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A Macro Perspective of the Coronavirus Recession

May 29, 2020 By Mircea Vasiu

The coronavirus pandemic affects the world economy in unprecedented ways when compared to previous recessions. When compared with other major setbacks in human history, only WWII, so far, had greater economic consequences than this virus has.

Every country in the world came out with its own way of supporting citizens. Some countries, especially developed ones, had the luxury of testing the population to find out exactly how the virus spreads and how many have been infected. Some others however had neither the medical infrastructure nor the financial one to do that. Yet one thing all countries did was launch massive support programs, both from a fiscal perspective (governments) as well as from a monetary one.

Assessing the Economic Impact of a Prolonged Health Crisis

As social distancing became the new norm, the big question moving forward is what solutions countries have if the pandemic extends? Second, or even third waves of the outbreak may very well mean new lockdowns in new epicenters, further hurting economic recovery.

With few exceptions, the population understood the risk of not respecting the health rules as people saw the damage around them. In the United States, people are filing for unemployment benefits by the millions every week, with some weak signs that part of those unemployed started to return to their job.

While at the start of the outbreak, economists and monetary policymakers alike advocated a V-shape economic recovery, the scenarios were quickly adapted. The more time that passes in lockdown, it becomes obvious that 2020 will end up with economic contraction, and 2021 looks flat at best.

Instead of a V-shape recovery, an L-shape evolution is more likely.

In the United States, a forecast run by Deutsche Bank’s economists sees the US GDP shrinking by 10% in 2020 and remaining flat for 2021. What is stunning is that during the course of 2020, the budget deficit is expected to show a whopping 25% of GDP. And, by 2030, the debt-to-GDP ratio could rise to 175% – double the last year’s figure.

All these numbers are meant to show the impact and the challenges the coronavirus poses to economies around the world. Forget about high-interest rates anytime soon in the future – the numbers presented earlier reflect a perpetual low-interest rates environment relative to growth.

In other words, the coronavirus shock may be more than just an exogenous one. After an exogenous shock, the economies quickly come back on track. This time, it feels like the virus will change the very economic concepts societies lived by up to this point.