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COVID-19 could severely scar the global economy

COVID-19 could severely scar the global economy

Wednesday 15, 04 2020
The global economy is experiencing a severe crisis that has never appeared since World War II.

According to the Brookings Institute, this will be a widespread and long-lasting depression.

The differences between the current epidemic and that in 2008-2009

The latest Brookings-FT TIGER (the Global Recovery Tracking Index) shows clearly that the economic activities, the financial market, and the belief of the private sector are all being negatively affected by COVID-19.

If international cooperation in dealing with the epidemic remains untightened, the situation will be worse. Many people think that the current reduction is temporary, saying that economic activities will return to its normal state once the epidemic is properly controlled.

However, there are reasonable reasons for us to be concerned that the global economy is entering a serious and long depression, which will majorly depend on the developments of the epidemic and the responses of policymakers. The question here is whether governments are properly restricting the damages and rebuilding consumers’ and enterprises’ beliefs.

It is quite unlikely that there will be a quick recovery, as the global demands have gone through a dramatic shock, there has been a major delay in the supply chain, the fact that there is an ongoing financial crisis.

Different from the 2008-2009 crisis which occurred due to the lack of liquidity in the financial market, the crisis caused by COVID-19 is related to issues irrelevant to the financial sector.

During and after the crisis in 2008, some recently-appeared markets, including China and India, continued to develop dramatically, carrying the remaining part of the global economy.

However, this time there is no exception, and no nation will be able to recover with an export orientation. The current collapse has increased the deflation and financial risks in modern economies, while simultaneously making exporters suffer. Particularly, the oil price is falling more sharply than before.

The global responses

COVID-19 could severely scar the global economy

The American economy is facing a dead-end. Most service industries have stopped operation, industrial activities have been delayed, and the employment wave has been wreaking havoc for several weeks.

The US has responded to these events with special financial and monetary stimulation measures, which may help the country to temporarily avoid a collapse, but it is still not enough to achieve the long-term goal of reducing damages and protecting vulnerable business households and small enterprises.

Europe and Japan, which are the places that had overcome economic tension even before the epidemic started, have better defense against the noticeable reduction in products and the increase in employment.

China is making a recovery, even though it is only partial. The industrial output, retail sales, and fixed asset investment of this country all plummeted in January and February, but things seemed to be slowly reviving.

In some senses, the Chinese economy is having more advantages than that in other countries to deal with such severe shock, as the state can control the maximum national resources, conventional macroeconomic tools, and direct support for businesses and banks.

However, there are still shortcomings, such as the rising unemployment, the lack of domestic and global demands, and a potential second wave of the epidemic outbreak which may result in a persistent threat.

Other newly-developed economies are entering a particularly gloom period. Several countries have an inferior healthcare system, overly-populated urban areas, and high poverty levels, deterring them from controlling the epidemic and preventing an economic disaster.

Some countries also have capital withdrawals and currency devaluation, and the international demand for their goods is seriously reduced, while others face huge debts. All of these show that the economic and financial massacre of COVID-19 could leave severely scar the global economy.

​>> What has COVID-19 caused to the global economy?


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