Economists across the globe are grappling with the question how to arrest any further slump in the economy and restore some degree of stability. The growing realisation is that the fate of the global economy rests more than ever on finding a vaccine for COVID-19. Economic officials now say that full recovery relies on the scientists, medical experts say don’t expect a miracle, vaccine is going to take time
In my two previous columns ‘Economics of health; health of economies’ (Urban Update, April 2020) and ‘Where is the vaccine? The multi-billion-dollar question’ (Urban Update, May 2020), I had argued two points. First, ‘a vaccine is currently the best bet to end the threat posed by the novel coronavirus, which has caused a pandemic across the world’. Secondly, ‘The Covid-19 pandemic crisis is a reminder of the importance of investing in the healthcare sector for any country. There is a strong relationship between health and the economy. The healthcare performance of any country is directly dependent on its economy. This link between the two must be understood’.
While economists across the globe have been grappling with the question of what governments should do to arrest any further slump in the economy and restore some degree of stability, the realisation is growing that the fate of the global economy rests more than ever on finding a vaccine for COVID-19. As more and more economies are opening up after a prolonged period of lock down, it’s becoming clearer by the day that any chance of full recovery from the worst slump since the great depression of 1929 is not possible until a vaccine or treatment is found for the deadly virus that has killed almost half a million people in the world. Economic officials now say that full recovery relies on the scientists, medical experts say don’t expect a miracle, the vaccine is going to take time. From bankers to the chief economist of the World Bank, all are echoing a similar viewpoint. Harvard University professor Carmen Reinhart and incoming chief economist of the World Bank told the Harvard Gazette. “We’re not going to have something akin to full normalization unless we (a) have a vaccine and (b) — and this is a big if — that vaccine is accessible to the global population at large”. Australia’s central bank chief, Philip Lowe, said “If we don’t get breakthroughs on the medical front, then I think it’s going to be quite a slow recovery. We’ve got a lot resting on the shoulders of the scientists here.” Echoing his Australian counterpart, US Federal Reserve Chairman Jerome Powell has warned that a full recovery will need to wait until the scientists deliver.
Consumers are still on the edge and companies are holding back as temperature check and social distancing norms are set to remain in place for a long time to come in workplaces, restaurants, schools, airports, sports stadiums and more. The World Health Organisation, in the third week of June, issued a fresh warning that the COVID-19 pandemic is entering a new and dangerous phase. Tedros Adhanom Ghebreyesus, WHO chief said that the cases are accelerating after the numbers of cases reported on June 19 hit the highest in a single day, at 150,000 new cases. He noted that people are fed up of being at home and countries want to reopen their economies, but this time calls for extreme caution as the virus is spreading fast and many are still vulnerable.
The challenge is not only finding a vaccine to arrest the biggest slump but also to make sure there is a very large capacity available so that the quantity can support a large part of the world. There has to be an equitable access in the world, so that people can get access wherever they need it in the world. If this infection is not solved in every part of the world, it will not be solved for the world and consequently economic woes would continue to haunt the globe
Economic woes
It simply means that global policymakers, who have already announced trillions of dollars of fiscal and monetary support, need to keep the stimulus flowing to avoid yet more company failures and job losses. Global infections have almost touched nine million with half a million deaths. A survey of money managers by Bank of America Corp. found the biggest tail risk is a second wave of the virus that means restrictions will have to be imposed again. Only 10% expect a rapid rebound, the Bank said in a note titled “V is for Vaccine”. The fusion of when successful drugs can be found and when economies can get back to normal is dominating sentiment in financial markets. The race for a cure has a geopolitical edge too. U.S. President Donald Trump has vowed a Manhattan Project-style effort dubbed “Operation Warp Speed” to develop a cure, while China’s President Xi Jinping has pledged to make one universally available once it’s developed. Health experts caution that the process for developing an effective immunity will take time – possibly years. Even after an effective cure is found, it will need distribution on an unprecedented scale, according to Anita Zaidi, Director of Vaccine Development and Surveillance at the Bill & Melinda Gates Foundation. She says “I am optimistic we can develop a vaccine by the end of 2020, I am not very hopeful that we can deploy a vaccine for mass use by the end of 2020 because of the unprecedented scale needed to immunize the whole world.”
Let’s look at some hard facts globally
- China — the first major economy consumed by the virus and the first to emerge on the other side — has been able to revive production but not demand.
- International Monetary Fund (IMF) now sees world GDP contracting 3 per cent in 2020, with more than a hundred countries having approached the IMF for aid. IMF has warned the ‘Great Lockdown’ recession would be the steepest in almost a century.
- In South Korea – where the virus was controlled without a hard lockdown – consumer spending remains weak as infections continue to pop up.
- Sweden did not go for any lockdown and kept much of the economy open, yet the country is headed for its worst recession since World War II.
- UK retail sales dropped by almost a fifth in April.
- In the United States, industrial production plunged a record 11.2 per cent in April, the largest drop in a century. 36.5 million Americans – more than 10 percent of the population – left unemployed by the coronavirus disaster.
- Germany meanwhile tipped into recession, suffering its steepest quarterly contraction since the global financial crisis in 2009.
- The Bank of Japan launched a lending programme worth 30 trillion yen (Dh1tn/$279 billion) to support small businesses.
- The Reserve Bank of India cut interest rates in an unscheduled announcement, to their lowest level since 2000.
- More than 1 billion workers are at high risk of a pay cut or losing their job, the International Labour Organization has warned.
- World merchandise trade volume is likely to fall ‘precipitously’ in the first half of 2020, according to the World Trade Organization.
- Bloomberg Economics estimates the lockdowns triggered a drop in activity of around 30 per cent and their research found that the first steps to relax controls will have a more positive impact on activity than later ones.
Vaccine hopes and economic woes as virus spreads
Covid 19 pandemic has disrupted all forms of economic activity across the world. The popular theory that is emerging is, till the successful development of a vaccine, these activities cannot resume their normal ways. Will such a theory prove to be true? Deepankar Basu, professor of economics at the University of Massachusetts says “My understanding is that the current crisis, although started in the health sector, has quickly spilled onto all other sectors, having particularly pronounced effects on the economic sector. A correct response to the crisis can only be given when the crisis in both the health and the economic sectors are addressed together because you cannot deal with the health crisis without dealing with the economic crisis. This is especially true for developing and poor countries like various countries in South Asia, including India, where if the economy tanks or is imbalanced, it will lead to a far greater number of non-COVID deaths. On the other hand, the economy cannot be revived till the time the health crisis is looked after as the people are wary and scared of stepping out of their houses and working. Therefore, till the time the public health sector does not intervene to the fullest and try its best to rectify the pandemic, the economy will not be able to function normally again. Moreover, we are looking at a situation where a vaccine will not be available for the people for a long time.” Prof Sudipta Sarangi, Head of Department, Economics, Virginia Tech University, USA echoes similar viewpoint and concurs with the view of Prof Basu. He says “I believe that in the short run we will see partial recovery driven by sectors of the economy where close proximity between people is not required. Full recovery will only be possible when we have a vaccine and it is widely available to everyone simply because this is the only thing that will reduce uncertainty with respect to both aggregate supply and aggregate demand. Only when firms are confident of their future will they make hiring, investment and expansion decisions. Only when consumers are not worried about future job losses will they truly start spending. And even then – it is not clear what will bring workers back to urban areas – it will need more than a vaccine – trust and empathy will be just as important as a vaccine”. But there are others who are more hopeful and are optimistic of recovery even without a vaccine. Dr Yves Montenay, an economist based in Paris says “In a free market economy, the recovery is spontaneous and strong, as nothing – plants, machines, roads, vessels, etc. has been destroyed, and as a very few working age people died. The question is what will paralyse the free market? Growth is change, from agriculture to industry, from industry to services and so is recovery. That means that the workforce has to move to new sectors”. Prof Chetan Dave, Department of Economics, University of Alberta, Canada says “Well, it’s not about ‘beating’ the recession, it’s about managing the virus shock. Some opening up will have to be done as cost of total shutdown might be too high. I think that if we follow the guidelines properly like social distancing, wearing masks properly, handwashing, etc. then economies may muddle through a recession and see the other side sooner rather than later”.
The challenge is not only finding a vaccine to arrest the biggest slump but also to make sure there is a very large capacity available so that the quantity can support a large part of the world. There has to be equitable access in the world so that people can get access wherever they need it in the world. If this infection is not solved in every part of the world, it will not be solved for the world and consequently, economic woes would continue to haunt the globe.