The financial crisis that swept through 2007-2009 like a tornado creating a shaky situation where risks and imbalances were permeating the global economy were magnified by policy mistakes. The economic collapse and recession that followed, revealed structural problems. Significant downside risks evolved that made it inevitable that enough financial crisis could be on its way. Let’s take a closer look at the reasons that we are due for another recession.
One obvious factor is the financial fallout from COVID-19 that can be summed up in three ‘D’ words: debts, defaults, and deficits. Responding to the coronavirus pandemic ushered in a horrifying increase in fiscal deficits, no less than at least 10% of GDP or more, with public debt in many regions already being unsustainable.
The severe lack of household income means that private-sector debt levels will also be unsustainable as well, with mass defaults and bankruptcies to follow. This points towards a return to a recession.
Risk of Deflation
COVID-19 is not only ushering an intense recession; the crisis is also creating mass unemployment and price collapse in oil and industrial metals. That makes debt deflation rather likely.
Central banks are working to fight off deflation and prevent the risk of surging interest rates. Monetary policies will become even more far-reaching in response to the fallout from COVID-19.
Governments will have to run monetized fiscal deficits to do their best to avoid deflation and depression. But unfortunately, the negative supply shocks from accelerated deglobalization and renewed protectionism will push currency deflation towards an unfortunate misfortune.
Digital Disruption of the Economy
Millions of people are losing their jobs all at the same time, and even many of those that are working are earning less. If it wasn’t bad enough that there was a severe wealth gap, these would most likely widen even further, pushing us deeper into a recession.
In order to guard against future supply-chain disruptions, businesses in advanced economies will re-shore production from low-cost regions to higher-cost domestic markets. With this higher cost of doing business closer to home, companies may be faced with the decision to cut out numerous workers and replace them with automation. For those that are still working, they could face lower wages that can drastically offset the quality of life that people were recently accustomed to.
The pandemic is fast-forwarding trends toward fragmentation. The United States and China will decouple. Most countries will respond by adopting more protectionist policies to protect domestic workers and firms from global disruptions taking place.
What will a post-pandemic world mostly likely look like? We will probably see tighter restrictions on the movement of capital, data, goods, services, labor, technology, and information. This is a trend that we are already seeing happen in the food sectors, along with areas such as the pharmaceutical and medical spaces where governments are imposing export restrictions and other protectionist measures in response to the crisis.
The coronavirus pandemic has shown how environmental issues can negatively affect the economy. Think about all of the recurring epidemics we have continued to endure? There has been HIV, Sars, Ebola, H1N1, Mers, and also, let’s not forget climate change. As these disasters become more frequent, the economic pitfalls will be more severe.
By the 2030s, technology and political leadership will hopefully minimize many of these problems, with the hope for a more stable and cooperative world. But that positive outcome will depend on how well we come out of the other side of a current recession. The importance of procuring market research and responding to it will become even more of an importance as time goes by.