The real challenge facing the world in the next few years will be what is forecast to be a worldwide economic depression.
In a current article in Foreign Affairs by Vincent Reinhart of Harvard and Carmen Reinhart, Chief Economist of the World Bank, entitled “The Pandemic Depression,” the authors lay out in a clear fashion why this coming depression will be both severe and unlike any we have known before.
The global economy will run differently as balance sheets in many countries slip deeper into the red and the seemingly unstoppable (as it seemed for several decades) march of globalization grinds to a halt. As a result, the World Bank estimates that as many as 60 million people worldwide will be pushed into extreme poverty.
In the U.S., rates of unemployment are expected to remain in double digits until mid-2021 at a minimum. Most countries do not have the capacity to recoup the damage done by Covid-19 quickly, but, given the size of the U.S. economy, it is reasonable to expect that it will fare better in the mid- to long-term.
Or as the authors put it: “The ongoing rebound is the beginning of a long journey out of a deep hole.” Three indicators, they argue, suggest that the recovery will be a long one.
The first is exports. Border closures and lockdowns have contracted demand for goods, and this has hit export-dependent economies hard. Commodity prices — particularly that for oil — have suffered a huge drop. The World Trade Organization estimates that global trade will fall from between13 to 32 percent in 2020. If the decline is in mid-range, it will still be the worst year for globalization since the early 1930s.
The second factor pointing to a prolonged recovery is unemployment. The longer widespread joblessness persists, the greater the impact. Some furloughed or fired workers will leave the labour force permanently. Others will lose skills and not receive professional development opportunities. The most vulnerable, however, are those who may never get a job in the first place — the current graduates entering an impaired economy.
The third factor bringing about a severe recession is that the crisis is both highly regressive within countries and across nations.
The dislocation impacts those with lower incomes far more heavily than mid- to upper-income workers. Typically, they do not have the ability to work remotely nor the resources to tide them over when not working.
A further complication is the actions of many central banks in buying the debt of both municipalities and corporations that appear to be solvent, but nevertheless illiquid. Dealing with this debt will be challenging and will take a long time.
The G20 has already postponed debt service payments for 76 of the poorest countries. Undoubtedly, more will have to be done in the future. The real question is: Will these wealthier nations have the political will to undertake the required measures, or will they instead turn inward?
One of the central enabling features of global trade is trust, and that seems increasingly to be in short supply. Many borders are already difficult to cross and more are becoming so. Doubts about the reliability of some foreign partners will fester.
Finally, government policy-makers may confuse a short-term rebound with a lasting recovery. The temporary actions that were put in place to offset the impact of Covid-19 should not be cut off cold turkey once things start to improve; rather, they should be sustained until unemployment falls well below current numbers and closures and bankruptcies fall off as well.
The U.S. Congress, with its failure to act this summer on extending supports to the unemployed and helping financially-strapped municipalities, is a prime example of short-term folly.
Hopefully, in Canada, our leaders will be able to avoid this pitfall.
David Bond is a retired bank economist who lives in Kelowna.