Covid-19 – addressing the economic shock
One year ago, the World Health Organization (WHO) declared that COVID-19 was a pandemic. By the time Covid was declared a pandemic last March, there were more than 118,000 confirmed cases of the virus in 114 countries and more than 4,000 deaths. Many European countries locked down the same week amid rising hospitalisations.
A year later, there are more than 117 million cases and 2.6 million deaths globally.
The economic effects of the restrictions on business activity following the outbreak of the pandemic prompted an extraordinary response by policymakers, and we have seen unprecedented measures taken both in terms of fiscal and monetary policy. Fiscal interventions have provided support to thousands of families and many businesses, as well as numberless loan guarantees and debt moratoria. Monetary policy has provided liquidity support and enhanced credit facilities. The IMF is currently making about $250 billion, a quarter of its $US1trn lending capacity, available to member countries.
The international banking community has put in place a package of measures designed to help keep firms in business and people in jobs, and help minimise the longer-term damage to the economy when Covid subsides. Banks have also contributed, offering their own relief measures for debtors such as extending payment moratoria, granting pre-approved loans or advancing the payment of pensions and unemployment benefits.
All this has helped to preserve confidence and ensure credit and liquidity were extended to the economy at times of maximum need.
Support for companies
With regard to government and the banking sector’s support for companies, a significant number of companies will continue to be unable to meet their financial obligations and it may be that a large number will need to be restructured or liquidated. This might happen to companies with financial difficulties or it may be that there is simply no future due to systemic changes in the marketplace, such as, for example, reorientation towards a more sustainable economy. It will therefore critically important that banks apply sensible guidelines when ordering the borrower classifications.
In terms of government intervention, the problem lies in applying tight constraints, first in order to distinguish between viable and non-viable companies, and then, for those viable entities, helping to facilitate access to financing, or guidance on restructuring their financial obligations.
Building back better
The report, Are We Building Back Better? drew together researchers from the UNEP and Oxford University to analyse the economic recovery efforts by 50 leading economies in 2020. It found that of the US$14.6tn in spending announced in 2020 across the largest economies, just US$368bn was “green”. This extended into long-term recovery efforts too. Of the total spent by governments in 2020, just US$1.9tn (13%) was directed to long-term recovery measures, the report noted. Of that, just US$341bn (18%) was earmarked for green initiatives.
BBC World Business Report – BBC’s Business and Economics teams examines the economic impact of Covid-19
A full year on from the WHO declaring Covid 19 a pandemic, the BBC World Business Report examined the economic impact with LBS’s Richard Portes talking to the BBC’s Lucy Burton and UCL’s Mariana Mazzucato.
“Reactions were quick; central banks moved in to stabilise the markets,” said Professor Portes. “The scarring left by the Global Financial Crisis of 2007-08 is what is principally at risk today, post Covid-19. The UK government has taken equity stakes in well over 50 firms that were indebted and the question is, what kind of conditionality will be put in place, and how will that be managed? The history of this kind of state intervention in the UK is not terribly good, so we need to think through how we manage this transition.”
In terms of addressing what has commonly come to be called, ‘building back better’, Professor Portes said: “The issues I see from a macroeconomist’s perspective when one looks at the issues associated with inclusiveness are: let’s reverse the rise in inequality, let’s strengthen labour rights, let’s raise the minimum wage. These things are perfectly within the scope of government policy and there’s no reason why we shouldn’t move in those directions. These would be part of the building back better narrative.”