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What Does the Second Wave of the Pandemic Mean for the Global Economy?

22.09/2020

Published with the kind permission of the author 

The first wave of COVID-19 passed through most of the developed countries, including Russia, in March-June 2020. China dealt with it earlier, in January-March, the United States in general, as well. Brazil, India, and many developing countries got hit by this wave later and, apparently, are still facing it, in September. The characteristics of the First Wave are clear: it is sudden, health systems are unprepared in many countries for such a shock, it is transferred from country to country by tourists, and it deals a blow to the elderly and areas with a high concentration of poor people. 


The rise in the incidence of diseases has been widely extinguished through quarantines and isolation – which are ultimately successful in stopping the pandemic. The number of cases throughout the world has reached 30 million, on September 14 alone, 308 thousand people fell ill - a maximum since March. The overall death toll is almost a million. All of this generally refers to the First Wave, although the structure of the country localisation of the Pandemic is changing.

We would not necessarily define the second wave of the Pandemic as a sharp new increase in morbidity in countries that have passed through the first wave. Health systems have already adapted and gained experience - it is hardly necessary to wait for a repeat of the parameters of the First Wave. Rather, it is a stream of relapses, and the periodic lockdown of cities or venues which draw massive crowds. This has prevented the full-fledged opening of economic activity and the 2020 recession is giving way to a long "painful" revival, with a growing gap between countries that successfully endured the Pandemic and the acute phase of the recession and those which were unlucky or unsuccessful (historians will later analyse the differences between these two groups). To a large extent, the impact of the Second Wave (possibly interspersed with the next flu style) will be determined by the extent to which economic activity has managed to recover after the First Wave and the severe contraction of business it led to in the spring and summer. The history of business cycles shows that deep-but-short V-crises are much easier to bear, also because there are fewer electoral events, and the feeling of recovery allows us to quickly forget about the unpleasant and threatening moments which characterised recent events.

The global recession, which was also the result of the First Wave and the quarantines, is a "consumption recession of the rich." If stadiums, beer and department stores were closed to all social strata (coupled with the transition to TV and shopping on the Internet), then in the field of tourism, entertainment, and restaurants, naturally, the wealthy sectors of society dominate. The reduction in their earnings brought down some of the trade, air traffic and the operation of resorts (in particular, the Mediterranean countries lost their high season). The contraction of economic activity in several sectors of the world economy hit the employed, small and medium-sized businesses, the poor in relatively prosperous countries, and the poor and very poor countries themselves, which have lost many sources of income: work in developed countries, tourism from rich countries, the remittances of labour migrants ... As a result, according to IMF estimates from June 24, we expected a 4.9% decrease in world GDP in 2020, and an 11% decrease in trade.

At first glance, the economy should be expected to open as quickly as it shut down, but unfortunately this is not the case. Firms have posted record losses in a number of industries, the poor have lost a significant portion of their income, which the states can’t be expected to help them recover. However, countries are trying to support businesses and people, each in its own way and in accordance with its capabilities. But the logic of the crisis has already led to a significant decrease in capital investments - statistics are still lagging behind, although in the oil and gas industry, world investments will fall by an estimated 30%. In addition, the way of life of hundreds of millions of people has been ruptured. The forced squeeze of the wealthy strata's spending (say 20%) did not mean a consumer disaster for them, but they also failed to switch to compensate for the loss of resorts, restaurants, museums and the opera - in part, additional “forced” savings occurred.

The opening of access to previously quarantined service industries is proceeding, but it is proceeding slowly, interrupted in countries and in some US states (with an expected GDP drop of 8%). The threat of infection remains, apparently, even where the number of new cases has radically decreased - there are latent cases, unclear cases of new infections and even rumours about new strains. The recovery in economic activity is proceeding with great caution.

Hopefully, the incredible drop in GDP in Q2 (by 20% in India) will remain a short episode, but growth in Q3 will not bring it back to its previous level, either. The use of private cars is above its pre-crisis level in Sweden, Taiwan and Russia. According to many indicators, we can say that something resembling a decrease in the level of personal consumption of about 10-15% has taken place - in different countries and indicators. But the return to the level of the world economy of 2019 can hardly be expected before 2022. China looks much better and remains in the positive zone due to domestic consumption, but its trade has suffered, and tourism is frozen. This is the global status of economic activity for autumn: rather shaky. Its changes depend on the efforts of governments and the costs they face, trust between countries, vaccinations, and the threat of a second wave of cornavirus.

Regarding trust, we mean the possibility of opening cities and industries within one country - this is determined by both the objective picture and the discipline of citizens and their trust in the authorities (and their willingness to accept an uncertain residual risk). Universities have largely switched to distance learning, but student life is returning, schoolchildren have gone to schools, museums and cinemas are opening, so the world is now waiting with tension to see how much it will be possible to go through with the restoration of social life.

In world affairs, much will depend on the creation of information and administrative systems for the administration of people – as happened after September 2001, and the creation of barriers against terrorism. Actually, it will only be possible to use five million barrels per day of aviation fuel if confidence is restored, tourist flights and "world recreation" - then the oil market will also stabilise (ordinary petrol and diesel fuel are not enough for this). The delay in economic recovery, the threat of a Second Wave or “elements of the second wave” are most clearly reflected in several markets and indicators: energy resources, remittances of migrant workers' funds, trade in bulk goods produced in developing countries (clothes etc.)Observance of social distancing measures ("one adult kangaroo" = one and a half meters) is becoming common in some countries, while in others it is much weaker. Given the fact that in many countries, the First Wave has not yet passed, the threat of a re-introduction of infection through third countries is an ever-present threat. In this case, the choice between the economy and limiting risks becomes simply elementary: in the EU, without tourists from the US, China and Russia, the restoration of activity of small businesses, resorts and museums is simply unrealistic. Therefore, according to an IMF assessment, the GDP contraction in Spain, Italy and France will be 12.5% ​​or more, versus a contraction of 7.8% in Germany.Relapses, local outbreaks of disease, and residents' distrust of security conditions are other factors which may delay a recovery by themselves. Images of the French enjoying Cannes without the presence of foreigners, like Russians exploring museums in St. Petersburg, will not improve statistics or deceive tax authorities - the turnover of trade and services is still much lower than its pre-crisis level. The whole world seems to be getting used to this situation, living with some additional risks, a different structure of service consumption, the transition to remote work and study (there is also less income generated from transport, cafes, etc.), and cooking at home. The more affluent are still traveling around own countries, and Russians are waiting for "Windows to Europe".

In the global economy, a Second Wave threatens to impoverish many countries and regions throughout the world, prolonging the crisis in the energy sector and requiring greater resilience from the OPEC ++ agreement. Changes in the structure of world trade in goods and services (including tourism) are gradually becoming entrenched in consumer habits. A recovery in US activity will be of great importance, as imports to the country will then begin to grow, which could accelerate growth in other countries, as has happened in the past.

Among the major secondary problems - after the fall in personal consumption - we see a drop in investment. But record budget deficits and rising debt will be of great importance. At low interest rates, they are not yet so dangerous, but the revival of activity and an increase in rates will create problems in the servicing of government debt. The fall in income of many countries from transactions among citizens will have more negative consequences the longer the epidemic lasts. It is not entirely clear to what extent the funds and political resolve of the international financial institutions and leading countries will be enough to support huge injections of liquidity into financial markets (as it was in March - April), as well as to help weak countries. The Eurozone has lifted the Maastricht cap imposed on budget deficits (3% of GDP), but no one knows what to do with these deficits further. And, of course, there is an increase in inter-country and social inequality in the world, a return to poverty. Perhaps the world is sliding back closer to poverty within the parameters of the 2000 Millennium Goals - no one has yet dared to calculate, but in 2021 this will become absolutely clear.

It will be interesting to see how citizens will return to public transport, and the exit from the First Wave, discussion of the threat of subsequent waves, or relapses will be discussed about the changes in the lifestyle of the masses, the middle class in particular (the poor, as usual, have little choice). The vaccine debate is still more related to politics and is image-related in nature. The recognition of vaccines by the doctors of the countries and the WHO will become a matter of conflict management and commerce.

Wealthy strata survive the epidemic most easily (not all have even suffered significant financial losses). One can expect an increase in the cost of “reliable” services, resorts, restaurants and hotels, since occupancy is objectively decreasing. It’s true that any growth “from the bottom” is psychologically perceived positively, so the duration of the recovery and its effect on world GDP will be constant positive news from the media and governments, especially for the elections. Employment in trade, transport and services will depend on the return of wealthy, hedonistic lifestyles. So in Latin America, Africa and India, they still have to go through the First Wave and a recession. And in the Northern Hemisphere, two frontiers are immediately ahead: autumn flu season and the threat of a relapse; and then Christmas and New Year parties "during a pandemic" - remember Pushkin and the Decameron. And we repeat - even the threat of the Second Wave is very dangerous for the global economy.

Source: Valdai Club