It may be too early to speculate on the long-run coronavirus curve, but it is not too early to admit that the next global recession is soon
This recession is likely to be very different from the two recessions that started in 2001 and 2008
For a start, the economic recession is likely to start from China and in fact could actually be on the way
China’s economy is heavily dependent on leverage loans, as it cannot afford a more sustainable cessation of loans today than did Japan, which was growing at an accelerating pace in the 1980s.
Individuals and companies need financing to pay off their huge debts.
Indeed, the negative demographics foreshadow sharply with the narrowing scope for catching up with technology as well as the massive overpopulation of residential real estate as a result of frequent stimulus programs not to mention increasingly centralized decision-making processes and China may experience much slower economic growth in the coming periods
Moreover, unlike the previous two global recessions in the current century, the new Corona virus “Covid-19” means a supply-side shock as well as a demand-side shock.
Indeed, it is necessary to return to the mid-seventies when the shocks of the oil supply occurred to detect a similar great shock.
Certainly, fear of contamination will hurt demand for airlines and global tourism, and reserve savings will rise.
But when tens of millions of people cannot go to work (either because of the closure or out of fear), global supply chains collapse and borders are closed as it is now, global trade will shrink because every country doubts the health data of every other country, the supply side will suffer At least as much.
The affected countries will, and should do so, spend heavily in debt to strengthen their health systems and support their economies.
The goal of saving in preparation for difficult days is to spend when those difficult times come while preparing for epidemics, wars, climate crises and other unexpected events specifically explains why endless disability spending in booms is extremely dangerous.
However, politicians, along with many other economic commentators, also failed to understand how the supply component might make the next global recession different from the last two recessions.
In contrast to recessions primarily driven by lack of demand, the challenge posed by a downward trend in the supply-side economy is that it can lead to sharp falls in production and widespread bottlenecks.
In that case, the general deficiencies could ultimately drive the inflation rate up instead of falling.
Admittedly, the initial conditions for containing high inflation today are exceptionally favorable.
However, given that four decades of globalization were almost certainly the main factor behind the low inflation rate today, any sustainable closure in the borders between countries due to the “Covid 19” epidemic (or even permanent fears of the epidemic), in addition to commercial frictions The rising, it is a recipe for the return of upward pressure on prices
Under the umbrella of this scenario, rapid inflation could drive interest rates higher and pose challenges for both monetary and fiscal policy makers.
It should also be noted that the crisis of “Covid-19” is hitting the global economy at a time when growth is weakening and many countries are burdened with leverage debts on a large scale.
Global GDP growth was only 2.9 percent in 2019, which is not far from 2.5 percent, a level that historically marked the beginning of a recession.
Italy’s economy had barely begun to recover before being hit by the Corona virus, and Japan was already in recession after the VAT increase, which came at a bad time, and Germany was reeling in the midst of political chaos.
Although the United States is at its best, the probability of a recession that was 15 percent before the presidential and congressional elections in November is now much higher.
It may seem strange that the new Corona will cause so much economic damage, even in countries that have the resources and technology to fight this virus.
The main reason is that previous generations were poorer compared to the present time so many people had to take risks and go to work.
Contrary to what is happening today, radically stopping economic activity in response to epidemics that did not kill a large number of people was not an option at the time.
What happened in the Chinese city of Wuhan, the epicenter of the current epidemic, is a dangerous situation and shows an example of this bad situation. The Chinese government has completely isolated Hubei Province, which puts its population of 58 million under martial law since ordinary citizens do not They can leave their homes only under very special circumstances.
Meanwhile, the government has apparently been able to deliver food and water to people in Hubei Province for about 6 weeks now, something a poor country cannot do.
In other regions within China, a large number of individuals in big cities such as Shanghai and Beijing have stayed at home most of the time to reduce their exposure to the virus.
It is highly unlikely that governments in many other countries will take drastic measures such as those taken by China, but many people do not leave their homes, which means a sign of a very negative impact on economic activity.
The prospects for a global economic recession have risen very significantly, well above traditional expectations recognized by international investors and institutions.
Policymakers must recognize that in addition to interest rate cuts and fiscal stimulus, a massive shock in global supply chains also needs to be addressed.
The stronger easing by the United States could come with a sharp cut in tariffs imposed during the trade war with China, which would calm markets.
In the end, the global economic recession is a time for interstate cooperation and teamwork, not isolation and unilateral action.