2020 Global Economic Review: The Stage Is Set For Disruption

Whether we like it or not, dealing with disruption will have to be increasingly incorporated into the way we do business in the years to come. But what exactly are we looking at? Nobody knows for sure; the only constant appears to be that we can expect disruption to continue for the foreseeable future. One thing that economists all agree on is that the world has taken a beating of unprecedented proportions in these past few months. However, they have also pointed out that the pandemic caused by Covid-19 is only the latest in a long list of calamities that include the US-China trade war, Brexit and general unrest in many parts of the world.

A world in turmoil throws up more risk than can be imagined; mitigating these starts with understanding the challenges that confront us. The IERP’s International Conference 2020 went live online with a Global Economic Overview as its first session, presented by Alan Tan, Chief Economist of Affin Hwang. The IMF, World Bank and Asian Development Bank are projecting economic recovery in 2021, but realistically, this is premised on recovery of the external environment and, more importantly, the availability of a viable vaccine.

Without a vaccine, the pandemic is likely to persist; markets will continue to be unsettled and uncertain. Tan pointed out that there are concerns that the global economy will not return to normal even with the availability of a vaccine. Where the virus appears to have been contained, the affected economies appear to have recovered but, realistically, have not returned to full capacity.

Even with Standard Operating Procedures (SOPs) in place, economies have remained sluggish. Many businesses, particularly SMEs, have not reopened, and there has been a sharp decline in market activity. In China, at the onset of the virus in early 2020, the global supply chain was impacted. Intermediate goods from the region were unable to be exported to major economies. But when restrictions were lifted and essential services and business activities were allowed to resume, the economy picked up almost immediately.

Improvements in the global economic environment, reflected in the global Purchasing Management Index (PMI), shows that manufacturing is starting to pick up with orders rising, going into 2021. Shipments of products are close to normal and there is less drag on the world economy. But if there is a resurgence of infections, it will decline again. Generally, however, there are signs that the global economy is recovering, spurred by positive news of the development of viable vaccines which may be available as early as the first quarter of 2021. But are the IMF/World Bank/ADB projections of recovery too optimistic?

Economies are generally interlinked and interdependent, and in recent years, have become even more so despite efforts at decoupling. The environment becomes even more difficult to navigate when there are indications that the US and Europe are experiencing a resurgence of infections with the onset of Winter. As more people fall ill, more businesses will be affected, impacting the economies of those countries. This may well create a domino effect, and have a knock on impact on economies in other regions. The US, as the world’s biggest economy, is also the biggest trading partner of many countries across the globe.

Local businesses therefore have to take cognisance of how and where their own supply chains may be affected or will be at risk, as the pandemic scenario continues without abating in the US and Europe, into 2021. Governments the world over have been grappling with the difficulties brought about by the pandemic, with many scrambling to stretch or revamp fiscal and monetary policies to shore up their economies while simultaneously trying to protect their citizens from resurging infections. It has become, in many cases, trying to juggle lives and livelihoods.

What has become obvious is that the 2020 economic situation is set to outstrip the global financial crisis of 2008, extending into the foreseeable future. There is no knowing when many economies will get back on track, considering the depth and complexity of the damage currently being experienced. Governments are having to dig deep to try and spur economic recovery through stimulus packages. Aggressive fiscal policy and easing of monetary policies globally will provide support, going into 2021. In an economic slowdown, the government usually pump-primes with expenditure on development. This has a good multiplier effect on the economy.

Investments in the construction of schools, hospitals and highways are domestic economy boosters. While these support domestic demand, they also spur further investment. But even with these injections, some industries like tourism, which have been among the hardest hit globally, may not recover for some time yet.

It cannot be emphasised enough that governments need to prevent their economies from falling any deeper into recession during the pandemic. The deeper it slides into recession, the more difficult it will be to restart growth. When the private sector suffers, the government has to give it a hand. Ultimately, all parties will benefit. In the US, the government is pumping massive liquidity into the system; from US$4 trillion to US$7 trillion in quantitative easing. The Federal Reserve has also committed to keeping fund rates low, near zero, until 2023.

The private sector will eventually recover but it needs the government to provide the necessary economic stimulus first. Rising government debt fiscal/budget deficits can then be addressed as the economy recovers. A fair measure of fiscal discipline will need to be applied in the long run. Also, once the pandemic comes under control – possibly with the availability of a vaccine in early 2021 – it will be necessary for governments to look for new revenue streams to reduce budget deficits over the next two or three years. Besides launching a raft of aid measures in support of the private sector, the government also needs to keep an eye on the unemployment rate and keep it as low as possible despite these straitened times. The higher the employment rate, the faster the economy will recover.