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How might the world have changed when global economies reopen?

Neil Shearing


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Women on a subway train in Milan with seat signs reading 'Please do not sit here, respect social distances'

Women on a subway train in Milan with seat signs reading 'Please do not sit here, respect social distances'

AP

Workmen near a building site in Paddington in the UK capital

Workmen near a building site in Paddington in the UK capital

PA

People keeping their distance talk on a bench in a park in London

People keeping their distance talk on a bench in a park in London

AP

Women on a subway train in Milan with seat signs reading 'Please do not sit here, respect social distances'

As lockdowns are lifted, the supply potential of most economies should be restored relatively quickly; firms will reopen and people who were temporarily laid off or took unpaid leave will go back to work.

Of course, this will not be possible if lots of previously solvent firms go to the wall during the shutdown. Indeed, some business failures are unavoidable. But as long as the substantial Government support in the forms of loans and grants proves effective, we do not envisage a big, permanent reduction in supply. And people are unlikely to lose their skills during only a short period of unemployment.

The picture surrounding demand is more complicated. Demand should rebound as lockdowns are lifted and some of the restrictions on spending imposed by the shutdowns ease. But several factors are likely to prevent a swift recovery to pre-virus levels. The balance sheets of some households and businesses will be impaired by the crisis, uncertainty will persist, and confidence will remain fragile. Behaviours may change, too. Even if shops, cinemas, restaurants, and theatres reopen, individuals may be reluctant to gather in public spaces, thus depressing demand.

All of this has implications for the speed and shape of the post-virus recovery. It's likely that we will see some strong growth rates over the second half of this year and the early part of next as shutdowns are lifted. But this would only reverse part of the huge fall in output experienced previously. Indeed, prolonged weakness in demand means that the level of GDP will remain below its pre-virus trend for several years.

One consequence is that inflation pressures will remain extremely subdued and policy support will have to remain in place for some time.

The virus will also have a profound effect on the world economy beyond the profile for GDP over the next year or so. For a start, government debt burdens will be much larger as a result of the various fiscal measures that have been announced over the past month. As it happens this need not necessarily be a major problem. After all, one of the lessons of the past decade is that in a world of low interest rates, governments can sustain large debt burdens. For some countries a combination of economic growth, low interest rates and the passage of time may be enough to erode debt burdens gradually.

But countries that do not issue debt in their own currencies - including lower-income emerging markets and members of the eurozone - face tougher choices. For some, default and restructuring may ultimately be the least unattractive option.

Neil Shearing is group chief economist with Capital Economics www.capitaleconomics.com

Belfast Telegraph