Here comes the recession again!
View(s):“Fall of the West and rise of Asia”, was the title of a couple of lectures I used to deliver a few years ago. It was about the global economic crisis in 2008/09. Although the crisis was called “global”, it was the advanced countries – particularly the US, Europe, and Japan, which suffered the most and, not so much the Asian countries. In fact, the Asian developing countries benefitted from it, as the title of the lecture inferred.
File picture of a worker gathering a stock of onions in Pettah last week.
After little more than 10 years, here comes a global economic recession again, led by the global epidemic, coronavirus. But this time, it is really “global” in which Asia is not excluded. Unlike in the previous case, this time the recession is visible too. The global crisis in 2008/09 was like a tsunami in the midnight so that it was a surprise to the world economy. But the present recession is in the daylight so that everyone can see the tsunami coming and, they anticipate it too.
The only questions which have no clear answers would be as to how big and deep it is going to be and that what types of policy regimes and economic orders that it would bring about.
Boom and bust
An economic recession is a significant decline in the volume of economic activity. Accordingly, we would see businesses plummeting, trade and exchange contracting, distribution and sales dropping, consumption and investment declining, and economic growth falling. Finally, it is people who would bear the cost with income losses, job losses, poverty and increased hardships.
The fallout can be very severe too to the extent that it can wipe out the values of investment and accumulated global debt. Perhaps, in some places the economic crises can lead to political repercussions as well. Usually the recessions are also followed by a change in economic policies too.
After sometime, there would be a recovery – a period of expansion in economic activity. It would reverse all negatives back to their normal levels.
Recessions are all about demand and supply, whatever the cause may be. It can be seen from falling demand or falling supply or both.
The global economic crisis of 2008/09 was primarily demand-driven and originated in the financial markets. The world became poorer as the accumulated wealth was lost overnight causing a credit crunch so that the world consumer demand started falling. When the consumer demand falls, production has to be down and, trade and exchange contracts too.
When production is cut down, demand for producer goods – raw materials, parts, components, machinery, falls too.
As business plummeted, people lost incomes and jobs, causing another round of loss in consumer demand. It is the continuation of the recession with spiral effects.
Asian countries did not suffer the global financial crisis in 2008/09 unlike advanced countries did. The economies of high-income countries contracted by 3.5 per cent in 2009, with a loss of nearly US$3 trillion from their GDP. Asia and the Pacific still reported around 7.5 per cent GDP growth in the same year.
Road to recession
The outbreak of the coronavirus disease 2019 (COVID-19) in Wuhan, was reported by China on December 31, 2019. The world first thought it as a local issue that China had to take care of.
Within less than three months it had spread over to more than 150 countries in the world. Among them, the impact of the spread quickly exceeded the prevailing health capacity in Italy, Spain and Iran, while some other countries are in the line to follow them. The spread of infections was exponential. According to world authorities, the first 100,000 cases of infected persons was reported in 67 days, the second 100,000 in 11 days, and the third 100,000 in just four days. The World Health Organization (WHO) declared it a “pandemic” on March 11.
Most of the countries in the world are now in lockdown mode, which is an ‘isolation’ from engaging in daily affairs of economic activity, which is the road to an economic recession. There are no interactions and transactions. It cuts down both aggregate supply on the one hand and, aggregate demand on the other hand.
Carrying capacity
For example, more than 100 countries in the world have imposed travel restrictions, as BBC reported on March 20. The EU has sealed the borders banning travellers from outside for 30 days, grounding 48,200 flights with over 10 million passenger seats – a cut down in supply. The airlines don’t demand for fuel, food and drinks, airport services and, the passengers don’t demand for air tickets, local travels, accommodation, and whatever the businesses they planned to attend – a cut down in demand. People, firms and countries don’t generate incomes and jobs.
Countries have adopted strict measures to keep citizens in isolation confining to their homes. They don’t work and don’t generate incomes and employment. Production declines, resulting in lower supply. Consumption declines, resulting in lower demand. As one of the first indicators of the recession, the values of the company stocks all over the world declined.
Here is the dilemma: The longer the lockdown, the easier would be the control over the spread of the virus, keeping it below the capacity limit. But the longer the lockdown, the harder would be the impact over the economy, which determine the depth and the width of the recession.
Nationalist distancing
There is, apparently, a boom followed by the recession, and that boom period would also be accompanied by new policy regimes. Booms and busts are usually characterized by different policy regimes. It is not because the governments decide to change their ideologies, but because it is the need of the hour. Countries cannot go on endlessly along one policy regime, since there would be time requiring them to change the policy package.
A typical policy response after a recession would essentially require monetary and fiscal policy stimuli – a policy package that has been used for too long since the global economic crisis in 2008/09. Today the need for the same policy package is even more than ever before, but the world has been approaching their limits now.
Depending on the depth and the width of the recession, countries would be forced to more disciplined monetary and fiscal policy management as well as, perhaps, even to more painful levels of their implementation.
There is also a possibility of moving towards policies of nationalist distancing as a side effect of the social distancing. Its foundation was already laid down since the global financial crisis in 2008/09 with the resurgence of protectionist tendencies, US-China trade war and the Brexit.
The forthcoming recession has all necessary ingredients to usher controlled policy regimes with domestic market focus, until the need for integration and globalisation arise again as a necessary condition.
(The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk).