed that the coronavirus outbreak would be a localised problem for China and that any spillover effects to the rest of the world could be comfortably managed by a bit of policy easing by central banks.
When it became clear that Covid-19 was not confined to China and that the economic effects would be more widespread, forecasts started to be revised down. But central banks, finance ministries and independent economists took comfort from the fact that there would be a sharp but short hit to activity followed by a rapid return to business as usual.
This line of thinking has exact parallels with the events of 2007, when it was initially assumed that the subprime mortgage crisis was a minor and manageable problem affecting only the US – and nobody needs reminding how that ended.
If history is any guide, the global economy will eventually recover from the Covid-19 pandemic, but the idea that this is going to be a V-shaped recession in the first half of 2020 followed by a recovery in the second half of the year looks absurd after the tumultuous events of the past week.
It has been clear from the start that Covid-19 affects both sides of the economy: supply and demand. The supply of goods and services is impaired because factories and offices are shut and output falls as a result. But demand also falls because consumers stay at home and stop spending, and businesses mothball investment.
Conventional policy measures – such as cutting the cost of borrowing or reducing taxes – tend to work better when there is a demand shock. There is a limit to what they can do in the event of a combined supply and demand shock.
One reason for that is because the economic disruption caused by Covid-19 is enormous. Entire countries – Italy and Spain – are in lockdown. The problems facing airline companies are symptomatic of a crisis facing the global travel industry, from cruise companies to hotels that cater for tourists. Discretionary spending by consumers appears to have collapsed in recent days.
Despite globalisation, much economic activity remains local but here, too, there will be an impact as people cancel appointments at the dentist, put off having their hair cut and wait to put their house on the market.
It also seems likely that the economic pain will go on for longer than originally estimated. Having imposed bans and restrictions, governments and private-sector bodies will be cautious about removing them. Countries such as Italy will be wary of opening their borders while there is a fear of reinfection.
There is also a question of how long it will take consumer and business confidence to recover. Policy action by central banks and finance ministries can help in this respect but only so much. The chances are that the imminent recession will be U-shaped: a steep decline followed by a period of bumping along the bottom. There will be recovery but it will take time and only after much damage has been caused.
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