̽��ֱ�� of Cambridge - recession

No country ‘immune’ to COVID-19 economic shock, but Asian nations will bounce back faster

fpjl2 — Wed, 02 Dec 2020 10:25:22 +0000

Global GDP will drop three percent below pre-pandemic estimates by the end of 2021, with many Western nations seeing "deeper and longer-lasting" effects compared to China and other Asian economies, a study suggests.

Moreover, nations that adopted less stringent lockdowns – Sweden, for example – will not be shielded from the economic losses of COVID-19, owing to spillovers from other countries.

Published by the National Bureau of Economic Research, the macroeconomic study captures the economic volatility caused by the last 40 years of "rare events". It uses this historical data to forecast the longer term effects of the pandemic on individual economies.

̽��ֱ��research suggests that economic growth will be stymied in at least 80% of the world’s advanced nations and many emerging market economies due to 'excess global uncertainty'.

Two Cambridge economists conducted the study with an international team of researchers. They argue that the pandemic will lead to a "significant fall in world output" – the consequences of which could last much of the dawning decade.

“ ̽��ֱ��COVID-19 pandemic is a global shock like no other, involving simultaneous disruptions to both supply and demand in an interconnected world economy,” said co-author Dr Kamiar Mohaddes, a Cambridge Judge Business School economist.

“Infections reduce labour supply and productivity, while lockdowns, business closures, and social distancing also cause supply disruptions. On the demand side, redundancy and the loss of income from death, quarantines, and unemployment plus worsened economic prospects reduce household consumption and firms’ investment.”

̽��ֱ��study from Mohaddes, a Fellow of King’s College at Cambridge, and colleagues, including M Hashem Pesaran, Fellow of Trinity College, uses the IMF’s GDP growth forecast revisions between January and April 2020 to identify the COVID-19 economic shock.

̽��ֱ��research team created a model of 33 countries covering 90% of the global economy, using data from 1979 onwards – in particular the rare economic shocks – to predict the range of GDP loss likely to be suffered by each nation and region as a result of the pandemic. ̽��ֱ��study accounts for the "nonlinear" effects of global economic volatility.

“ ̽��ֱ��techniques developed in this study are intended to capture the effects of rare events such as COVID-19, and account for interconnections and spillovers between countries and markets,” said Mohaddes, who worked with colleagues from the International Monetary Fund, Johns Hopkins ̽��ֱ�� and the Federal Reserve Bank of Dallas.

̽��ֱ��study suggests that the US and the UK are likely to experience deeper and longer-lasting effects, while China has more than a 50% chance of its economy improving far quicker than its major western counterparts. ̽��ֱ��odds for the Euro area are 'skewed negatively', but it’s likely to experience a speedier and sturdier recovery than the US by the end of 2021.

“Pulled by China, most of the emerging economies in Asia have a higher chance of performing better than the global average,” said Mohaddes. He argues that China and others in the region may fare better globally thanks to their manufacturing bases.

Economies with strong service industries have proved resilient in the past as manufacturing was more exposed to market fluctuations, but COVID-19 and the digital age have turned this on its head: services suffer as people stay at home en masse while goods are still traded through online platforms.

“Non-Asian emerging markets stand out for their vulnerability, and will suffer from a significant output collapse in 2020, with a less than 30% chance of not experiencing an output loss by the end of 2021. Turkey, South Africa, and Saudi Arabia will almost certainly see at least eight quarters of severely depressed economic activity,” Mohaddes said.

̽��ֱ��study pays close attention to Mohaddes’ home nation of Sweden, where the government took a markedly different approach, with little in the way of the mandatory social distancing and lockdowns adopted by most countries.

“ ̽��ֱ��Swedish economy will also see a large fall in GDP, very similar to other European economies,” he said. “Our estimates for Sweden illustrate that no country is immune to the economic fallout of the pandemic, because of interconnections and the global nature of the shock.”

̽��ֱ��study predicts lower interest rates in core advanced economies – about 100 basis points or 1 percentage point below pre-COVID rates. “ ̽��ֱ��crisis raises precautionary savings and dampens investment demand,” said Mohaddes.

However, he warns that the same cannot be said with certainty about emerging market economies in regions such as Latin America, where borrowing rates can increase rapidly, with implications for "debt servicing".

̽��ֱ��study’s calculations involve both the 'temporal and cross-sectional dimensions' of data that take into account real and financial drivers of economic activity, as well as common factors such as oil prices and global volatility. Country-specific models include output growth, the real exchange rate, as well as real equity prices and long-term interest rates when available.

Added Mohaddes: “Given its unprecedented nature, any analysis of COVID-19 has to go beyond identifying the economic shock and account for its non-linear effects and cross-country spillovers, as well as the uncertainty surrounding forecasts. This is what we address with our econometric model.”

Study uses 40 years of quarterly data to forecast a lengthy global recession resulting from coronavirus, with the manufacturing bases of China and East Asia predicted to fare better than most Western economies.

Any analysis of COVID-19 has to go beyond identifying the economic shock and account for its non-linear effects and cross-country spillovers

Kamiar Mohaddes

Gary Butterfield

A lone walker in a shopping district of Leeds, UK, during lockdown.

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Sleepwalking into the Euro nightmare

sjr81 — Sat, 09 Nov 2013 08:59:23 +0000

Professor Jesper Jespersen, an economics expert and visiting overseas fellow at Churchill College, will use his lecture ‘A European Nightmare: How could the economists be so wrong on the Euro?’ to suggest Greece’s need for another multi-billion bailout - and call for a fundamental shift in economic practice to prevent the break-up of the Eurozone as we know it today.

Jespersen, who previously advised the Danish Parliament on monetary union policy, says that despite reports of limited growth and rising optimism in some quarters, recession, social unrest and political turmoil will only worsen while crushing austerity measures continue to bite in central and southern Europe.

“This is a nightmare that could have been prevented. But the real nightmare is yet to come,” said Jespersen. “ ̽��ֱ��economists who said monetary union would bring growth and stability were entirely wrong. Instead of trusting mathematical models that claimed such a crash would happen only once every thousand years - and losing sight of the realities - they should have stuck to real economics.

“People were blinded by the perceived benefits of integration rather than the actualities. They said the system could be detached from political interference; but those who imagined that were either naïve in the extreme or were part of the elite that stood to gain from monetary union.”

Now, argues Professor Jespersen, only a profound and fundamental rebalancing of economic hierarchies and financial policy can save from ruin those parts of Europe most affected by the unemployment and social crises.

He argues the most effective way to save Europe from its looming nightmare would be for Germany to accept its hegemony and reduce its huge balance of payments surplus – a surplus larger than that of China’s. Germany could display solidarity with its struggling European neighbours by using more money domestically and abroad, rather than strengthening its own position by accumulating more foreign assets. Then, the notion of a fairer, better balanced Eurozone, could be more likely.

However, the idea of Germany or any other surplus country eschewing national gains for the necessary stabilization of the common currency is not respected, perhaps hardly understood, and therefore largely inconceivable; a problem Jespersen argues has dogged the notion, and reality, of European monetary union from the beginning.

“ ̽��ֱ��Euro countries are too different to make the idea of a single currency work by itself,” added Jespersen. “ ̽��ֱ��EU Commission, the surplus countries and most economists say that countries in difficulty should just do as Germany has done. But that is a political and logical impossibility because all countries within a monetary union cannot run balance of payments surpluses. For every surplus country there has to be a deficit country otherwise the equation does not add up. So, Germany and other surplus countries have to reduce their balance of payments surpluses.”

Jespersen will also use his lecture to frame today’s current woes in an historical context; looking at the position of Germany before and after both World War One and Two and examining its status as Europe’s economic superpower.

He will also contemplate that for some nations, falling out of the Eurozone and returning to a sovereign currency, may be in the best long-term interests of the country as well as the EU as a whole, even if it proves inconvenient for the European elite in Brussels and for the economists who misjudged the consequences of a single currency.

Jespersen pointed to the 15 years of growth Britain enjoyed following ‘Black Wednesday’ and its exit from the Exchange Rate Mechanism – as well as Argentina’s departure from the currency board arrangement – as positive examples of what can be achieved. Jespersen argues that the European economy would ‘definitely benefit’ and begin growing from such a rebalancing; pointing to the growth of all EU member states outside the Euro (except Britain) since 2010.

“Things are getting worse from a social point of view,” said Jespersen. “ ̽��ֱ��welfare systems of some southern European countries are in ruins in an unfair attempt from Berlin (and Brussels) to require balanced public sector budgets. Unemployment is still running at more than 25 per cent in Spain and Greece. Tensions are huge. Greece will need one more rescue package – they will default if they don’t get it. But there is an elite and a bureaucracy in Greece that has really benefited from the Euro and is still in favour of the Euro. There is huge Greek wealth abroad while the working people get their pensions cut.”

Jespersen said a worst-case scenario might see the Euro being dissolved all together except for a ‘greater German area’ including Germany, Austria and perhaps the Netherlands and Belgium. Breaking up the German/French axis would herald the dawn of an entirely different European landscape.
He added: “ ̽��ֱ��present talk of tiny green shoots of growth as a vindication that ‘the medicine was right’ is misplaced. One should not forget that a balanced growth process implies 1.5-2 per cent yearly growth. Britain and Europe at large are still far below the normal growth rates. Growth, due to austerity policies, has been much slower than it could have been; therefore total unemployment in Europe is higher than ever before in the entire post-war period. Austerity is wrong from a growth perspective. Something has to change before prosperity will return to Europe.”

Professor Jespersen’s lecture takes place at 6pm on Monday, November 11 in the Bevin Room, Churchill College. All are welcome to attend.

Eurozone countries are still careering towards a financial and social ‘nightmare’ of their own making according to a leading academic speaking at Cambridge ̽��ֱ�� on November 11.

This is a nightmare that could have been prevented. But the real nightmare is yet to come.

Jesper Jespersen

Avij

Euro bank notes and coins

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