Economists are virtually unanimous in their assessment that the impact of the coronavirus will be a global recession rivaling the Great Depression in its depth. But there are good reasons to believe that once the virus is under control, financial markets will bounce back much faster than they did in the 1930s.
What shape the economy takes when that rebound occurs, though, is far from clear.
Last week, the International Monetary Fund released a report forecasting a steep drop in global economic growth in 2020. From an original prediction of about 3% growth, the IMF revised downward to -3% for the year.
“I think there's no doubt that the world economy is headed for the deepest recession since at least the Second World War and possibly since the Great Depression,” said economist Robert Scott, the director of trade and manufacturing policy research at the Economic Policy Institute in Washington.
In the U.S., for example, there were some 5 million small businesses, classified as employing 500 or fewer people, operating in the months prior to the virus outbreak. Many of those businesses have been forced to shut down temporarily, and an unknown percentage will find it difficult to reopen.
“It's clear we're going to see a major collapse of the small business sector,” said Scott of EPI. “We're going to lose a lot of those businesses; they are not going to be able to survive this downturn.”
However, Scott and others point out that the world’s largest economies are far better equipped to deal with major financial shocks than they were in the early half of the 20th century.
2020s vs 1930s global depression
“Compared to the 1930s, we're in a better position,” said Maurice Obstfeld, professor of economics at the University of California-Berkeley and a nonresident senior fellow at the Peterson Institute for International Economics. “We have a much better, deeper understanding of the levers of monetary and fiscal policy and how to use them. We have a much better understanding of how to react to financial crises and how the central bank can be a key element in preventing the meltdown of the financial sector.”
Developed countries have tools to keep their economies from falling off a cliff and to speed recovery once the crisis is over.
As the financial crisis unfolded in 2008-2009, Obstfeld pointed out, circumstances “could have led to another Great Depression.”
But central banks aggressively supported demand for goods and services by making it cheap to borrow and assuring widespread liquidity. Today, the U.S. Federal Reserve and its counterparts in other advanced economies are working from the same playbook, keeping interest rates very low and increasing the flow of cash into the economy by purchasing bonds and other long-term assets.
Bring back jobs
To some extent, job losses in developed countries may be offset by an effort to bring the manufacturing of critical medical supplies back. Decades of increased outsourcing has meant that medical devices, personal protective equipment and medications are largely produced overseas, including in China, where the virus first appeared.
Create new jobs
Manufacturing medical supplies at home would create just a tiny fraction of the jobs the country will need to recover. But according to Scott, “There are tremendous opportunities to put people to work in good jobs, transition to a clean, renewable economy and making things that we need.”
A more effective way to create millions of new jobs in the U.S., Scott said, would be for the federal government to undertake a huge stimulus program to improve the country’s aging infrastructure and ramp up investment in renewable energy. President Trump and Democrats in Congress have talked about infrastructure projects for years, while taking little real action. Whether this is politically possible in the U.S. during an election year remains to be seen.
For developing countries, the situation looks potentially more difficult. While advanced economies are, for the most part, already enacting major stimulus programs, poorer nations are facing a far more difficult road.
At the beginning of the crisis, investors began to pull money out of developing economies, in what the IMF described as the largest ever outflow of capital from the developing world. This means that while countries like the U.S. can borrow to enact stimulus programs, poor countries struggle simply to retain the capital they have, and will struggle to find lenders willing to fund stimulus programs.
How can the developing world put itself on a road to recovery? There is no magic bullet here, but once the virus is under control there will be some obvious first steps.
Countries that have seen large outflows of capital need cash. The World Bank and the IMF have already stepped up lending and grant programs in the developing world, in some cases relaxing requirements in order to get the money moving. Large developed economies are already increasing their funding of these and other nongovernmental organizations to make more aid available.
The good news for developing countries is that a movement by Western countries to bring critical manufacturing back home is unlikely to extend to more mundane products, like clothing and electronics. Once the virus is under control and large economies ramp up demand again, jobs should begin to reappear in many parts of the world.
However, economists note it will be essential for countries like the U.S. to ease tariff and import restrictions that could stand in the way of restarting the global supply chain.
Diversify supply chains
If anything, businesses are likely to spread out their supply chains in order to reduce the risk of a localized crisis creating a severe disruption. This could mean that production jobs will be spread more evenly around the world, rather than concentrated in certain regions, allowing more countries to participate in an eventual recovery.
Obstfeld, who served as the IMF’s chief economist from late 2015 through 2018, said that while global supply chains will undoubtedly change in a post-crisis economy, much of that change will be in the form of diversification, not on-shoring.
“Private businesses are not going to have an incentive to do anything but maximize profits,” he said. “So, if economics dictates that it's much cheaper to produce components abroad, they’'ll have to weigh the possibility of disruptions and international travel, geopolitical risks, all of those. But those are not new.”
If anything, businesses are likely to spread out their supply chains in order to reduce the risk of a localized crisis creating a severe disruption. This could mean that production jobs will be spread more evenly around the world, rather than concentrated in certain regions.
“I don't think that this, per se, will necessarily cause a big retreat from globalization,” Obstfeld predicted.