From a health crisis to an economic crisis

by Juan Carlos Martínez Lázaro, Professor of Economics at IE University.

Now that we have the projections published by the International Monetary Fund in its Spring Report, we know with certitude that we are facing an economic shock not seen since the Great Depression of the 1930s. Indeed, the IMF estimates that world GDP will contract by 3% this year, compared to 0.1% during the first year of the financial crisis. What’s more, the collapse we experienced 12 years ago hit the more advanced economies worse than emerging nations, but in this case, no country will be spared a recession lasting at least one or two quarters.

Even so, it is surprising that, overall, the intensity of the recession will again be more so in advanced economies—at 6.1% on average—than in emerging and developing economies, which will contract on average by just 1% this year. Moreover, a handful of them, including several African countries, could end the year with positive growth. If the recession will be hard on developed countries, it will be even harder on those that do not have the same health care resources or the same capacity to implement fiscal and monetary stimulus programs to mitigate the effects of the pandemic. In this sense, the forecast that India will end the year with growth close to 2% seems optimistic, taking into account that just today its government has announced an extension of the lockdown until the beginning of May. Furthermore, the fall in raw material prices and the depreciation that many emerging currencies have experienced since the beginning of the year are beginning to make it difficult to manage foreign debt. Only China, despite being the start and center of the pandemic during the first quarter, seems likely to quickly recover a significant part of lost activity, and may well emerge stronger from the crisis.

The US economy will shrink by around 6%, while the range in Europe is between 3% and 10%. Unsurprisingly, Greece, Italy, Spain, and Portugal will experience the largest contractions. In the case of Spain, the figure will be 8%, due to the intensity with which we are being hit by the virus and the importance of tourism and the automobile sector. In addition, unemployment will once again cross the fateful threshold of 20%, despite the fact that there are already more than 3.5 million workers covered by temporary layoff arrangements subsidized by the government. Given that unemployment is already running at around 13%, this is to be expected. As far as public accounts are concerned, it is quite likely that we will again reach a double-digit public deficit. In short, the imbalances that we have been trying to reduce for more than six years are now back to the levels they were at before the start of the expansionary cycle that is now coming to an abrupt end. The Spanish government's reaction to the IMF's predictions has been to ignore the magnitude of the tragedy and to emphasize that the recovery will be strong: 4.3% in 2021.

And will the recovery indeed be strong? We don't know, because we still do not understand the main unknown in the coronavirus equation: how long lockdown will last. What we already knew, and what the IMF is signing off on, is that the return to normalcy will not be as fast or as intense as the cessation of economic activity has been. Although some activities could start up again in the coming weeks, there are many doubts about when and how leisure, eating and drinking outside the home, or tourism will be reactivated. Furthermore, we cannot rule out a resurgence of the pandemic at any time, which could take us back to square one in this particular game.

Regardless of whether the IMF is more or less correct in its projections, what is already clear is that our lives and economic activity will not be the same as they were before the pandemic spread, or at least until a vaccine or similar drug is available – and this still seems many months away. In the case of Spain, we need to know, once and for all, who is infected, who is not, and who has already overcome the disease so that we can begin the measures that will allow us to get the economy back on its feet as quickly as possible and with the least possible damage.