Deeper in 2020, slower in 2021
“The crisis like no other will have a recovery like no other,” IMF chief economist Gita Gopinath said this week. I couldn’t agree more. We have never had a sudden stop in global economic activity like this one. It is only natural that we do not yet have a real idea of how to get out of this mess. For an economist, this is a real-world experiment of planetary scale.
That’s what IMF growth forecasts are telling us. Remember the January 2020 global growth expectations? When COVID-19 was an event in distant China, the global growth forecast was at 3.3 percent: Sluggish, but in positive territory. In April, there was a revision down to -3.0 percent. March 2020 really started to teach us about the nature of the economic problem, and now that we’re in June, we have another downward revision to -4.9 percent.
We now know that the recession of 2020 is going to be deeper than expected and that the possible recovery of 2021 will be slower than expected. Yet the predominant expectation still appears to be V-shaped, as far as I can see. The key here is to remember that this is an unprecedented event, and that we have not been very good about predicting it so far. This invites a bigger than usual dose of self-doubt. Rather than making a firm prediction, I will identify three trends that are important to watch regarding the shape of recovery.
First is the rise of new COVID-19 cases in developing countries. As of June 2020, that is where the virus is spreading the fastest. If you look at the top 20 countries with the highest new numbers of cases, 18 are now developing countries. Asia, Latin America and Africa. If this turns into a serious trend, it’s going to be more bad news for economic activity in developing countries, especially for ones with high indebtedness and troubled banking systems. Coupling a global sudden stop with a global debt crisis means an even deeper recession in 2020, and slower recovery in 2021.
Second, reopening means lower productivity, because social distancing inevitably slows down business. Lower productivity means higher working capital needs for companies. Any kind of adjustment in a business model to cope with lower productivity requires time and even more working capital, and that’s what we don’t have in developing country micro enterprises and SMEs, many of which are already in dire straits.
Third, reopening does not adjust consumption baskets instantly. Around 75 percent of countries have been reopened, yet the adjustment through exports is still very problematic. It’s the credibility of both the health and the economic response in each locality that is elemental in this adjustment. In the absence of a global collective response, the adjustment takes time, and those already troubled companies will need more working capital.
Looking for the bright side of this calamity? I see one. The low frequency data that we used to collect to analyze trends in economic activity is no longer adequate during this period. We now need high frequency data to understand what is actually happening in the real economy. That’s why we started using bank credit card expenditure data, for example, to understand the impact of the virus. Can you imagine what this means? With digital transformation getting deeper and deeper, more data is collected in private hands. It means that it is no longer the governments who have the deepest, most incisive knowledge about the economy, but the private sector. This, I tend to think, is something rather soothing, considering the tendency of some governments to hide their numbers these days. Why they’re still trying to do this, I don’t know. After all, nobody can hide the long queues of people applying for odd jobs.