Policymakers must limit the spread of the virus while marshalling the right monetary and fiscal toolsby Jagjit S Chadha / July 29, 2020 / Leave a comment
The Covid-19 pandemic and the effects of the measures taken to protect lives continue to dominate the short-term global economic outlook. World growth has not only stalled this year but has moved significantly into reverse, and will take activity back to its 2018 level. Year-on-year growth in world income has hovered in the range of 3 to 4 per cent for three decades, and even in the worst year of the once-in-a-lifetime financial crisis it was barely negative, yet we now expect global output to contract by some 5 per cent this year and that is probably one of the better case scenarios. In many countries, with the Euro Area a particular concern, even by 2022 or 2023 GDP will still be lower than the level reached at end of 2019.
Any return to the “blessed” pre-Covid-19 world may have to be staggered and will only be possible after the location of a vaccine. But there must also be a comprehensive rethink of economic practice. The crisis has led many to question whether liberal trading arrangements and economic mobility will be maintained at the level to which we have become accustomed. An impressively large injection of fiscal support in many countries, government-backed liquidity and prompt central bank reactions have militated against more extreme economic disasters so far. But the result will be that public debt has cranked up and policy rates will remain lower for longer. And there is a lingering concern as to whether this ongoing policy mix limits the scope for a dynamic recovery.
As our new forecasts show, the economic outlook for the UK depends critically on the effectiveness of monetary and fiscal policies to manage the economy while ensuring we limit the spread of Covid-19. It is almost certain that GDP will fall by some 10 per cent or so in 2020 and there is a material risk of a further fall in 2021. We expect public sector borrowing to be some 15-20 per cent of GDP this year and for debt to GDP to peak at well over 100 per cent in 2021. The most significant challenges are managing the relaxing of more stringent forms of lockdown and how the government’s supportive measures are withdrawn. Maintaining confidence in the public health system will be paramount.
Government schemes will then…