The COVID-19 pandemic has brought many countries’ economies to a virtual standstill as they have locked down to fight the spread of the virus, but on the whole the global economy has so far defied fears of meltdown, and instead bounced back, stronger and sooner than expected.
The questions are now, write the authors of “Why The Global Economy is Recovering Faster Than Expected”, published in the Harvard Business Review, what drove the gap between expectations and reality? And can the rapid recovery last?
While economic contractions were brutal as economies shutdown, the authors argue that the sustained effects of this were generally overblown “both systemically and cyclically – as the intensity of the shock fueled widespread economic pessimism”.
There was a popular prediction of a new Great Depression, bringing with it sovereign defaults, and a collapse of the banking system and deflation.
“Yet, after a wobble prices stabilized, sovereign borrowing costs broadly fell across the world despite expansive borrowing, and the banking systems has shown few signs of liquidity problems,” write the authors. “(In fact, after hoarding capital banks are looking to return capital again.) The broader systemic fears remain unfulfilled and never looked as perilous as in 2008.”
A vital measure of economic health, unemployment, was forecast to remain high in the US beyond the end of 2021, and there were predictions of a weakening housing market and waves of bankruptcies. “Yet here too the surprises have been to the upside,” the authors note.
By September, US unemployment was lower than it was forecast to be even by the end of 2021. House prices barely dipped, and activity and sales have recovered to, or near, the highs seen since the housing crisis. “Many parts of the U.S. economy have returned to pre-crisis levels of activity,” the authors write. And the same patterns are true around the world, they note.
Ultimately, the authors suggest, hospital capacity will be the constraint on the balancing act between keeping economic activity high and the virus in check. And, while they expect positive growth in the last quarter of the year and into 2021, a failure to extend fiscal stimulus measures could “diminish the slope of recovery – or in the extreme turn it negative.” They also point out that a broader political failure – such as a contested election result – is also on the list of risks.
For businesses, a crisis often causes pessimism and fear. But, the authors point out, this reaction carries risks in itself and it’s worth remembering that 14% of firms across all sectors “typically grow both revenues and margins during downturns”. And this isn’t just down to luck, they say.
“It’s driven by a firm’s ability to see beyond the acute phase of a crisis and exploit its idiosyncrasies to drive differential growth in new areas,” they argue.
“While monitoring the overall macro landscape remains important,” the authors add, “leaders should not underestimate the importance of measuring, interpreting, and exploiting the dynamics of their own sectors and markets in order to be able to invest and flourish during the recovery and the post-crisis period.”
Sourced from Harvard Business Review