Sunday, November 15, 2020

Pandemic's economic impact was exaggerated

 When the pandemic erupted in a big way in the US and Europe and engulfed the rest of  the world, including India, many forecasts verged on the apolycaptic. We were told that the global financial crisis would pale in comparison with the havoc wrought by the pandemic.

This is not unusual. Overshooting of forecasts is as common as overshooting of stock prices or exchange rates. In 1987, when the stock market crashed (for technical reasons), many in the US gloomily forecast the end of capitalism. They were proved wrong- the markets and the economy bounced back quickly.Then came the millenium IT bug and the imminent collapse of software systems. The millenium came and went without any turbulence. The global financial crisis was, in some sense, the real thing. But its impact was felt more in the advanced economies and, amongst these, the US recovered faster than Europe.

On now to the pandemic. The immediate impact of the pandemic is turning out to be greater than that of the financial crisis- in other words, the trough is deeper. But the bounce back promises to be faster. One reason is that banking systems have proved resilient, unlike in the global financial crisis, thanks to bigger capital buffers at banks. Another is a greater willingness on the part of policy makers to do what it takes in respect of fiscal stimulus. A third is that the fatality rate in the pandemic is lower than initially feared and this has emboldened governments everywhere to ease lockdown restrictions faster than supposed.

There is, of course, the second wave in Europe and US and the fear of a similar wave elsewhere. But the trend towards easing of restrictions on economic activity is unlikely to be reversed a great deal. So, the loss of economic output will be not as great as in the financial crisis.

More in my BS column, Covid shock versus global financial crisis

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