By taking a big picture perspective to understand the economic situation and possible future for world economies, we can see that the top economies are quite close to the end of the Partial Bounce Back and some have even begun the Slog.
C. Current Situation
The table above gives us clarity on how the Partial Bounce Back has taken effect in these countries. There are two points to be noted in the table above.
The third column shows a relative change in GDP in comparison to that of Q4 in 2019, which is the same base that is used in the second column.
These GDP figures are relative to the countries’ own economies. Hence a faster growth (such as China’s) doesn’t necessarily mean a larger size. USA’s GDP still exceeds China’s by approximately 6.04 trillion USD.
For the current and the next section, a major focus shall be on the US economy not only because it is one of the largest economies in the world, but because its responses to the pandemic have been one the quickest.
One notable information about the US economy was that the unemployment rate in USA during April, 2020 was 14.7%, which is the highest it has been since the Great Depression. However, if we also factor in the 7 million people who voluntarily left the work force (2) and those not looking for work due to other reasons (3), that number rises to 23.5%.
If we assume that every person gets fully vaccinated, people with temporary layoffs return to their original jobs, and if there are no more job losses, we would still have close to 8.5% of unemployment (4). This clearly indicates that even while the Partial Bounce Back shall drastically reduce the unemployment rate, it will eventually stall, giving rise to the Slog phase.
Deficit and debt have naturally increased during the pandemic. The deficit of USA at the end of 2019 was 984 billion USD, which had changed to 3.1 trillion USD by the end of 2020. The massive impact of the pandemic is thus seen as the deficit increased by more than three times the previous amount. As a result, the debt is also continuously increasing, coming close to a sizeable amount of the country’s GDP. This phenomenon is observable not just in USA, but most economies worldwide.
D. Economic Response
Despite such a serious economic situation, there hasn’t yet been a financial crisis in the US economy. This is largely to do with the immediate response of the US Federal Reserve System. It took several actions to stabilise the economy, such as:
It cut interest rates down by a large amount, which provided some ease to the citizens.
It bought large amounts of treasury and mortgage-backed securities. This helped in increasing the money supply in the economy, which had reduced as demand fell.
It introduced lending programs which helped stricken companies and prevented their fall.
It provided people with social insurance and security, such as stimulus cheques.
Provision of social insurance was most influential since it acts as a fiscal stimulus by helping people with their social security and maintaining their consumption instead of reducing it, maximising the macroeconomic impact; this is known as consumption smoothing. These are the same people who have a large marginal propensity to consume. Thus, the quick response of the Federal Reserve System has helped in somewhat reducing the massive impact of the pandemic.
E. Future Steps
Most of the important steps needed for recovery have already been undertaken by world economies. Now a comparative advantage can only be created by finer management of one’s own economies. These will help in maintaining the growth rate and help the economy get back on its feet faster. Such measures would be imperative to almost every economy, and not solely USA. An important measure would be avoiding State and Local Budget cuts since they would only lead to lesser money flow in local economies, pulling them down and influencing the country’s economy as a whole. Health coverage and nutrition increases are also extremely necessary. This is especially true in certain developing countries such as India and Iran, which are facing numerous problems relating to vaccine supply chain management and healthcare infrastructures.
Continued assistance to citizens, especially those of the middle and lower class in the form of stimulus cheques, social security and insurance measures, and employee benefits would be essential too. These should be based upon the relative unemployment rates of specific regions. Alongside it, tax increases in specific areas only may be introduced to reduce inefficient spending. This may even be combined with higher interest rates for fixed deposits in order to increase savings for limited periods, ensuring increased savings while preventing decrease in money supply in the long run.
Establishment of employee security and paid/sick leave benefits would give employees the assurance of continued employment. Infrastructure investments could be done in healthcare infrastructure as well as in industries that are currently incurring heavy losses, such as tourism and hospitality. This would also make sense in the long run as saving these industries would prepare them for the post-Covid situation where there shall be a sudden spike in their demand. Skill training is also crucial for the working class that would help them better adapt to the changing industries and work demands.
Of course, the above measures are far easier said than done; each would involve its own complicated process of setting up and application. However, such measures would make a large difference and create a necessary advantage to countries. I believe that by getting a deeper understanding of the current economic situation and the potential changes that the future holds, we can be better prepared and adapted for it. One is for sure though, the pandemic has created a slightly level playing field for most world economies, especially the developing countries. The countries that take advantage of the situation and make the right decisions will be the ones to present a grave threat to the current economic leaders of the world, and may even lead the field tomorrow.
Comments