The Economist March 21st, 2020 pp65 Free Exchange | From V to victory. “Economies can recover quickly from massive slumps in GDP-but not always”
As mentioned in the Journal Club recently, here’s what the Corvid-19 fallout might look like. In the last weeks, economists have revised the 2020 U. S. G.D.P. from about 2% to 1.2-1.3%. Under the worse scenario dubbed “Global Pandemic” economists at Bloomberg estimate the following G.D.P changes (2020 Baseline to Worst Scenario); Hong Kong -0.3% to -5.7%, Russia 2.1% to -2.8%, South Korea 2.2% to -2%, France 0.9% to -2.6%, Germany 0.7% to -2.7%, Spain 1.5% to -1.8%, U.K. 1.2% to -0.9%, Mexico 2.3% to -1.5%, Canada 1.2% to -1.8%, China 5.9% to 3.6% and America 2% to -3%.
Based on these data America could see GDP fall 5% from 2% to -3%.
How do economies recover from a drastic decline in GDP? Most data are from weaker or emerging economies that frequently experience large fluctuation in GDP with declines of 10% or more. Examining these data, the best immediate recovery was calculated as -10% and the worse -50%. One year, two years, three years, five years and ten years the best recovered 50%, 60%, 110% and 150% respectively with an average of -20%, -10%, 10% and 50% respectively. So, three years on average for recovery.
With this unprecedented decline economists predict a fallout worse than 2007-2009. Consequently, they urge aggressive action by all governments. What steps are recommended to facilitate an optimal economic recovery?
“If countries today can survive massive output declines…without…much institutional damage, that bodes well for the pace of recovery”. Work on ensuring “trade ties are restored” and “get macroeconomic policy right” or be “vulnerable to new [political and economic] shocks”. “Provide enough stimulus” and “The world should … bounce back … once covid-19 is … under control”.