COVID-19: Four ways to tackle the economic fallout

Governments must adequately acknowledge, confront the crisis, and take decisive actions now.

Covid-19 hit China at the start of December and outbreaks have since spread much more widely, causing massive health risk and disruption to economies.  Governments must adequately acknowledge, confront the crisis, and take decisive actions now.  Lee Kok Leong, executive editor, Maritime Fairtrade, reports

There is a threat of severe economic downturn as a global recession is looming.  Businesses and factories are closing down and sending workers home to stop the spread of the virus; there is significant economic disruption from quarantines, restrictions on travel, and a sharp decline in many service sector activities.  The world economy is in its most precarious position since the global financial crisis.

According to Laurence Boone, OECD Chief Economist, how far the pandemic spreads will determine economic prospects, therefore, governments cannot afford to wait and must tackle the fallout decisively.  

Governments must act now

Regardless of where the virus spreads, the world economy, previously weakened by persistent trade and political tensions, has already suffered a sharp setback.  Households are uncertain and apprehensive.  Firms in sectors such as tourism, electronics and automobiles are already reporting supply disruptions and/or a collapse in demand.  The world economy is now too fragile for governments to gamble on an automatic sharp bounce-back.

Containing the pandemic, limiting cases of serious illness is the policy priority

Limiting travel, quarantines and cancelling events are required to contain the pandemic. Increased government spending should be first directed to the health sector, tackling virus outbreaks and supporting research.  Complementary policy action can at least mitigate the economic and social fallout.

Supporting vulnerable households, firms is essential

Containment measures and the fear of infection can cause sudden stops in economic activity.  Beyond health, the priority should be on allowing short-time working schemes and providing vulnerable households temporary direct transfers to tide them over loss of income from work shutdowns and layoffs.  

Increasing liquidity buffers to firms in affected sectors is also needed to avoid debt default of otherwise sound enterprises.  Reducing fixed charges and taxes and credit forbearance would also help to reduce the pressure on firms facing an abrupt falloff in demand.

The G20 should lead a coordinated policy response

Countries should cooperate on support to health care in countries where it is needed, as well as on containment measures.  In addition, if countries announced coordinated fiscal and monetary support, confidence effects would compound the effect of policies.  This would help reverse the drubbing in confidence that a more widespread outbreak would provoke.  It would also be more effective than working alone.  

If G20 economies implement stimulus measures collectively, rather than alone, the growth effects in the median G20 economy will be 1/3 higher after just two years. 

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