The IMF now forecasts the world economy suffering its worst recession this year since the Great Depression.
This prediction is based on the relatively optimistic scenario of a partial 2021 recovery if the pandemic fades in the second half of this year to allow a gradual lifting of containment measures.
Illustrating the scale of the task, governments around the world have taken fiscal actions amounting to about $8 trillion – just over half the size of China’s economy.
Also according to the IMF, the UK is doing more than most: spending proportionally more than France, the US or China to fight the deep recession. The UK’s policies are generous: while Germany pays two thirds of furloughed employees wages, and Canada just 10%, the UK government pays 80%.
But regardless of outlay the coronavirus rainstorm is having an uneven impact on economies, affecting different sectors disproportionately. It is causing even the most prepared and prudent companies to rapidly exhaust their cash.
Many will need a bigger umbrella that only the hand of the state can extend – meaning industries are seeking packages of their own.
Savvy finance ministries will look to avoid comprehensive bailouts, which provide a template for countless other industries, and instead negotiate bespoke agreements with individual companies to secure the best deal for taxpayers.
Once you open the door to one sector, it becomes more difficult to refuse the sector next door once they start asking for help too.
Aviation is forecast to lose 44% of annual global revenues to the virus – a sector where over a third of airline costs are fixed, and therefore cannot be cut quickly. We should expect to see more flag-carriers globally as airlines continue to be bailed out and nationalised.
Car manufacturers will make a similar case for state support, given they are also household names that sit at the centre of complex ecosystems with millions of employees. Demand for cars may slide by around a sixth this year and is unlikely to recover fast. Car companies like Germany’s Volkswagen and Renault of France have already furloughed workers through state schemes. Others are reported to have around two months of cash on hand, though perhaps not enough to survive the crisis unaided.
Banks will be in a more solid position thanks to regulations enacted in the wake of the financial meltdown in 2007-09. For once they may be part of the solution, not the problem as governments use them as a conduit for state-guaranteed loans.
Steel industries were already struggling with a market downturn before Covid-19 struck. They are now warning policymakers that their liquidity is drying up and a cashflow crisis beckons given the slump in demand for metal and delays to customers payments.
For its part, the state in various countries has been providing several packages of support. For some this comes in the form of relaxed regulations and a programme of liberalisation to keep the economy functioning.
We have seen capital relief for lenders in Europe and America. Countries from France to South Korea are banning investors from betting on share-price falls. Some environmental regulations in America have been waived. Rules capping the hours drivers can work (if transporting food or pharmaceuticals) and restricting restaurants from offering takeaway food have been scrapped in the UK, as have regulations which would otherwise slow down medical device development.
The question will also be how each country can exit the lockdown without overwhelming their healthcare system. Everyone is facing this same balancing act.
European countries are starting to ease their full lockdown measures. Germany’s exit roadmap has begun with small shops. In France schools and nurseries will reopen first.
Industry leaders are being briefed on a possible sector-by-sector approach in the UK when the lockdown ends, with manufacturing, logistics and food supply companies likely to be at the front of the queue if they are not still open already.
Governments will want to particularly contain and shield the vulnerable as they bring their citizens with them on a journey through easing the lockdown – a lockdown that if extended, will have profound and vast consequences for society, economy and health.
It will be risky to lift any suppression measures but once new cases fall substantially nurseries and primary schools could reopen, the youngest workers could return to work first, restrictions could be eased in areas of the country where hospital capacity and caseload is under the least pressure.
The huge fiscal response to the present crisis has been designed to protect jobs, firms and incomes, and above all to ensure economies can continue to function.
We will soon see if the unprecedented action has the desired impact.
Stephen Lynch, writer