A year ago, if you asked experts to identify the biggest threats to the global economy and financial markets in the next 12 months, the answer would probably be the Sino-U.S. trade war and excessive debt build-up in the corporate sector.
But now, the Covid-19 pandemic is causing a never-before-seen disruption to economies all over the world.
When talking about Covid-19 in an economic context, the first words that immediately come to mind would likely be lockdown, slowdown and shutdown. As such, we will not expect to hear the word “up” in relation to economic activities while the pandemic is spreading and effective vaccines and treatments are still under development.
In its latest World Economic Outlook report published in April 2020, the International Monetary Fund projects global growth this year to fall to -3%. This represents a sharp downgrade of 6.3 percentage points from January's figure, and marks the worst global recession since the Great Depression.
Just like any other crisis, some of the effects and consequences of the coronavirus will be long-lasting even after the virus eventually recedes, which might change the world permanently. Here are some questions that we should ask from an economic perspective.
What will be the cost of coronavirus spending, and how to finance it?
Governments around the world have ramped up spending – in the form of tax breaks, grants, loans and guarantees – in order to counteract the heavy toll on economic activities caused by the virus and social distancing measures.
For instance, the U. S. has passed a US$2 trillion stimulus package, worth about 10% of its GDP. In the meantime, the Federal Reserve has committed to buy assets in unlimited amounts. In Hong Kong, a basket of relief measures has added up to a price tag of HK$287.5 billion, equivalent to 10% of GDP and creating an estimated fiscal deficit of 9.5% of GDP in the current financial year. All in all, the longer the coronavirus lasts, the more likely it is that there will be more stimulus in the coming months.
Although these measures, some of them once considered unthinkable, may help keep businesses afloat and maintain people’s livelihoods, at some point they will need to be paid back. There are worries about the austerity measures that will be needed in the coming years to cope with the huge bailout costs, with reference to how the global financial crisis and the Eurozone sovereign-debt crisis shaped public finance policies in many Western countries over the past decade.
The question for policymakers when the pandemic subsides will be how to pay this bill in a way that keeps public finances in good shape and avoids a public health crisis turning into a global debt crisis.
In addition, while it definitely makes sense for governments to increase spending on public health for the common good, there will be less financial resources and investment in other areas such as infrastructure, education, and innovation and technology. It is thus important to strike a balance in the components of public spending in the post-coronavirus world. For us in Hong Kong, the formulation of a fiscal framework to ensure that the Government can spend effectively and efficiently will be needed.
Will coronavirus mark the real turning point of globalisation?
Emergencies “fast-forward historical processes,” said historian Yuval Noah Harari. The trade war between the world's two largest economies and geopolitical tensions are part of a backlash against free trade and globalization that is emerging. The coronavirus pandemic and, consequently, factory closures and production suspensions in Mainland China and elsewhere, certainly add more pressure on multinational businesses to rethink the sustainability of such highly integrated supply chains and just-in-time manufacturing systems.
Meanwhile, a lack of domestic production capacity of medicines and related supplies has constrained the ability of some governments to respond more swiftly to the pandemic. Accordingly, in the U.S., there are growing calls for businesses to bring more manufacturing back to America amid mounting concerns about national security.
Globalisation is often cited as one of the major contributors to the low inflation environment, because a more connected world has given consumers far more choices than decades ago, enhancing market competition and depressing prices. If the coronavirus is going to reverse globalisation, costs to both businesses and consumers would likely increase. However, that extra expense might be considered as an insurance premium paid for a more resilient supply chain with a well-diversified supplier base. Just how long and how painful it is to achieve this goal is difficult to estimate.
Will the bigger role of the government in the economy and more regulatory interventions continue?
In order to fight the coronavirus, many governments have shifted to wartime mode and become much more visible than previous times. Some, including Hong Kong, are helping businesses pay wages to prevent massive unemployment. The Spanish government has nationalized all private hospitals and healthcare providers while the French government said it would use all means including nationalisation if necessary to save businesses.
Although Hong Kong has escaped the severe shutdown seen in many other economies, emergency regulations on businesses are being imposed as of this writing. For instance, restaurants in Hong Kong need to maintain at least 1.5 metres distance between tables, and only four people can be seated at a table.
It is hard to predict the duration of the pandemic and whether it will move the swing of the economic pendulum closer towards the Keynesian side globally, like in the mid-20th century when the economic role of the government was more prominent. In any case, it remains doubtful if more government intervention can cure the economic problems the world is facing and make society better off, without creating other problems.
Wilson Chong, email@example.com