The Great Shutdown : How COVID-19 changed the world economy

The Great Shutdown : How COVID-19 changed the world economy

Having good interna@onal financial rela@ons with foreign countries and the IMF is crucial for any

country. The IMF has always helped countries facing financial problems, especially during world

financial crisis such as the 2008 housing crisis, Greek bankruptcy and the most recent market

crash because of the COVID-19 pandemic that the world was faced with.

With this research paper, I am to study and report on the various challenges that many

countries faced such as a health crisis, financial crisis and a collapse in commodity prices. The

IMF and policymakers were faced with the challenge of providing the world with unprecedented

support to not only households and small business but even large corpora@ons and financial

markets in order to shape and mold the markets to be prepared when the world opened up

aOer the global lockdown. The global lockdown restricted travel, businesses world

wideworldwide, the healthcare system was overworked and overloaded with mul@ple pa@ents

and a disease the world had never seen before. Many believed that the great lockdown caused

an economic recession worse than the Great Depression and much more worse than the global

financial crisis.

In March when the COVID19 disease was declared as a global pandemic, the projected global

growth fell downfell to – 3%. Projec@ons showed the combined loss to global GDP would be

somewhere around the 9 trillion dollar mark. Countries that were heavily dependent on tourism

and travel expected massive disrup@ons. Developing economies and emerging markets were

projec@ng nega@ve growth rates for -1% for the year 2020. Countries like India and China were

faced with more problems due to the high popula@on in their countries.

As the world went into lockdown, policymakers started to take ac@ons on large, @mely and

targeted fiscal, financial and monetary policies. These policies included credit guarantees,

liquidity facili@es, laon forbearance ,forbearance, expanded unemployment insurance, tax

reliefs and s@mulus payments. These policies enabled small business and households to

con@nue to pass the lockdown. These measures ensured that there were less job losses due to

the pandemic.

The above listed measures and policies are a small part of the reopening phase of the lockdown,

however it played a vital role in ensuring economic stability post lockdown. In my research

paper I want to focus on what these policies were, how each one impacted what industry,

country and lastly how it helped the world recover from the financial crisis.

The COVID-19 pandemic was different from all the other past economic downturns and trigger.

The pandemic triggered infec@ons, shortage of labor, quaran@nes, lockdowns and social

distancing across the world. All business and movement was halted apart from essen@al

ac@vi@es. These measures were put in place in order to minimize the spread of the virus

amongst the public. With workplaces being closed, supply chain and produc@vity was disrupted.

Layoffs, incomes declines and heightened uncertainty made people more conserva@ve than

ever. On the other hand, medical expenses were at an all @meall-@me high with healthcare

equipment manufacturers running factories over @me. Rising unemployment triggered

widespread default on credit card payments and loans. Lenders were faced with the difficult

decision to hold back credit for firms and individuals.

Policymakers and governments were kicked into overdrive in order to draw up a plan that would

provide a roadmap for countries, industries and small businesses to ride the pandemic and

sustain through it to be able to resume businesses once the pandemic had passed. To come up

with strategies, policymakers looked at previous economic downturns to get inspira@on on how

to overcome this downfall. In response to the pandemic, advanced economies ini@ated

discre@onary fiscal and monetary policy support measures. These measures were believed to be

far greater as compared to the ones taken in response to the global financial crisis in 2008.

While these measures were being planned and put into ac@on, there was s@ll a great amount of

uncertainty revolving around the pandemic, which added addi@onal pressure on policymakers

to be prepared to implement even larger measures in the months to come. (Gopinath, n.d.)

(Gopinath, n.d.)

As men@oned above, there was a high level of uncertainty revolving around the pandemic,

there were significant upside as well as downside risks to the outlook of the pandemic. The

upside being vaccine trials showing progress, treatments ge_ng be`er and more policy support

that would lead to quicker resump@on of economic ac@vi@es. However, there were newer

variants of the virus showing up around the world that would trigger more waves of infec@on

and @ghten financial condi@ons with people spending more on healthcare.

With a crisis like no other, it was expected that there will be a recovery like no other. As

countries would reopen, it was expected that the pick uppickup in ac@vi@es would be staggered

and uneven. Demand for retail products would be high with demand with backed up orders

whereas travel and hospitality business would remain at all @mesall-@me lows. Countries that

were heavily dependent on tourism would face serious financial problems and would lead to

increasing poverty. Excep@onal policy support proved to be crucial in advanced economies and

to a lesser extent for emerging and developing economies that were more constrained by fiscal

space. During the course of the pandemic the global fiscal support reached $10 trillion and

monetary policy had eased drama@cally with interest rate cuts, liquidity injec@ons and asset

purchases. These measures ensured that small livelihoods and small businesses sustained and

at the same @me larger corpora@ons avoided bankruptcies, this helped reduce long las@ng

damages to the economy.

In countries that were being severely contained by the pandemic and went into lockdown such

as India, people that were directly impacted should receive income support through

unemployment insurance, wage subsidies and cash transfers. Firms that are impacted by the

pandemic should be supported with tax deferrals, loans and grants. Right before the pandemic

hit, countries like India had given tremendous importance to digi@za@on and digital banking.

This proved to be crucial to reach the unemployed.

Policy support was expected to shiO formfrom being targeted to being more broad based,

wherein the fiscal space would permit countries to taken green public investments and

accelerate the recovery process while suppor@ng climate goals. During the pandemic, pollu@on

levels were at all @meall-@me lows with factories and transport being halted. Along with the

long termlong-term challenges that policymakers faced, a medium term challenge that needed

to be addressed was public debt.

(Gopinath, n.d.)

Public debt was projected to reach all @meall-@me highs in rela@on to GDP in advanced as well

as emerging and developing economies. Countries would need strong fiscal frameworks for

medium term consolida@on, cut down on wasteful spending, widening tax bases and minimizing

tax avoidance.

In response to the 2008 crisis, policy rates were reduced by an average of 3 percent by the

central banks in advanced economies. Governments on a average deployed expansionary fiscal

s@mulus with primary balances to the GDP declining by an average of 4 percentage. Alongside

these implementa@ons, the central banks deployed unconven@onal monetary policy tools, large

scale financial asset purchases and nega@ve interest rates. It is believed that these policies

helped the economy avoid an even deeper slump.

The IMF projected a deeper recession in 2020 and an even slower recovery in 2021. It was

expected that the global output will experience a decline of 4.9% in 2020 and would be below

by 1.9 percentage points as compared to the projec@ons made by the IMF for April.

One of the key moves taken by policy makers was to deliver s@mulus to liO aggregate demand in

the market. Fiscal mul@pliers such as a s@mulus point to powerful effects of fiscal s@mulus when

normal interest rates are at an effec@ve lower bound or monetary policy is accommoda@ng. The

size of fiscal mul@pliers varies on how it is delivered. A meta-analysis of the vast literature on

fiscal mul@pliers points to average es@mates for public spending on goods and services.

Mul@pliers are expected to be higher when leakages from the economy are low and contained

or when the monetary policy is accommoda@ve.

Bibliography

(Gopinath, n.d.)