Illustration Blog EcoTV 20201016

The IMF‘s latest world economic outlook observes that the economic recovery will be long, uneven and highly uncertain. To illustrate the point “long”, it is sufficient to look at the time when economies will come back to the level of activity that was reached before the pandemic. For most countries that is, at the earliest, at the end of 2021 and for many countries even not until the course of 2022. So it means a long recovery process, and a highly uneven recovery process because of big differences between the countries. China is actually the big exception:  it has already reached its pre-pandemic activity level and that is the result of a very important stimulus effort and also of a very strict handling of the pandemic situation. Other countries are continuing to struggle and are, as we know, confronted with a significant increase in the number of new cases, which will have consequences on economic activity in the fourth quarter. There are big differences between economic sectors as well. Manufacturing is actually less impacted or at least slightly less impacted than Services by the pandemic. Within Services, you also have big differences: e.g. hospitality or tourism. And then finally, there are also big differences between socio-economic groups. What we have observed, in the United States in particular, is that lower-income households have been suffering more from the increase in unemployment than high-income households. So a long recovery, an uneven recovery, also a highly uncertain recovery related to the health situation of course, but also related to the concern about the scarring effects of the pandemic. That means that companies have been confronted with a very significant increase in their indebtedness and that households may be confronted with a long period of unemployment. All this will have an impact on investment and on spending decisions.

On the other hand, there is good news or at least hopeful news in the world economic outlook: the IMF is insisting that its forecast do not take into account the possibility of new fiscal support measures, so if these measures would be introduced  – in the United States, notably -, it would mean that there is a high likelihood of an upward revision in the forecast. Secondly, there is, of course, the hope that everybody is having about the introduction of a vaccine which would give a clear boost to sentiment of households and companies.

Against this background of a long uneven and highly uncertain recovery, that goes without saying, that economic policy support will need to stay in place for a long time to come. Typically, a distinction is made between monetary and fiscal policies. Monetary policy support is very much present: policy of central banks across the globe is highly accommodative. It is creating the necessary conditions for an economic recovery but not necessarily the sufficient conditions for households or companies to go to the bank and ask for a loan on account of cheap interest rate conditions. What really matters is the confidence of households and companies about the future. That is why we can now say that monetary policy that used to be the only game in town is now no longer in the driving seat and actually fiscal policy is now behind the steering wheel. We have seen during the earlier phase of the pandemic that it was really materializing in terms of income support for households and for companies. That will continue but in addition we can also expect that increasingly there will be an effort to directly influence demand in the economy via infrastructure projects. This is something that is being planned in the United States. Next Generation EU is also going to work along these lines.

Although the necessity of ongoing policy support is beyond doubt, looking at a recent policy debate, one does observe a shift in emphasis. This is inspired by two considerations. The first consideration is the question of how big a deficit we can afford and for how long. That means that the very expensive – in budgetary terms – policy support effort during the earlier phase of the pandemic will probably make way for a far more selective approach, a more granulous approach, more selective in terms of the types of households to help and the types of economic sectors to support. The second consideration, which explains this shift in policy emphasis, is also the awareness that the post-pandemic world will look very different from the pre-pandemic world:  some economic sectors will actually thrive from the changes that happened in society, whereas other sectors will actually struggle.

That means that economic policy will need to help this reallocation of resources from those sectors that are suffering to the sectors that are thriving. Now that is easier said than done. You can say that fiscal stimulus is rather easy; adopting a supply-side policy is difficult, it is necessary but difficult. One difficulty is how to implement such a policy. Another key difficulty is that you need to make very tough choices and make an assessment in terms of which sectors are clearly viable and will thrive and which sectors are going to experience a far more difficult environment. It means that there is a necessity to support the viable sectors and there is also a necessity to do more damage limitations for the sectors that in the post-pandemic world will continue to be under pressure.