The Perfect Coronavirus Storm: a Crisis with Hope for a Speedy Recovery

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How high is the risk of a full-blown financial crisis after the pandemic? Which countries and regions are most at risk? Are national governments managing to cope with the challenge of preventing economic collapse? Such topics were the focus of attention at the annual conference organised by the HSE University Faculty of World Economy and International Affairs.

The eighth annual Global Economy Conference ‘The Perfect Storm: The World Economy in Deep Recession’ was held on November 26-27. In addition to topics related to global macroeconomic stability, discussions were also held on climate change and social issues.

In the opinion of Sergey Karaganov, Dean of the HSE Faculty of World Economy and International Affairs, the main advantage of the conference is that the participants do not follow a ‘politically correct path’ in the discussions, but instead ‘sometimes move against the prevailing wind’. Welcoming the participants, HSE University Vice-Rector, Ivan Prostakov, recalled that the previous conference a year ago opened with the session ‘What will the next economic crisis be?’. Everyone knew that a crisis was inevitable, but no one could have predicted how events would unfold.

Rapid recovery stalled

Experts who spoke at the conference generally agreed that the depth of the current recession had been very significant, but the recovery from the recession was proceeding at a faster pace than the crisis of 2008-2009. This has been facilitated by the policies of authorities and central banks, which are spending huge sums of money on supporting businesses and the general public. Even so, the world economy may not reach pre-crisis level until 2022, and many countries have not been able to avoid increasing poverty. The consequences of the Coronavirus crisis include rising debt and de-globalisation.

In particular, Marcel Salikhov, Director of the Centre for Economic Expert Analysis, at the Institute for Public Administration and Governance, HSE University, President of the Institute for Energy and Finance Foundation, noted that world GDP lost 10% in the Q2, but active recovery began in Q3, and has managed to achieve 6% growth. Although there is no positive news on the spread of Coronavirus, markets are encouraged by the imminent introduction of a vaccine.

The recovery that began with the lifting of social restrictions was faster than after the crisis of 2008, says Annette Kyobi, the IMF’s Resident Representative in Russia. However, this recovery has stalled since August, since a number of countries introduced new restrictive measures in the autumn in response to the second wave of the pandemic. Economic mobility in many countries has declined markedly in the past two months, particularly in Western Europe, Annette Kyobi said. In most developing countries, particularly in Latin America and Asia, there has been some improvement in the sales of goods and services.

Annette Kyobi drew attention to the unprecedented measures taken at government level to support economies: the central banks in almost all countries lowered interest rates, and in many countries measures were taken to maintain the liquidity of financial systems, support employment and protect other areas of the economy. Peter van Bergeijk, Professor at Erasmus University Rotterdam, also noted that the recovery of these economies after the easing of the lockdown was proceeding at a very rapid pace, which is very a positive factor. ‘We support 90-95% of economic activity, important parts of the economy continue to operate, and this is very inspiring’, he said.

Leonid Grigoryev, Professor and Academic Supervisor, HSE University School of World Economy, also drew attention to the fact that the pandemic had forced national banks to abandon the Maastricht principles and to undertake a massive injection of liquidity into the banking sector, and into the wider economy. The pandemic also led to a dramatic increase in the public debt of many countries, he stressed. Leonid Grigoryev believes early predictions of the world economy contracting by 3% this year to be too optimistic, and that it is more realistic to expect global GDP to fall by 4.7%. Only in 2022 will it be possible to return to 2019 levels.

Globalisation is withdrawn

The second wave of the pandemic has led to support measures remaining in place. Today, there is a stark choice of state policy for countries between declaring a lockdown to avoid overloading healthcare systems, or not  imposing restrictive measures, which could lead to chaos, notes Alexander Kurdin, Associate Professor at the HSE University School of World Economy. Mortality remains the main indicator for assessing the situation. According to him, in Russia, despite criticism of the government from all sides, the situation looks good.

It is now critically important to understand what the world economy will look like after the restrictions are lifted, Annette Kyobi says. Igor Makarov, Head of the HSE Centre for Comprehensive European and International Studies, tried to answer this question. He said that the pandemic had ended the discussion on globalisation. The reasons are clear — we cannot travel, and world trade has collapsed, although it is slowly recovering. It is clear that de-globalisation did not start with the pandemic, it began earlier: the ratio of exports to GDP is known to have peaked in 2007, after which growth stopped, and the indicator remained stable for some time, and has now been declining steadily over recent years.

It is important to understand what will happen if the trend of de-globalisation continues, in particular, how it will affect the convergence between developed and developing economies, says Igor Makarov. One of the drivers of globalisation in the 2000s was China, whose economy was export-oriented, alongside other emerging market countries, whose exports also grew amid high prices for raw materials. But China’s growth has slowed down in recent years, and its economic strategy has shifted to domestic consumption. At the same time, global value chains, which have flourished with information technology, are now being localised and transformed into regional value chains. The pandemic has strengthened all these trends. According to Igor Makarov, all of this does not help restore globalisation; on the contrary, the interdependence of economies will continue to decline, creating grounds for trade wars, protectionism and the imposition of reciprocal sanctions.

Not everyone will receive aid

The pandemic has highlighted the challenges of reaching those in need. Over the past 10 years, aid has increased, but in countries hosting large numbers of refugees, it happened mainly as a result of increased expenditure on this sector of the population. This does not contribute to long-term development, noted Alexandra Morozkina, Head of the ‘Structural Reforms’ division of Economic Expert Group, Associate Professor at the HSE University School of World Economy. Aid is also often politicised: donor countries prefer to allocate funds to former colonies, and in some cases, there is a strong correlation between aid and subsequent arms purchases from donors. Judging by the experience of previous crises, donor aid decreases substantially (by 8-10%) in the first two years and recovers after three to four years.

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Annual aid from the US, has decreased by 3%, says Alexandra Morozkina, and the remaining amounts have been redirected to humanitarian spending. Great Britain is cutting its aid by 20%, with former colonies receiving priority. It is not yet clear what the German response will be; the country previously intended to increase overseas aid spending by $1.5 billion.

One of the most significant consequences of the pandemic will be demographic problems. Irina Kalabikhina, Head of the Population Department, Moscow State University (MSU) estimates that the world will face increased mortality and lower life expectancy in the coming years, as well as a declining birth rate.

In the long term, mortality is expected to decline, as the pandemic has claimed the lives of many people in poor health. Fertility and marriage rates depend on economic trends: if income recovers, we can expect a corresponding growth in these, and in the event of a recession, people will postpone starting families and having children until more prosperous times. Nevertheless, the trend of an aging population is unlikely to be interrupted. Irina Kalabikhina mentioned that a major attribute of the current pandemic has been the choice to protect human life, very different from the Spanish Flu pandemic that swept the world just over 100 years ago.

There Will Be More and More Poor

Marek Dabrowski, Professor at the HSE University Department of Applied Economics, stresses that researchers still do not know much about the epidemic, as the various statistics use different methodologies. It is not yet clear why some countries were less susceptible to this infection than others. In order to predict the impact of the pandemic on socio-economic indicators, ‘we have no clear concrete statistics on the level of inequality; complete data will only be available in a few years’, said Marek Dabrowski.

There are many dilemmas facing social policy makers, especially in countries where resources are insufficient to combat high incidence of disease. He also noted that in autumn, unlike spring, there is no shared acceptance of quarantine in society, so we can see a decline in social discipline.

Outbreaks of the epidemic often depend on social status and are spread around districts; in Brazil, for example, the majority of those affected are residents of favelas where social distancing cannot be ensured, Leonid Grigoryev notes. The rate at which Coronavirus spreads and its impact on consumption, the professor says, also depend on the climate and the severity of the restrictions. For example, in Germany and Brazil, these factors increased in the third quarter of 2020, while in Sweden and Mexico they decreased.

‘We need to buckle up, – we will live in a very complicated world, Guterres (Antonio Guterres, UN Secretary General — ed.) promised 150 million new poor’. In his opinion, the most important thing now is to solve social and medical issues in order to stop the pandemic among the poor.

Responding to a question about the countries that have benefitted from the Coronavirus, Leonid Grigoryev answered with a comparison — ‘it is the same as discussing which cabin of the Titanic is the best’. It is important not to repeat various mistakes made by the owner of this ship: not to reduce the number of binoculars in order to see the danger in time, not to change the crew and not to scrimp on lifeboats, which were insufficient when disaster struck, he said, summing up.