• jmcdonnell64

The Global Economy is on the Verge of a Catastrophe

People in Australia seem to be relatively nonchalant about the economic slump caused by COVID-19. This may be because the impact of the disease has been relatively mild or because the Government has cushioned the blow with the biggest financial package of all the OECD countries (with the exception of the United States). However, the world is on the verge of an economic catastrophe and as yet there does not seem to be any way to avoid it.

On April 14 the IMF released a report that said that the global economy was likely to face the biggest contraction in nearly a century. Since then the United States has had 25 million people apply for unemployment benefits. There are estimates that America has 25% unemployment which is worse than the great depression.

China has experienced negative growth in the June quarter and may not recover in the September quarter. The situation is similar in Europe. This means that the locomotive economies have literally run out of steam.

All the G20 economies have frozen economic activity to some degree if not totally. Industries like air travel and tourism and hospitality have many businesses on the edge of bankruptcy, while others have virtually ceased production. Even institutions like universities in America are in danger of going bankrupt because they have no revenue. Professionals who were thought to have secure jobs are being forced onto the dole queues.

The idea was that economies or parts of them could be put into hibernation and revived once the pandemic had peaked. This is now looking less and less likely.

In order to recover from the downturn, there has to be a global plan. Individual countries will need to restructure their economies but there will also need to be an agreement to keep the global trade and payments system open because the world economy depends on multinational supply chains and international currency exchanges.

The problem is that the Trump administration has neither the capacity nor the inclination to take a global leadership role. It will be locked in a bitter election battle for the rest of the year as well as dealing with the devastation of the virus. That leaves China, the world’s second-biggest economy, to fill the void.

China has its own problems. Several weeks of government-imposed lockdowns on dozens of cities led to double-digit percentage declines in factory output, retail sales, construction, and other economic activity. Urban unemployment reached a record high of more than 6 percent in February.

China’s leadership seems less inclined to spearhead a global economic recovery this time than it did following the 2008 financial crisis when it spent liberally on a stimulus package of more than a half-trillion dollars. In the years since, China has roughly doubled its government debt—to about 60 percent of gross domestic product (GDP)—and many analysts think it cannot afford to spend so aggressively again.

Most of the other major economies have a debt problem. However, in order to get out of the current situation, they have to simultaneously boost growth and productivity. Percy Allen, the Professor of Economics and Business at the University of Technology Sydney, makes the point that because inflation is low governments can print money in the short term to stimulate their economies. At the same time, countries could move to harmonize their tax and welfare systems as closely as possible as a means of encouraging business activity and employment.

Finally to ensure that productivity is boosted and growth is sustainable the top 20 countries should reduce protection in order to ensure that economies are based on comparative advantage and efficient resource allocation.

This is a big task for the G20 and someone needs to get the ball rolling immediately or we are doomed to a lifetime of misery.

29 views0 comments

Recent Posts

See All

What’s Behind the Victorian Recovery Roadmap

Medical authorities have praised the Andrews government’s recovery roadmap but the business has slammed it as an over-reaction. The Prime Minister has said that he hoped the Andrews’ plan is the worst

Premiers Prefer To Stay Under the Doona

At last Friday’s National Cabinet meeting Scott Morrison put forward a perfectly reasonable plan to re-open the national economy based on isolating hot spots but the premiers preferred to stay under t

Parliament Resumes

Parliament resumed on Monday under novel circumstances. Some members participated by way of video link, while others from Victoria had to spend two weeks in quarantine in order to attend parliament. T