Opinion: The world may be heading toward a global recession
Coronavirus has swept world leaders off their feet (and not in a romantic sense). The crisis that originated in China has now spread across the world. A majority of the countries in Asia, Europe, Africa and the Americas have either declared a complete or partial lockdown to halt the rate of infections.
However, the impact of the pandemic is not just limited to a public health emergency, it is also followed by a huge economic downturn.
The lockdown led to an abrupt halt in commercial activities, which still threatens to impose great damage to the entire world economy. Recovery from this crisis could take years. The economic storm will engulf not only the developing nations, but also superpowers like the United States.
The crisis knows no national borders, and everybody hurts. In the past three weeks, more than 16 million Americans have filed for unemployment.
“The massive number of suddenly unemployed and furloughed Americans speaks to the urgency of our economic predicament,” said Greg McBride, a chief financial analyst at Bankrate.com.
World leaders are not oblivious to the looming recession.
The United States, United Kingdom, Germany, France and other prosperous nations have announced plans to inject trillions of dollars into their economies to provide monetary reliefs and boost demand. Up until August last year, if you told someone that the government would be distributing ‘free stuff,’ they would have mocked you.
Desperate circumstances call for desperate measures, but leading economists fear that financial interventions intended to ease the global crisis could cause even more fundamental problems.
The government is asking people to spend money by going over their credit card limits, thus increasing consumer debt. In the United Kingdom, banks are offering momentary reliefs in the interest payments of home loans, and Bank of America has deferred payments on credit cards, some mortgages, and auto loans, while a lot of banks all over the world have allowed the moratorium of Equated Monthly Installments (EMIs) to cushion the blow on bank debtors.
This, as comforting as it sounds, does not mean that the owed payments are being canceled, as they will still need to be paid at a later date. The bills are mounting as rapidly as the sources of income are shutting down. Excess government spending in the midst of a global crisis gives birth to the problem of inflation.
Inflation, simply put, means that we are printing more money to provide liquidity in the system. Once governments start pouring stimulus money into the economy, it becomes extremely hard to pull it back out again, as with the case in the U.S. during the presidential election year.
Economists suggest that inflation is already happening now, but is disguised by the temporary coronavirus crash in demand. Once the lockdown begins to lift with the decline in the infection rates, a large enthusiastic population will start working, shopping and going out to eat. There will be too many dollars chasing too few goods and services, a classic case of inflation.
The situation looks even more grim for the developing nations with foreign investments being pulled out, forcing people to pay more for imported goods and threatening governments with insolvency.
For anyone who thinks that governments cannot go bankrupt, last month’s announcement of the Lebanese Prime Minister, Hassan Diab came as a reality check. He admitted that the country would not be able to pay $1.2 billion in Eurobond when it reached the redemption date. Lebanon was referred to as “the Switzerland of the East” back in the 1960s because of its remarkable banking system.
Even after the virus is somehow cured, which will hopefully be soon, the world that will emerge from it will have to be ready to face a vast array of problems: economic, political and social.
Mass unemployment will prove to be costly for society. A steep decline in investment and innovation may take a deadly toll on the industrial sector. Consumer spending accounts for two-thirds of the economic activity worldwide. The consumer will be reluctant to spend if they are grappling with fear and anxiety, while social distancing may still remain an indefinite measure.
“I feel like the 2008 crisis was just a dry run for this,” Kenneth S. Rogoff, an economist at Harvard, said. “Everything depends on how long it lasts, but if this goes on for a long time, it’s certainly going to be the mother of all financial crises.”
Yusra Asif is a junior in the College of Arts and Sciences. She is a senior reporter for The Review. Her views are her own and do not reflect the majority opinion of The Review’s editorial staff. She may be contacted at email@example.com.