“This time it is different, every part of the economy is being hit at the same time,” Alasdair Ross, Countries Editor, The Economist
This is a global problem and like the great recession global coordination will be needed if we are going to minimize the damage. But Alasdair Ross, countries editor at The Economist, is still optimistic: – Im really optimistic about the capacity and the achievements of the systems.
There is nothing fundamentally wrong with the economic system as appose to the last economic collapse 2008, but why do we see these massive economic consequences?
– It is interesting, recessions are normally caused by collapses in the supply of goods when credits decreases. The recession in 2008 was a credit crunch and that’s what pushed the economy over the edge then. Businesses need credit to function and when banks are unable or unwilling to lend to them, the business have to adjust. But this time it is different. Every part of the economy is being hit at the samt time, and business can’t function because they can’t get their workers in or their supply chains are breaking down and they can’t get their customers to them. Customers can’t consume since they are stuck at home, perhaps with heavily reduced funds because they are not able to work.
Even massive action of economic stimulation has limits in what it can achieve. When entire countries are in lockdown it doesn’t matter how much money you pump in to peoples pockets if the can’t get out to spend it and put it back in to circulation. But that money is hugely important to preserve the mechanisms of the economy until such time when they can be bought back to life which one hope is a question of weeks or months rather than any longer than that. When a recession is cause but structural weaknesses, as the last one was, those weaknesses have to be repaired before things can get back to normal. That’s less the case here since this crisis is cause by one single parameter.
We see local countries launching support packages for SME’s but what can lager institutions such as EU do to help these businesses who are working on a global market?
– This is a global problem and like the great recession global coordination will be needed if we are going to minimize the damage. It has to be adressed at a global and a multilateral level and multilateral institutions and regional blocks as the EU will need to coordinate their policys to avoid, as far as possible, that policys that aim to protect one country does it at the expense of another. Recent years we have seen a pull back from multilateralism and internationalization that I would suggest is a risk that will end up making this crisis worse than it has to be.
What are the different stages these SME’s will go through the coming year?
– It will vary a lot by sector. Some sectors are less vulnerable than others. People like me and organisations that provides information or advices may find themselves in good times. There is nothing really that stops someone like me continuing to do what I do. Contrast it with a company that have a chain of cafes or pubs – they are instantly, immediately in crisis because instantly their cashflow stops. And with instantly I mean that in a few days these companies are going from scratching their heads wondering what is going to happen, suddenly finding that they have no customers.
In those kind of circumstances everything that can stop those companies going bust is immediate aid and financial injections. I think that is what governments are focusing on at the moment. There is a big race on the policy side to develop and then implement policys quick enough to get ahead of the economic crises. It is a race against time.
As the contagion makes its way through the population and our economies get through the peak and come out again on the other side, as long as businesses have been helped to get through the immediate cashflow and liquidity problems there is every chance that they can come back afterwards. But there are many companies that won’t make it to the other side.
I have seen criticism that the government are too keen to support businesses and do it at the expense of people. I don’t really see that distinction, because businesses are people. And the people who work for those businesses will have nowhere to go back to work when the crisis is over unless those business are protected. Help has to go in both directions, both to the people and to the business.
How will politics and their decision making affect the country’s economy, countries have similar strategies but executed in different time lapses and with different force, who do you think will cope better?
– I think that is a fair question because I think that as much as one would like to ignore it there is a kind of macabre competition going on here to see who’s government makes the best job of coping with this. There is an awful lot of politics in it and this is an opportunity for opposing sides to make accusations at each other. In terms of whose approach is gonna prove at the end to have been the most effective is quite hard to say because so much is uncertain at the moment.
There is a lot of basic information that we still don’t know about this epidemic and until that comes clear, which may be in a long time, we won’t really be able to say which strategy would have been the most successful.
There are two strategies – lock everything down and suffocate the virus. But the risk with that is that once you relax there can be a second wave and you find yourself in a position where you have to maintain the deeply damaging and impractical restrictions for a very long period of time. And that can be far more damaging in the long run. But on the other hand we have the approach where we slow the virus and flatten the curve so that you reduce the burden on the health system. But fundamentally you allow the virus to do what you believe it is gonna do anyway, which is to make its way through a large percentage of the population. Those two approaches seems to have been the competing ways of looking at this, but I think that we all are roughly heading in the same direction and the only variable is how long it’s gonna take to get there. Since we are just in the beginning of the epidemic I don’t think in the long run it will make a great deal of difference.
We see a slightly calmer situation is China right now, when do you think China will open up for business again, and how will this affect the rest of the world and in particular the EU?
– China is already opening up, people are going back to work. How ever Wuhan where the outbreak began remains in lockdown. People are still in their houses and that will remain the case for quite some time. There are signs of China having overcome the worse of the crisis as the sharp upward curve in new infections has leveled out. From that perspective it looks good. The big concern in China and the thing Im looking at is when contagiousness is going to pick up again as all restrictions are lifted. As the Chinese are celebrating the end of the crisis, and they may be right, there is a risk of a second wave. It was the case with the Spanish flu a hundred years ago. The first year of the flu there were a lot of infections and deaths and then it faded away. The second year it came back and it was much worse, it was three or four times as big in terms of impact as in the first year. So I think that’s the nightmare scenario that keep us from relaxing.
China has become an absolute critical driver of global growth and with China of the table the global economy is very shaky so we should all be hoping that chinas economy comes roaring back after this crisis.
The Chinese central bank has not acted as drastically as other central banks, why haven’t they already and what do you think their action will be?
– I think the Chinese economy has been charging forward since the financial crisis in 2008 on the bases of a great deal of stimulations both from the central bank and from the government. Money has been very loose. There are limits on how much more China can do. They will of course do anything they can to strengthen its economy because it is absolutely vital for the Chinese system that the authorities can deliver economic success since their credibility as an authority I based on that.
It is normal after a crisis like this that the economy rebound and if China has indeed quell the virus on a sustainable bases then there is a chance that the economy will rebound but Chinese growth will be lower this year than it otherwise would have been.
How will the isolation of countries and regions affect us in the long run? Will this change how we encourage globalization moving forward?
– There are two ways this can go basically. We have been backing away from globalization for some years now. There is much more nationalism and isolation on the political agenda now compared with some year ago. It is clear the mood in the world is not wanting more globalization, it’s the opposite. We have to wait and see if what arises from this crisis is a shift in the mood of people. Maybe people have noticed that international cooperation is necessary or it could be the opposite. I don´t know which way it´s gonna work.
Fundamentally Im an optimist but at a time like this its quite hard for your optimism to break through, but generally speaking Im really optimistic about the capacity and the achievements of the systems.
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