Market Overview

12 May 2020

How will the Economy Look After the Crisis?

Despite all the economic scenarios that are being created, uncertainty remains on several levels. It is difficult to predict how easy it will be to recover lost jobs, when it will be possible to travel again or what the real impact of stimulus measures by central banks and governments will be on an economy that has little impact. While the doubt focuses mainly on its time horizon, it is possible to start thinking about what the world will look like after this pandemic. Not in terms of concrete figures, but in terms of the economic paradigm that will most probably be different. From a wide range of topics that could be addressed here, four will be highlighted: globalisation, secular stagnation, inequalities and the US Dollar.

Globalisation

If before this pandemic it was already possible to observe a reduction in international trade and protectionist measures, then after this crisis this trend may be further exacerbated. Companies that depend to a large extent on global commercial chains are feeling the risks inherent in their interdependencies and the great losses caused by social restraint measures. In the future, these companies are likely to take these risks more into account, resulting in more local and robust supply chains - but less global ones.

Adam Posen, economist and president of the Peterson Institute for International Economics, says that "economic nationalism will increasingly lead governments to disconnect their own economies from the rest of the world - this will not, however, lead to complete autarchy".

Secular stagnation

This situation of Secular Stagnation was first described in the great depression of the 1930s by Alvin Hansen and it was disregarded by most economists at the time. The economist said that that economic situation could be the beginning of a new era of unemployment and economic stagnation and that the free market alone would not bring the economy back to its potential. Nowadays, secular stagnation's biggest advocate is Larry Summers, who characterises the moment as a time marked by low interest rates, inflation below his target and slow economic growth.

This situation may deepen as people remain risk averse, thus increasing their savings, thus persistently reducing demand and innovation.

Social differences

There are already many studies that indicate that reducing inequality is friendly to economic growth. The latest empirical results suggest that if inequality is reduced, particularly among the lowest income groups, this has a positive effect not only in terms of social justice, but also in terms of economic growth. In a study by the Organisation for Economic Cooperation and Development (OECD), education is said to be the "key and the main factor behind the inequalities that hinder growth."

In the current times we are living, as in any recessionary economic cycle, the lower classes are mainly affected, greater fiscal deficits are likely to increase, and a reduction in investment in education is also expected. Both its cause and its solution will likely be very difficult to mitigate for those countries that did not do so before the pandemic began. Regardless, everyone is likely to suffer and an increase in the gap between the two extremes of social classes is expected.

American Dollar

Aversion to risk and the search for more secure assets all over the world and, in particular, for emerging and developing economies will continue to depend on the US Dollar for financing and trade . Again, Adam Posen says that "even if the United States becomes less attractive for investment, its attraction will be greater than that of most other parts of the world. "

It is now in the hands of world leaders to avoid this outcome and to maintain the spirit of international unity that has sustained a collective front for more than 50 years.

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