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12 March 2020

UNCTAD: The coronavirus shock: a story of another global crisis foretold and what policymakers should be doing about it

The so-called “Covid-19” shock will trigger a recession in some countries and a deceleration of global annual growth to below 2.5%. The resulting hit to global income will be around the trillion-dollar mark; the bigger question is could it be worse?


The duration and depth of the crisis will depend on three variables: how far and fast the virus spreads, how long before a vaccine is found, and how effective policy makers will be in mitigating the damage to our physical and economic health and well-being. The uncertainty surrounding each of these variables is adding to people’s sense of anxiety, which is a fourth variable that will shape crisis outcomes.

There are two possible readings of the economic consequences of the Covid-19 shock. The consensus view is that the shock has the potential to upset what was a spluttering but otherwise well-aligned global recovery that had set in during the second half of 2017, with the policy task at hand to nullify the new threats to a renewed economic confidence that had underpinned a string of optimistic growth forecasts for the coming years. From this perspective, if the outbreak is short-lived, a familiar mix of accommodative monetary policies (ideally limited to cuts in the central bank’s rate but possibly involving more unorthodox measures to lower long-term interest rates) and automatic fiscal stabilizers should be sufficient to save the day, with the recovery assuming the “V” shape that followed, for example, the SARS virus shock of 2003.

If, however, the crisis is more long-lasting, most likely due to disruptions on the supply-side of the economy through crippled production networks and squeezed profit margins, hopes of recovery will hinge on more sustained and coordinated liquidity injections by Central Banks, more active fiscal policies (where space is available) and by renewed efforts to bolster free trade and foreign investment. The recovery will then more likely assume a U-shape, like the oil shocks of the 1970s, with some serious economic casualties along the way, but with the organizing principles of the world economy preserved… until the next crisis!

On a second reading, the economic consequences linked to the virus are less a matter of time and confidence and more a matter of the (political) leadership and (policy) coordination needed to stem the waves of economic pathogens released by the crisis from crashing in to an already fragile and highlyfinancialized world economy. Losses of consumer and investor confidence are the most immediate signs of spreading contagion, but asset price deflation, weak aggregate demand, heightened debt distress and a worsening income distribution pose greater policy challenges. The East Asian financial crisis might offer parallels, but that crisis occurred when China had a smaller economic footprint and the advanced economies were in reasonably good economic shape which is not the case today.

From this alternative perspective, an effective response to the economic consequences of the Covid-19 will require not only active and targeted macroeconomic measures, but a series of remedial policies and institutional reforms needed to build a robust, sustained, equitable and climate-friendly growth trajectory that would reduce the chances of a subsequent economic breakdown. [...]

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