Manuel Aguilera, General Director of MAPFRE Economics.
As has been widely discussed by analysts and academics, the current crisis in the global economy—characterized by the sharp and deep decline in economic activity—has only one explanation: the implementation of lockdown and social distancing measures with which governments have sought to contain the expansion of the COVID-19 pandemic. To the extent that the crisis is an externally induced and genuinely global fact of nature, the world’s economic recession was almost all-encompassing in its reach. When restrictions on activity imposed to deal with the pandemic were at their peak, almost 95% of the world’s economies were simultaneously plunged into recession (measured as the annual contraction of GDP per capita). This compares with 60 percent at the worst point of the 2008–2009 financial crisis.
However, vaccine development and recent progress in the production of drugs to slow the spread of coronavirus, have opened up the prospect that economic activity could start returning to normal by spring 2021. However, the universal nature of the global economic recession is no guarantee that economic recovery will likewise be so uniform. On the contrary, the future looks like a change from universal recession to uneven recovery. What will this process depend on? I believe there are five factors at play.
1. Vaccines and therapeutic treatments
To the extent that the duration and impact of the economic crisis are contingent on the progress of the pandemic, the effectiveness with which the world’s health systems can roll out vaccines and any therapeutic treatments that slow the spread of the virus will mark an initial point of differentiation in economic recovery.
In general, developed countries appear to have health systems that are better equipped for this purpose. Here, after a period of relative control, a second wave of the virus took hold and then began to abate through the application of new restrictive measures. By contrast, emerging countries with weaker health systems and governance must address not only the growing rate of infection (which has hardly changed since the start of the crisis), but also the economic challenge of acquiring sufficient doses of vaccines and drugs. To this, add the logistical challenge of distributing and applying the vaccines and drugs quickly to their populations.
2. Economic policy effectiveness
Secondly, success in assessing the monetary and fiscal policy measures used to limit the economic impact of the pandemic shock will be another factor. It will explain the structural damage that the recession has caused and the speed with which different economies can recover once restrictions are eased or eliminated.
Ultra-expansionary monetary policies and a unified central bank vision have become widespread around the world, and these policies will continue for some time. However, the same did not happen with fiscal measures to support production and employment. These met various obstacles to their global spread, from constraints caused by previous high levels of public debt to explicit self-containment by some governments. In the end, economies that have more effectively balanced the use of these two economic policy instruments to limit the damage of the recession to the real economy will be better at securing a faster, more sustainable recovery when health conditions permit.
3. Sectoral economic structure
A third factor explaining the dissonances at play in post-pandemic economic revival between countries—and between their internal regions—has to do with the different ways that economies are structured. Because the crisis was generated externally, economies whose structure accommodates more manufacturing and primary industry will have a relative advantage over those where the service sector is a major contributor to GDP growth. Unlike primary and secondary industries, services—strongly dependent on proximity, social contact, and consumer confidence—are affected the most in real terms and will encounter the greatest difficulties in securing a complete recovery.
4. Structural vulnerabilities
Remember that the world’s economy was already losing impetus before the pandemic hit the global scene at the end of 2019. This in itself affected the previous structural vulnerabilities accumulated by emerging and developed economies alike. Therefore, the preexisting weaknesses in macroeconomic fundamentals (internal and external public debt, corporate and family leverage, poor balance-of-payments financing, etc.) and the extent to which they have deepened during the recession, will be another key factor in the speed at which the economies of countries and regions recover. There is no doubt that the effects of these vulnerabilities will emerge when economic activity resumes and may become a constraint on the sustainability of the recovery over the medium-term.
5. Governance and economic policy
Lastly, uncertainty about the implementation of public policy in each country is clearly an important differentiating factor in the recovery process. Uniformity and consistency in the implementation of economic policy relate to the strength of a country’s governance. The technical capacity of governments to deal with a complex scenario requiring measures to reactivate industries made dormant by the recession and to help others severely damaged by the recession recover is also important. In combination with the other factors referred to above, governments’ success in these areas will stimulate or discourage savings and investment and the consequent formation of capital.
To date, the weak economic rebound achieved by easing some restrictions represents only the partial recovery of the industries least affected by the crisis. However, a scenario involving a return even to pre-pandemic levels of wealth generation remains distant. Once the effectiveness of vaccines and anti-viral drugs has been proven, the real challenge for governments in the coming months relates to their ability to rebuild the areas of the economy most severely damaged by recession and, by extension, to help production systems, employment and income to recover. Post-pandemic, still immersed in a complex context of uncertainty, the unevenness of recovery will be the next major challenge for the world’s economy.