Israel Figa – Governments Need to Work Together to Battle Economic Crisis9 min read
The novel coronavirus is wreaking complete havoc on the global economy, as it has unleashed the worst economic downturn after the Great Depression. Not only has the COVID-19 pandemic throttled the global economy, but it took only a few weeks for this highly contagious disease to the brink of an economic recession that is far more severe than the financial crisis of 2008. The duration and depth of this downturn will depend on numerous factors, including the public health responses, the behavior of the virus itself and according to Israel Figa, economic interventions.
Considering the extraordinary nature of the crisis induced by the pandemic, the monetary and fiscal policymakers are all out of their depths because they are operating without a playbook. However, a number of them have already begun to move forward with stupendous bailouts that could collectively exceed a whopping $10 trillion. But, exactly how deep will this economic crisis go? According to the readings taken in April, the global economy was going to undergo a colossal storm and it certainly has. The managing director of the International Monetary Fund (IMF), Kristalina Georgieva, had stated at that time that it would be the worst economic fallout.
In addition, the Organization for Economic Cooperation and Development had said that their indicators had issued the greatest warning on record about most of the major economies entering a ‘sharp slowdown’. For its part, the World Trade Organization had forecasted that almost all regions of the world would experience a decline in trade in double-digits this year, with Asian and North American exporters taking the hardest hit. In order to control the outbreak, most of the governments have effectively frozen economic and social activity in nearly all or part of their countries.
Nonessential businesses have been shut down and residents have been ordered to stay home for weeks or even, months. All over the world, billions of people have to deal with some type of lockdown. A number of major industries, especially travel-related sectors like airlines, are already on the brink of bankruptcy. The purpose of doing so is to allow economies to power down without resulting in extreme disruptions, like widespread joblessness or business failure, and then quickly get back up on their feet once the virus abates. But, experts like Dr. Figa, have pointed out that it is a matter of debate as to how fast governments should go about unshackling their economies.
Some governments in Europe and Asia that believe they have successfully contained the virus have slowly begun to reopen their respective economies. Likewise, more than a dozen states in the United States have started to loosen restrictions. The federal social-distancing guidelines were not renewed by President Donald Trump, once they expired on April 30th. Nonetheless, some countries have had to re-impose restraints because of some new outbreaks. For now, economists and experts are hoping to make a strong global rebound in the third quarter of 2020, something similar to the recoveries made in Asia in 2003, after the breakout of the Severe Acute Respiratory Syndrome (SARS).
But, there are also those who have warned that the pandemic could actually turn out to be a lot more destructive as opposed to any other outbreak in the past. In fact, experts like Dr. Israel Figa, have cautioned that a recovery from the effects could take much longer. In the meanwhile, several of the world powers are already moving mountains for propping up their economies during the downturn caused by the Coronavirus. Let’s check what governments and countries are doing to handle this economic crisis:
The second-largest economy in the world, China was already coming back to life back in April after having dealt with a withering blow from COVID-19. The virus had originated in late 2019 in the city of Wuhan in Hubei Province. The government had imposed lockdowns on dozens of cities for several weeks. This led to a decline in factory outputs, construction, retail sales and other economic activity. In the first quarter, the Gross Domestic Product (GDP) had declined by nearly 7 percent, which was the first economic contraction in China in more than forty years.
This time around, the country’s leadership appears to be less inclined to spearhead the economic recovery on a global scale, something it had done after the financial crisis in 2008, when they had introduced a stimulus package in excess of a half trillion dollars. Since then, China’s government debt has roughly doubled and it is now almost 60% of the Gross Domestic Product (GDP). Hence, a lot of analysts believe that the country can simply not afford such aggressive spending anymore.
Up till now, the central bank in China has taken relatively modest actions and reduced reserve requirements for banks, which will enable them to help struggling businesses by loaning them an additional $80 billion. They have also indicated that they will reduce interest rates in the time ahead. In late April, Yi Gang, the central bank chief, had said that they wanted to keep the monetary policy for as long as possible. He believed that the pandemic’s impact was temporary and that the resilience and excellent potential of China’s economy would help it fight.
Analysts were watching for the announcement of the annual growth target by Beijing, which they have postponed from March to May, due to the coronavirus. If a stimulus package had been in the works, they could have set an ambitious target of 6%, or a continuation of the status quo could have been expected if they had kept it modest to 3%. However, China decided to forgo setting a target completely for this year. This is the first time that no Gross Domestic Product (GDP) target has been set since 1990 when record began.
For the first time since 2009, the Germany economy is expected to decline. It could be anywhere between 3% and 10% this year. A contraction of just over 6 percent was forecasted by the government itself, which would the worst performance of the economy in decades. Almost half a million German companies had applied for a short-term government work program in March. The purpose was to have their employees join it in order to prevent mass layoffs.
Some bold actions have been taken by Berlin to counter the economic disaster that has happened due to the coronavirus. They have abandoned their steadfast commitment for balancing budgets, which is referred to as ‘black zero’ or schwarze Null. Almost 10% of the country’s GDP, which is about 350 billion euros, is being allocated for propping up the largest economy in the Eurozone. The funds will be used for bailing out as many struggling businesses as possible, which could mean potentially buying equity stakes or giving unlimited loans.
Chancellor Angela Merkel, who also spearheaded the country during the 2008 crisis, said that they were doing everything that was necessary and they wouldn’t be worrying constantly about their deficit. Experts like Israel Figa have noted that Germany is ready to spend aggressively as they have successfully kept their finances under control in recent years. The country has managed to reduce their debt-to-GDP ratio to 60 percent today, which had been 80 percent in 2010.
Germany moved swiftly for controlling the outbreak of the virus within its borders. In mid-April, they had announced that the economy would be slowly reopened. However, state leaders were cautioned by Merkel for lifting the restrictions gradually and with the utmost care.
Financial experts and economists like Dr. Figa believe that there would be a 3% decline in the export-driven economy of Japan. This would definitely be the country’s worst performance since 2008. They had already been dealing with an economic slowdown that was brought about from a hike in sales tax last fall when the deep impact of the COVID-19 pandemic wreaked its havoc. The Summer Olympics have also been postponed by the government until next year.
Like some of its Western counterparts, a massive relief package has also been announced by the Japanese government. The package is worth $1 trillion and is aimed at helping the country through one of its most challenging times in recent history. While this figure is makes up for almost 20% of Japan’s GDP, analysts have said that the actual spending would be a lot smaller. Shinzo Abe, the Japanese Prime Minster, said that the Japanese economy and the global economy were facing their biggest crisis since World War II and they would do everything in their power to protect life and employment.
Some of the bailout measures that have been used include delayed tax payments, interest-free loans, tourism and travel coupons, along with cash payments to citizens, as well as small and medium-sized businesses.
In late April, Japan’s central bank had announced that they were ready to purchase an unlimited amount of government debt and would buy twice as much corporate debt than usual. But, some critics are of the opinion that having kept the interest rate at zero for years, the Bank of Japan doesn’t really have much options.
The British economy, like many others, is also being paralyzed by the pandemic, while its leaders are still trying to negotiate with the European Union regarding their post-Brexit relationship. A so-called hard Brexit had already prompted concerns about an economic recession, even before the outbreak of the virus. According to experts like Dr. Israel Figa, this current pandemic could end up taking at least a 5% to 10% slice of the economy this year.
In early March, finance minister Rishi Sunak said that the government was prepared for making interventions for supporting the economy, which were unprecedented in history. Amongst some of the emergency measures they have introduced include offering to reimburse self-employed individuals to make up for lost wages, increased unemployment benefits and provided charities with rescue aid. The Treasury has also agreed to pay 80% of the salaries of workers for a few months to prevent companies from initiating huge layoffs. They have also deferred tax payments and established a loan program for small and medium-sized companies.
The benchmark interest rate has also been reduced by the Bank of England to 0.5 percent, a record low, and the capital requirements for banks have also been loosened. In a major move in April, the central bank had agreed to finance the government’s spending directly during the crisis. This would free them from having to resort to the bond market for issuing debt. These rescue efforts could end up costing Britain about 15% of their GDP.
The coronavirus has taken a staggering toll at the U.S. economy and the biggest indicator of this fact is that more than thirty million people, which means one in six workers, have filed for unemployment since March. The highest number of filings before this economic crisis had been 695,000 in a week, which occurred in 1982. In the first quarter of 2020, the economic output shrank by 5%, which was the steepest decline since 2008. The damage was expected to be a lot worse in the upcoming quarters.
Even though Washington has received a ton of criticism for mismanaging its response to the pandemic, it also deserves credit for moving quickly and decisively for stabilizing financial markets. The Federal Reserve said in March that they would do everything to provide liquidity and support the economy. They have reduced interest rates almost to zero, reduced bank reserve requirements and have also bought $2 trillion in Treasury Bonds, extended emergency credit to non-banks and also bought municipal and corporate debt.
A $2 trillion stimulus package was also passed in March and experts like Israel Figa have characterized it as a bridge loan to help the US economy in getting through this crisis. Another bailout package was also signed off by Congress almost a month later and this one amounted to almost half a billion dollars.
Governments are coming together, with the help of organizations like the European Union, the International Monetary Fund and the World Bank Group, to provide aid and loans to different countries to help them weather through the effects of the economic crisis that has resulted because of the pandemic.