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A dangerous moment for the world economy

The world economy is in a dangerous place. Attempts to restart activity, premature or not, have led to a rise in coronavirus cases, particularly in Europe where the pandemic previously looked under control. Relief from a potential vaccine, if any works, seems months away. Meanwhile, central banks have little capacity to respond to a further downturn. Governments are already fretting about the debt they incurred by keeping economies in deep freeze through the outbreak’s first stage.

Whether in Hong Kong, Australia, Japan, Israel or Germany, countries that appeared to have halted the spread of the virus are now having to deal with either a second wave nationally or sporadic regional outbreaks. Only the relatively isolated archipelago of New Zealand, which has managed to suppress the virus internally and cut itself off from the rest of the world, has reached something approaching full normality. This was the week when hopes for a short lockdown followed by a swift resumption of economic activity were dashed once and for all. 

The damage done already has been substantial. US growth figures released on Thursday pointed to the highest recorded decline in activity in the world’s largest economy. The 32.9 per cent annualised fall in national income in the second quarter was three times the previous postwar record. In a possible attempt at a distraction, President Donald Trump chose that moment to tweet that the US may have to delay November’s presidential election because of unreliable postal ballots.

Europe is suffering, too. Its biggest economy, Germany, reported a 10.1 per cent fall in gross domestic product (not annualised) during the same period — the fastest since the Federal Republic started keeping records in 1970. Spain and France fared even worse, according to figures on Friday.

As the Federal Reserve’s open market committee observed in its interest rate decision on Wednesday, the prognosis for the economy now depends on progress against the virus. Even where countries attempt to reopen economies, the new normal will still involve social distancing measures and cautious consumers. Cheap money will do little to stimulate consumption and investment when the prospect of further restrictions being imposed at any time contributes to the uncertainty facing businesses and shoppers alike. 

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This suggests governments will have to keep borrowing and spending. A second bout of lockdowns will, hopefully, be less damaging than the first, but will still need financial support. The virus struggles to spread outside and many companies have better worked out ways to keep operating while maintaining enhanced precautions. City centres in Europe still look like ghost towns but shops in many outlying districts, closer to where people live, are thriving without causing an exponential surge in cases.

Lessons have been learnt in how to treat the virus and shield the most vulnerable. The current rise in cases in Europe has been mostly attributed to the young who are more comfortable with travelling and enjoying their freedoms but are less susceptible to Covid-19’s worst effects. While the pandemic has not been beaten, the healthcare response is making progress. 

Lockdowns, however, have slowed but not stopped coronavirus. A vaccine or other medical breakthroughs will be necessary before economies can fully recover. Until then, governments will face pressure to fund the incomes of those who isolate and help companies that have seen revenues collapse through no fault of their own. The fight against coronavirus is debilitating but it is far from over.

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