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Flattening the recession curve: are we doing it right?

This is the second in a three-part series studying the unintended consequences of the novel coronavirus on island and worldwide from an economic standpoint

At some point in the next two to three months, the coronavirus infections curve will flatten for sure, but when will we see the economic recession flattening? Are the implemented relief programmes in place at present adequate and sufficient?

So much isolation, exposure to social media and conflicting information are generating in the people anxiety and anguish over not knowing what kind of country and economy awaits them once the acute coronavirus emergency is over.

Will we have a job? How many stores, how many factories will be able to reopen? What should companies and their owners do? Are governments doing what is right?

Social-distancing measures have placed the economy in an “induced coma” state. How long will the recession last?

The severity of the recession, in the first place, is a direct function of the severity of the social-distancing policies — either because the government suspends certain activities that involve contact between people or because people prefer to isolate themselves for fear of contagion.

Second, the magnitude of the recession will depend on how long the containment lasts. Every week that lapses under quarantine, new jobs are lost and more productive capacity exits the economic cycle.

How the downturn feeds back day by day? The recessive effect of social-distancing occurs in concentric circles, initially affecting a first group of non-essential activities and then moving towards more nuclear ones.

Inside a company affected by the first waves of activity restriction, owners will normally try to preserve their future viability by keeping essential personnel in the hope that the reopening will happen soon, until the passage of weeks makes it unsustainable to maintain even this key personnel.

This particular coronavirus recession is ravaging demand and supply at the same time. The demand collapses because, first, the purchasing power of dismissed workers falls and, secondly, because consumer confidence disappears and people refrain from buying in the face of general uncertainty.

On the supply side, factories and services close primarily by decree. Others have to follow suit owing to a general interruption of supply chains or to general low demand. Both sides of the coin — demand and supply — escalate by feeding each other.

The final blow to companies and consumers in times of recession comes from the closing of bank credit. Banks stop lending or demand repayment of credits at the prospect of a crisis that may make a company not viable or a consumer insolvent.

The banks do not even lend to each other because they do not know how their accounts receivable are affected or how much their balance sheet — their investment portfolio — has been impacted by the collapse of the stock market.

The widespread mistrust ends up spreading to the government because the fall in tax revenue and the immense burden of unemployment and health benefits will seriously affect the administration's ability to pay its obligations and also its ability to issue new debt at reasonable interest rates.

Data on the fall in economic activity in the world is appalling. It shows that the deterioration is happening at breakneck speed. In China, economic activity in the affected areas fell 40 per cent in the first quarter of 2020. In the United States, in the two weeks ending March 28 alone, almost ten million Americans went into unemployment, increasing the unemployment rate from 3.5 per cent to 10 per cent.

Goldman Sachs estimates that US GDP will fall 24 per cent in the second quarter of this year. In Europe, the fall in GDP for the second quarter is estimated at 14 per cent. These deterioration figures at the start of a recession are truly unprecedented.

The “good” news is that this time it seems that governments and central banks have taken seriously their task to give their respective economies a parachute against free fall. They have announced the intention to put together relief packages that guarantee unemployment benefits to all those dismissed by social-distancing measures, that provide direct aid to families and give financial oxygen to companies to avoid closures.

The message in unison is that “they will do whatever it takes” to keep workers, households, companies and public administrations afloat.

To give just a few examples, the US has approved a package of $2.2 trillion of fiscal stimulus, equivalent to 12 per cent of GDP, Germany has promised resources over 1.7 trillion euros (51 per cent of GDP), France about 510 billion euros (23 per cent of GDP), Britain £396 billion (18 per cent of GDP), Spain 200 billion euros (15.7 per cent of GDP).

To this must be added liquidity assistance programmes, such as the one approved by the European Central Bank for 750 billion euros or the Bank of England for £200 billion. If we look at the proportions over GDP, we see that these figures are truly extraordinary. It should suffice at least for the first round of severe isolation.

Extraordinary times require extraordinary measures. Some economists have coined the apt term “buyer of last resort” to define the government's new role in the economy during the coronavirus emergency. The absolute priority is to guarantee employment and keep companies alive, covering all their operating costs, with no greater requirement than maintaining jobs — “no questions asked”.

Administrations have enough information to know the level of costs in each company. Reasonably enough, owners and stakeholders will have to put some skin in the game, but not to the point of forcing them out of business. Achieving this objective is essential to avoid the total collapse of economies because no one should be under the delusion that companies open or close simply by turning a key.

Once closed, it is hard to reopen. The objective must be that the fundamental pillars of economic activity still be in place when the health emergency gradually passes.

However, there is an inexplicable omission in the stimulus programmes: the urgent investment in health systems.

The pandemic has shown that the emperor has no clothes. Decades of underinvestment in public-health infrastructure, in production of medical equipment, in research and development, have led to existing deficiencies.

One way to alleviate the health emergency in the short term would be to condition the support to companies to their contribution in overcoming the emergency in the fields where they are good.

Miguel I. Purroy, an economist, political scientist and director of Hotelco Bermuda Holding Ltd, is the author of Germany and the Euro Crisis. A Failed Hegemony

Miguel I. Purroy, an economist, political scientist and director of Hotelco Bermuda Holding Ltd, is the author of Germany and the Euro Crisis. A Failed Hegemony

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Published April 07, 2020 at 9:00 am (Updated April 07, 2020 at 8:56 am)

Flattening the recession curve: are we doing it right?

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