By Foday Moriba Conteh
What initially seemed localised is now worldwide and economic pain will go on for far longer than first thought. Travel bans; Sporting events cancelled. Mass gatherings prohibited. Stock markets in freefall. Deserted shopping malls. Get ready for the Covid-19 global recession!
Up until a month ago this seemed far-fetched. It was assumed that the coronavirus outbreak would be a localised problem for China alone and that any spill over effect to the rest of the world could be comfortably managed by a bit of policy easing by central banks but when it became clear that Covid-19 was not confined to China and that the economic effects would be more widespread, forecasts started to be revised downwards. But Central Banks, Finance Ministries and independent economists took comfort from the fact that there would be a sharp but short hit to activities followed by a rapid return to business as usual.
If history is any guide, the global economy will eventually recover from the Covid-19 pandemic, but the idea that this is going to be a V-shaped recession in the first half of 2020 followed by a recovery in the second half of the year looks absurd after the tumultuous events of the past week.
What’s more, policymakers know as much. The Sierra Leone Central Bank – did not need to be told by Julius Maada Bio that it needed to cut interest rates and resume large-scale asset purchases known as quantitative easing by slashing rates to nearly zero and pledging to expand its balance sheet by normal rate.
In the coming weeks the Bank of England can be expected to cut interest rates to 0.1%.
In the UK the coordinated response by the Bank of England and the Treasury last week was seen as a textbook example of how policymakers thought to respond to the crisis. It was, though, only the start. Airline companies will quickly go bust unless they receive financial assistance. So, in the coming weeks the Bank can be expected to cut interest rates to 0.1% – the lowest they have ever been. It has been clear from the start that Covid-19 affects both sides of the economy: supply and demand. The supply of goods and services is impaired because factories and offices are shut and output falling as a result. But demand also falls because consumers stay at home and stop spending, and businesses mothball investment.
Conventional policy measures – such as cutting the cost of borrowing or reducing taxes – tend to work better when there is a demand shock. There is a limit to what they can do in the event of a combined supply and demand.
One reason for that is because the economic disruption caused by Covid-19 is enormous. Discretionary spending by consumers appears to have collapsed in recent days. Despite globalisation, much economic activity remain but here, too there will be an impact as people cancel appointments at the Government Ministries.
What’s more, in a service-sector dominated economy much of the lost output is never going to be recovered. If people do not go out for their weekly meal at their favourite local restaurants for the next two months they are not going to eat out four times a week when the fear of infection has been lifted.
It also seems likely that the economic pain will go on for far longer than originally estimated. Having imposed bans and restrictions, Government and private sector bodies will be hesitant about removing them.
There is also a question of how long it will take us consumers and business confidence to recover.
