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Two scenarios of global economic recovery after the COVID-19 pandemic — economists forecast

Two scenarios of global economic recovery after the COVID-19 pandemic — economists forecast

In most countries of the world, the coronavirus epidemic has not yet reached a peak, and economists, political scientists, and philosophers are already trying to make out the contours of the new world that will arise after the victory over the disease.

Most agree that large-scale changes are coming in the economy, business, international relations, domestic politics, the social sphere, medicine, and human behavior. But the extreme uncertainty associated with the epidemic itself and the cost of combating it gives rise to directly opposite forecasts: someone believes in a new better world, someone in a long-term deterioration of people's lives and political cataclysms.

Uncertainty lies in the epidemic itself: it is caused by insufficient knowledge about the virus, its degree of infectiousness, transmission methods and mortality. Economists are forced to multiply the rough forecasts of epidemiologists by the uncertainty associated with the behavior of economic agents - the population and companies — in an epidemic.

Finally, leaders of different countries are forced to make decisions based on all these very crude forecasts, which gives rise to another level of uncertainty — no one knows if their actions will help or aggravate the situation.

Sooner or later, the global economy will recover from the crisis into which the epidemic drove it. The pace of recovery and the size of the damage depend only on how quickly and at what cost the virus can be stopped.

Two forecasting options can be made, experts from the world's largest consulting company McKinsey write in a series of studies on the “world after coronavirus”:

Optimistic, according to which after a sharp (possibly even record-breaking since the Second World War) recession a quarter or two long, and equally sharp recovery will follow.

Pessimistic, according to which the epidemic will stop the world economy for several months or even quarters and/or cover it with a second wave after quarantine measures in different countries are weakened. In this case, the current crisis, caused by the shock of demand and the shock of supply, will become a full-fledged financial crisis with massive bankruptcies, structural rather than temporary unemployment, destruction of assets and welfare of countries. This can destroy the very structure of the global economy.

Optimistic scenario

McKinsey experts (many economists and investment bankers give similar forecasts) see the consequences of a quick victory over the epidemic as follows:

The main condition: the epidemic will be defeated in most countries of the world with the help of strict quarantine in 2-3 months, that is, until the end of the second quarter of 2020.

In this case, China will lose 3.3% of GDP in the first and second quarters, but then it will quickly recover and return to the level of production at the end of 2019 by the fall. In general, over the year the country will experience only a small — less than a percent — decrease in growth rates.

In the USA, the recession will be deeper — up to 8% of GDP for the second quarter, since the epidemic is wider and the economy is more focused on consumer demand. This will be the deepest decline since the end of World War II when the demilitarization of the economy caused a severe decline in production. After the epidemic, the country is waiting for a rapid recovery, the level of production in 2019 will be reached at the end of 2020. But in general, over the year, the growth of the US economy will be zero.

The EU, even in the optimistic scenario, will suffer even more: the economy in the second quarter will lose almost 10% and will fully recover to the pre-crisis level only at the beginning of 2021. Over the year, it will lose about 4% — this is the worst indicator since the 2009 crisis.

In general, the world economy, having experienced a decline of almost 5% in the second quarter, will return to normal by the end of the year. The growth rate for the year will decline by 1.4%. The pace of recovery depends on how quickly the international production chains that the epidemic has cut short are reassembled. Countries and regions where strict quarantine measures and other restrictions were first introduced may be recovering faster than those who tried to maintain the economy by refusing to suppress the epidemic — because there will be fewer victims. This conclusion was made by experts of the US Federal Reserve System, who investigated the restoration of different states and cities of the country after the Spanish epidemic in 1918.

Changes in different areas of life will not be profound and irreversible. The speed of recovery may be affected by the fact that different industries will recover unevenly. How this can be seen in the example of China, which has already survived the first wave of the epidemic. Tourism, air travel, export-oriented industries, industries that are part of international chains, and traditional services and entertainment sectors, where close contacts between people and mass gatherings were practiced before the epidemic, will be restored longer. Most likely, the recovery schedule in the world and in different countries will look like the letter V (a sharp decline and an equally sharp recovery) or the letter U (the rise will be delayed due to the fact that many firms will have to restore production chains and re-hire employees).

A new kind of inequality is likely to arise and exist for several months: governments of different countries (and societies themselves) will struggle with new outbreaks of the disease, which are unavoidable provided that the majority of the population has quailed the quarantine epidemic and not received “collective immunity”. This will require new restrictions in the affected regions, while everything around will work as usual.

Pessimistic scenario

There are a whole host of darkest scenarios that seem increasingly likely, according to McKinsey experts and other economists:

The blackest suggests that all attempts to stop the epidemic will fail and governments will not be able to help enterprises and banks. Many of them will collapse, which will cause a debt crisis and a lack of liquidity. The collapse of banks and companies will destroy the entire global financial system and production; the crisis will drag on for many months (a graph in the form of the letter L).

Softer (and more likely) forecasts say that the second wave of the epidemic will complicate and delay recovery.

It will not be possible to contain the epidemic, but after the majority of the world's population has been ill, it turns out that the measures to support the global economy have worked, its structure has not been destroyed, which will lead to a quick recovery.

McKinsey studied in detail one of the gloomy scenarios where the second wave of the epidemic will complicate the restoration of the economy and the usual way of life of people:

China will again be ahead of everyone (having lost half of the growth rate in 2019 in a year), but it will recover only by the middle of 2021.

The United States will lose more than 8% of GDP, and the EU — almost 10%. They will return to the level of 2019 only at the end of 2023.

The world on average (thanks to the success of China itself) will recover a year earlier. In developing countries, many of which over the past decades have gone through similar deep crises with the destruction of various spheres of human life, they will survive the new crisis more easily. The population of Western countries, which has not encountered a similar one since the Second World War, will experience an unprecedented shock, McKinsey experts write. This can cause profound changes in the world itself and people's behavior.

Actually, the depth of changes in all spheres of life depends on which of the options will be implemented in different countries and in the whole world.

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