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Who is knocking at the doors again?


This isn’t 2008, it’s worse. The global economy today is in a fleeting deep freeze. The endemic is above all a public health emergency and no one was on the toes for it. But after the virus would be repressed; even though nobody really knows when that will be as it still is unknown to all of us, the world that is going to appear is prospected to be obstructed with distresses, perplexing the recovery. And what was normal before may not be anymore. Everyone is performing their best whether they are doctors, engineers, governments, or general public to contribute in one way or other in this time of upheaval.
As far as governments are concerned, these around the world, are spending massive amount for tackling corona outbreak, and for this purpose a huge amount of debt has been raised both internally as well as externally. Whenever government spending is supported by huge debts, one sure thing is high level of taxes in future. A high future tax is something that repels both domestic as well as foreign investor. Clearly, many states around the world are about to experience decline in investment followed by decline in consumption, saving, employment and GDP growth.
On the other hand, stock markets are always months ahead of normal economic activities and all of these markets are showing lucid signs of recession. For these reasons and more, economic doctors are signaling out again and again: the next global recession is knocking at our door. Whereas, a recession is formally defined as two quarters of negative GDP growth combined with other macroeconomic downturns. It’s probably by that definition, it can be said that the recession of 2020 -fifth most significant one ever- is our unwelcomed guest. But it’s hard to tell how severe it will be or how long it will last. Recessions are tougher times for any economy to handle but preemptive measures prescribed by its specialists can make their intensity and impact smaller. From recent experience, all of us would inarguably agree that alertness matters. And now is the time for the economists to perform their duty by suggesting pertinent propositions as everyone can talk what causes recession but main concern right now other than epidemic is how to come out from the upcoming real recession as early as possible.
Calling this expected recession as real recession is due to the fact that it is representing potentially severe but essentially transient shocks in the form of both demand and supply shocks. Now the point to ponder is economic doctors have not yet invented an economic system where it can be avoided.
When corona outbreak smashed at the doors of the world, most of the countries were unprepared to fight with this pandemic. Corona, like a voracious living being, capturing almost every country and is leaving signs of agony and despair everywhere. The major challenge the world face right now, regarding Corona, is lack of preparedness. Preparedness means suffering less of pain now to avoid grander discomfort later. Even if quarter of infection estimates were forecasted, world would have been in much better place to tackle this unwelcomed and abhorrent guest.
Depending on its extent and sternness, it is obvious that COVID-19 subsequent recession will introduce a new economic system. Commencing former patterns while speaking on recession readiness, the two things economists usually suggest are: firstly, to build up emergency savings and secondly to pay off high-interest debt and keep other debt to a minimum. But with current scenario and situation these both suggestions won’t be a much helping hand as the current settings has never been experienced before at a global level. The bottom line here is to think ahead and start developing strategies.
To avoid deep, long-lasting damage to economies, governments will need to reduce the number of personal and corporate bankruptcies, ensure people have money to keep spending even if they’re not working, and increase public investment and healthcare spending.
Else-ways talking about conventional policy measures – such as cutting the cost of borrowing or reducing taxes – tend to work better when there is a demand shock. There is a limit to what they can do in the event of a combined supply and demand shock.
Seeing solution under certain circumstances from an economist point of view is by following both fiscal and monetary policy.
Firstly, taking the fiscal measures, theory of multiplier implies that increase in Government expenditure will raise aggregate demand and resultantly output and employment, not by the amount of increase in Government expenditure but by a multiple of it. Another central measure is the reduction in taxes to raise employment and output. When rates of personal taxes such as income tax are reduced, disposable income held by the people increases which fetches about upsurge in their demand for consumption. The rise in consumption demand will support in eradicating recession and unemployment.
Secondly, taking the monetary measures, community liquidity preference curve (demand for money) is justly flexible even in times of recession which implies that monetary supply expansion will root a decline in interest rate and will therefore stimulate private investment.
Thus, both monetary and fiscal measures and policies are imperative instruments whereof aggregate demand of the economy can be changed and to bring economy out of recession. At the multilateral level, the crisis could be read as a call to more cooperation.
Following these measures is an excruciating choice, but it is the right choice as if not handled properly this recession can create havoc predominantly for the developing countries.
The simple act of putting a plan into action will improve the prospects of coming out of the next recession intact.