A Notch or a Hole

coronavirus sustoA lower vaccination rate than initially estimated would have negative implications for growth expectations

Fernando G. Urbaneja | Economies around the world, and in Europe in particular, have been improving for less than a year, the recovery after the Great Recession peaked, to weaker growth times, including some local recessions (for example in Italy). The causes were known and repeated: trade war, Brexit, insufficient and confused fiscal policies, geopolitical uncertainties. But the “black swan” was missing, the unforeseen that becomes a necessary excuse, the scapegoat, for a trend change and even an end of cycle.

The epidemic has two aspects, viral and psychological (fear. The latter is part of those “animal spirits” that economists have been talking about since Keynes and which are usually well explained afterwards). Fear paralyzes decisions and causes paralyzing decisions. How far does fear go? At the time of closing this magazine there is no answer. Scientists are working non-stop to determine the nature and characteristics of the virus, its origin and its behavior pattern, to find the vaccine and an effective treatment. They will find a solution, but we don’t know how long it will take. In the meantime, containment and patience, we must mitigate and defer the damage while waiting for valid alternatives.

Meanwhile, the economy is suffering two simultaneous negative shocks: one of supply, with the breakdown of supply chains; and the other of demand, with the collapse of some sectors (tourism, consumerism). In the case of demand, these shocks are immediate and can be seen in the cancellation of trips, reservations, activities and in the case of supply, they take a few weeks to be noticed, but the result is paralyzed supply activities. Both shocks have additional unforeseeable consequences, among other reasons because they affect confidence and expectations. Once again the key question is “time”, how long can uncertainty last, how far and how many will it affect? If time is short, as has been the case in previous epidemics, the effect on growth will be a notch in the curve, a parenthesis, a brake that ends with the postponement or shifting of the supply and demand curves. If the adjustment time is short, even if the fall is severe, recovery will come more or less quickly. However, if the impact is long, the damage to the system may be deep and recovery will need more time and effort. The first measures to sustain growth and businesses, starting with the Federal Reserve’s rate cut, have gone unnoticed; the supply of liquidity is useless if sufficient demand does not follow to sustain and increase activity.

So until several weeks have passed, we will not know if we are facing a growth gap or a sinkhole that will return us to the fear of another recession. In Spain, the government, overwhelmed by essential political problems, supported by very weak pacts, considers it almost impossible to approve the 2020 budgets and many voices point to prepare, calmly, with time to know the effects of the two epidemics (the virus and fear) on the 2021 Budget and say that we must continue working to achieve all goals until the end of the year. No matter the results, we have a good scapegoat: the coronavirus imported from China. With such an excuse anything goes, governments are forgiven and broken promises are forgiven.

About the Author

Fernando Gonzalez Urbaneja
Over 30 years working in economic journalism. Fernando was founder and chief-editor at El País, general editor at the business daily Cinco Días, and now teaches at Universidad Carlos III. He's been president of the Madrid Press Association and the Spanish Federation of Press Associations. He's also member of the Spanish press complaints commission.