Justin Yifu Lin: State and outlook of world macroeconomy
Apr 08, 2020
Peking University, April 8, 2020: Since the second half of 2019, international agencies like IMF and the World Bank have downgraded their growth projections for several times. Two weeks ago, due to the COVID-19 rampage and the plunge in oil prices, New York Stock Exchange saw the circuit breaker triggered for the first time since 1997, which went on to kick in for another three times. The Dow Jones Industrial Average dived over a third from its peak last month. The US shockwave has also reverberated in other countries, causing stock prices in some to plummet by 40% or more.
Starting from January, the Chinese government has been taking a host of actions against the coronavirus, which effectively contained the outbreak in China. The measures bought time for the world and serve as precious experience for other countries to get prepared. Most countries, however, didn’t take it seriously and fail to brace themselves up. At the moment, the virus is spreading faster globally and has broken out in many countries. By March 23, the number of cases outside China reached 260,574, which is 3.2 times the size of China’s 81,691. WHO officially named it a global pandemic, for confirmed cases have appeared in 183 countries and regions.
In the pandemic, the hardest hit is the developing countries like Iran whose medical resources are limited. But developed countries are not immune. Despite their advanced medical systems, they are less able to mobilize resources. If cases begin to proliferate in cities or counties, centralized treatment may not be promptly implemented. The lack of effective treatment and quarantine measures may well heighten the risks of serious local outbreaks.
Italy and Spain have come under lockdown like China, and advanced countries like the U.S., Britain, Germany, Australia and Canada have also implemented quarantine policies including nationwide shutdowns. The epidemic in developed countries may not end until the second half of this year or even next year, considering: there have been yet no vaccines proven effective against the virus; quarantine measures in developed countries may not go as planned like China, and discharged patients could fall ill again. Or, the virus may be transmitted back and forth between countries like the “pass the parcel” game, which could deal a heavy blow to all corners of the world.
The quarantine makes things worse for the developed economies that have already been sluggish in recent years. The EU, the U.S. and Japan have lowered their interest rates to zero or negative, thus running out of monetary policy instruments other than extreme easing measures. The tremendous debts governments have accumulated leave little room for fiscal policies, so an economic recession is inevitable in the U.S. and the developed world at large. JP Morgan Chase estimated last week that the GDP of America may slip to -1.8%, the eurozone to -3.4%, and Japan, -1.3%. New projections are even gloomier as the epidemic escalates. James Bullard, president of the Federal Reserve Bank of St. Louis, predicted the U.S. unemployment rate may hit 30% in the second quarter with a 50% drop in gross domestic product. There is a distinct possibility that the U.S. and other developed countries would fall into an economic depression like the one in the 1930s.
Though the virus is exacerbating or plateauing in most other countries, it has been contained in China. While guarding against imported cases and sharing experience with the world, China needs to quickly lift its lockdown and assist companies to go back to normal. It should also support others to combat the virus by providing supplies like face masks, gowns, test kits and ventilators, of which it has great production capacity. Meanwhile, exports will surely sink due to the epidemic overseas and the economic recession, if not depression. Against this backdrop, the Chinese government needs to leverage the policy space created by the supply-side structural reform in recent years. It should adopt positive fiscal policies, build infrastructures, and give grants to low-income families, so as to boost domestic demands, maintain social stabilities, break the potential bottleneck in future economic growth and enhance the quality of its development. China has the ability to keep its growth within a proper range despite bleak global economic prospects. It will be the world’s main driver of growth and recovery when the world suffers from a recession or depression, just like it did after 2008.
The international financial crisis in 2008 put the world in a decade-long adjustment period and profoundly changed the balance of power between both developed and developing countries and developed countries themselves. This year, the downward pressure and uncertainties caused by the COVID-19 and the oil price free-fall have crashed the stock market that was backed by loose monetary policies in the past ten years. In the future, this could turn into a global economic crisis. As long as China handles it properly and keeps up growth, it will successfully meet its poverty alleviation targets set for 2020 while helping others recover with its experience and resources against the epidemic. After the 2008 crisis, China will once again further promote its economic status and influence in the world.
About the author
Professor Justin Yifu Lin is Dean of the Institute of South-South Cooperation and Development (ISSCAD) and the Institute for New Structural Economics (INSE), and Honorary Dean at the National School of Development (NSD), Peking University.
Translated by: Zhang Ning
Source: PKU Institute of South-South Cooperation and Development
