Global economy will take years to recover from the effects of the coronavirus pandemic– OECD

  • Mar 24, 2020 GMT
  • Team Kalkine
Global economy will take years to recover from the effects of the coronavirus pandemic– OECD

In a statement given to BBC, OECD Secretary-General Angel Gurría has stated that the fallout of the Coronavirus pandemic is already more significant than the 2008 financial crisis and the world is going to suffer from its economic fallout for a number of years to come. Stating that the current world growth estimate of 1.5 per cent, which is half of the previous estimate is already looking too optimistic. He further warned that the number of companies going bankrupt and job losses in particularly the larger countries of the world will be phenomenal and that the possibility of the world economy going into recession is highly probable.

Majority of the densely populated areas of the world going into lockdown conditions has caused massive business disruptions across the world. Restricted transportation services have meant that the movement of goods has also been halted. The necessity to stop the spread of the virus is so overwhelming that the world has come to a standstill and has reached such a point where a global recession is almost inevitable. Major world economic superpowers like China, the United States and the United Kingdom have already been subjected to tremendous financial stress. Majority of the world’s largest central banks have lowered their interest rates to historic lows, and others like ECB and other global financial institutions have resorted to bulk quantitative easing measures to deal with the current crisis.  Even the banking sector in some countries have started to allow clients to have mortgage payment holidays in fear of large bad loans piling up on banks’ balance sheets.

The economic fallout of this pandemic is expected to be very harsh for the lowest strata of society. The massive lockdown conditions will lead to massive unemployment. Especially the temporary and seasonal workers who are dependent on daily wages will be the hardest hit. People higher on in the employment chain though will be able to withstand the fallout for some time, but mounting business losses could also put them into risk eventually. This phenomenon, however, will be more restricted towards urban working-class people who are more vulnerable than their rural counterparts. Highly localized economies thus are expected to be least affected by this pandemic.

The warning bells, however, had been rung several weeks earlier when the Federal Reserve of the United States of America and the Australian Reserve Bank had simultaneously reduced their policy rates to historically low levels fearing a widespread fallout of the pandemic. A week later, The Bank of England also reduced its rates to historic low levels and backed it up with a massive loan refinance programme totalling worth £350 billion to help affected British companies reeling under stress. This was followed by the European Central Bank announcing a massive bond purchase programme which will put in nearly €750 billion in the European economic system to prop up the economic block which has now been declared as the epicentre of the epidemic. Several other large and small countries have also announced or have undertaken several measures to contain this economic fallout, but the limiting factor to all this is the timeframe within which the pandemic can be contained.

One unique problem that has come to light with the outbreak of this pandemic is that economic impact of this outbreak will be difficult to contain with the traditional monetary policy tools usually employed to deal with economic peaks and troughs. The pandemic has created massive logistical bottlenecks by restricting the movement of men and materials which can be least addressed by lowering of interest rates. In an economic cycle when production exceeds demand or demand exceeds production such tools help in bringing about a balance, whereas this time around while demand is high and producers willing to supply but are not able to due to restricted movements. In such circumstances, quantitative easing measures are more likely to increase inflation and reduce the purchasing power in the hands of people who are already finding it difficult to retain their employment. The focal point, thus in this fight thus is the containment of this virus, and fiscal and monetary policy measures have secondary importance.

The biggest risk from such extended periods of disrupted business activity is that there will be a higher risk of enterprises falling apart. The greater number of enterprises fall, the more difficult it will be to rebuild the business and consequently slower will be the economic recovery process. Massive business failures would also entail into a massive pile-up of bad assets with the banking system leading to a collapse of the entire banking system taking with it the small and marginal savings of the ordinary citizens of the country. Several large global industry groups have already sounded alarms that many of their constituents face an imminent collapse if the pandemic continues for some time and have approached governments for suitable rescue measures to protect the interest of these businesses and the millions of employees working with them.

The world’s capital markets have also been witnessing a bloodbath. Most of the prominent stock exchanges of the world have been witnessing massive sell-offs and so have other asset classes like bullion. It has become very difficult to predict which way the world economy will move in the near future, leave alone predicting the longer-term prospects. The OECD General secretary’s assertion that it will take a long time for the world economy to recover is based on the losses of business activity that has been witnessed till now and what is predicted in the near future. In the long term, several structural problems might come to light that would need to be addressed for an effective recovery to come forth.

In the meantime, all the administrative power in the world is concentrated on fighting the pandemic. Health organizations are working round the clock to stay a step ahead of the virus that is spreading like wildfire. While significant success has been achieved in treating a large number of people that had got infected in China, the number of new infections being reported to have started to overwhelm the healthcare system in many other countries. The race is again with time; we have to put the world into working order again as soon as possible and for that controlling the pandemic in the shortest possible time is of paramount importance.

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