With each passing day, the 2008 global financial crisis increasingly looks like a mere dry run for today’s economic catastrophe. The short-term collapse in global output already seems likely to rival or exceed that of any recession in the past 150 years.
Even with all-out efforts by central banks and fiscal authorities to soften the blow, asset markets in advanced economies have cratered, and capital has been pouring out of emerging markets at a breathtaking pace. A deep economic slump and financial crisis are unavoidable.
The key questions are how bad the recession would be and how long it would last.
Illustration: Mountain People
Until it is known know how quickly and thoroughly the public-health challenge would be met, it is virtually impossible for economists to predict the endgame of this crisis. At least as great as the scientific uncertainty about COVID-19 is the socioeconomic uncertainty about how people and policymakers would behave in the coming weeks and months.
After all, the world is experiencing something akin to an alien invasion. Human determination and creativity will prevail, but at what cost?
As of this writing, markets seem to be cautiously hopeful that a recovery is to be fast, perhaps starting in the fourth quarter of this year. Many commentators point to China’s experience as an encouraging harbinger of what awaits the rest of the world.
However, is that perspective really justified? Employment in China has rebounded somewhat, but it is far from clear when it would return to anything close to pre-coronavirus levels.
Even if Chinese manufacturing rebounds fully, who is going to buy those goods when the rest of the global economy is sinking?
As for the US, returning to 70 percent or 80 percent of capacity seems like a distant dream.
Now that the US has failed miserably to contain the outbreak, despite having the world’s most advanced health system, Americans would find it exceedingly difficult to return to economic normalcy until a vaccine becomes widely available, which could be a year or more away.
There is even uncertainty about how the US would pull off its November presidential election.
For now, markets seem to be comforted by massive US stimulus programs, which have been absolutely necessary to protect ordinary workers and prevent a market meltdown. Yet it is already clear that much more would need to be done.
If this were just a garden-variety financial panic, a massive injection of government demand stimulus would absolve a lot of sins, but the world is experiencing the most serious pandemic since the 1918 influenza outbreak. If another 2 percent of the global population were to die this time, the death toll would come to roughly 150 million people.
Fortunately, the outcome probably would not be that extreme, given the radical lockdowns and social distancing measures that are being adopted worldwide. Still, until the health crisis is resolved, the economic situation would look exceedingly grim.
Even after an economic restart, the damage to businesses and debt markets would have lingering effects, especially considering that global debt was already at record-breaking levels before the crisis began.
To be sure, governments and central banks have moved to backstop broad swaths of the financial sector in a fashion that seems almost Chinese in its thoroughness; and they have the firepower to do a lot more if necessary.
However, the problem is that economies are experiencing not just a demand shock, but also a massive supply shock.
Propping up demand might contribute to flattening the contagion curve by helping people stay locked down, but there is a limit to how much it can help the economy if, say, 20 to 30 percent of the workforce is in self-isolation for much of the next two years.
There is also the profound political uncertainty that a global depression could spark. Given that the 2008 financial crisis produced deep political paralysis and nurtured a crop of anti-technocratic populist leaders, the COVID-19 crisis could lead to even more extreme disruptions.
The US public-health response has been catastrophic, owing to a combination of incompetence and neglect at many levels of governance, including the highest. If things continue the way they are, the death toll in the New York City area alone could surpass that of Northern Italy.
Of course, there are more optimistic scenarios. With extensive testing, authorities could determine who is sick, who is healthy and who is already immune and thus allow people to return to work.
Such knowledge would be invaluable, but, again, owing to several layers of mismanagement and misplaced priorities stretching back many years, the US is woefully short of adequate testing capacity.
Even without a vaccine, the economy could return to normal relatively quickly if effective treatments could be swiftly implemented.
Absent widespread testing and a clear sense of what would constitute “normal” in a couple of years, it would be difficult to persuade businesses to invest and hire, especially when they are anticipating higher tax bills when it is all over.
It is possible that stock-market losses so far have been less than those of 2008 only because everyone remembers how values shot back up during the recovery. If that crisis does turn out to have been a mere dry run for this one, investors should not expect a quick rebound.
Scientists would know a lot more about our microscopic invader in a few months. With the virus now racing across the US, researchers would have direct access to data and patients, rather than having to rely only on Chinese data from Hubei Province.
Only after the invasion is beaten back would it be possible to put a price tag on the economic cataclysm it left in its wake.
Kenneth Rogoff, a former IMF chief economist, is a professor of economics and public policy at Harvard University.
Copyright: Project Syndicate
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