Road to economic recovery will be long and hard

Experts estimate that when the world emerges on the other side of the coronavirus pandemic, global gross domestic product will have shrunk by about $4 trillion. For the largest economy in the world, they predict a 19 percent drop in GDP despite the stream of stimulus packages coming out of Washington designed to keep the economy afloat. Worse yet, even though a third of the labor pool is now unemployed, there is still significant resistance to ending lockdowns and stay-at-home orders — so economically the worst is not over.

The second-largest economy is faring better, with Beijing having eased restrictions three months ago. However, everyday activities and major economic growth drivers such as travel, transport, manufacturing and consumer spending have still not fully recovered.

For the rest of the world, the situation is more dire because many governments lack the tools and resources to boost social safety nets, let alone improve healthcare delivery. People in emerging markets are under lockdown, hurting export earnings, collapsing tax revenues and discouraging foreign investment, all essential to any meaningful recovery. The G20’s temporary debt payment freezes are welcome but they ignore the long-term impact of a prolonged halt to economic activity in nations that are heavily reliant on uninterrupted global trade and stable commodity markets, and sensitive to the tiniest disruptions in global supply chains.

With such limited options and the re-writing of the usual economic recovery playbook, the last — perhaps the only — resort that most countries have is debt.

The International Monetary Fund estimates that public debt across the developed world could rise by $60 trillion, or about 15 percent of combined GDP, numbers last seen in the immediate aftermath of the Second World War, dwarfing deficits from the 2008 financial crisis — or any other global economic crisis for that matter. The trouble with these estimates is that there is no clear date for when most of the world will fully ease restrictions — meaning cumulative debts will probably increase if lockdowns last longer.

As debt piles up, so do the costs of servicing it, but interest rates are historically low and it will be decades before they increase, which makes debt cheap. Central banks are also capable of keeping interest low by increasing bond purchases, and concerns about rising inflation have gone by the wayside with the unprecedented collapse in demand for oil.

Unfortunately, these assumptions work only if central banks have proper tools in their arsenals and provide adequate support to reduce the impact of fiscal crises. These foundations are shaky because oil prices will certainly increase as the world slowly reopens, re-igniting concerns about inflation that may force some central banks to ease bond buying, causing a premature rise in interest rates and making debt servicing more expensive.

With such limited options and the re-writing of the usual economic recovery playbook, the last — perhaps the only — resort that most countries have is debt.

Hafed Al-Ghwell

Of 66 emerging markets around the globe, only Saudi Arabia, the UAE, Kuwait and Morocco have the adequate combination of low public and foreign debt, reduced borrowing costs and sufficient foreign exchange reserves. Countries such as Lebanon, Tunisia, Jordan, Egypt and Iraq do not, leaving them exposed to the risk of failing to balance austerity with stimulus. Long after the pandemic, parts of the Middle East will struggle to recover, even countries that were on course to rein in public spending and rationalize budgets.

Rising debt levels like this were last seen 75 years ago but countries should not look for clues to recovery there because conditions are vastly different. It took decades for parts of the world to emerge from such massive debt, aided by a population surge and rising literacy rates — while fiscal policy favored high taxes (a non-starter now), holding domestic debt at artificially low rates, and inflation (reducing the real value of debt over time).

On the other hand,from  the European debt crisis we already know what happens when countries take short cuts to reining in debt. Austerity failed to deliver consistently positive outcomes and the EU is still reeling from the political backlash of trying to cut budgets.

Current disruptions to global supply chains, commerce and depressed commodity markets mean that export-driven economies in the region must prepare for an extended period of declines or sluggish growth and plan accordingly. It would be ill-informed to base future growth projections on a rapid rebound in demand because it ignores the residual paranoia that continues to grow as the world becomes more accustomed to living life under lockdown.

The effects are not immediate, but in a post-pandemic world such paranoia would encourage greater insularity, reduce immigration and lead to calls for more protectionism — even if it is just to shift the frontlines against future pandemics via tighter controls and a greater preference for bilateral rather than multilateral trade. It dampens any recovery efforts, necessitating more borrowing and increasing the debt burden, which would severely limit the ability and resources of future governments, especially in poorer nations, to act should another pandemic or financial crisis emerge.

For once, governments will have to look at the books and look for other ways to balance budgets while treading a razor-thin wire between greater stimulus or the prudence witnessed in the aftermath of the 2008 global financial crisis.

• Hafed Al-Ghwell is a non-resident senior fellow with the Foreign Policy Institute at the John Hopkins University School of Advanced International Studies. He is also senior adviser at the international economic consultancy Maxwell Stamp and at the geopolitical risk advisory firm Oxford Analytica, a member of the Strategic Advisory Solutions International Group in Washington DC and a former adviser to the board of the World Bank Group. Twitter: @HafedAlGhwell