By David Kuo
SINGAPORE: As countries around the world gradually lift their restrictions in place to tackle COVID-19 and normalise economic activity, global economic chiefs have warned that we are not out of the woods yet.
On Sep 9, Kristalina Georgieva, the managing director of the International Monetary Fund (IMF), cautioned that a full recovery of the economy is unlikely without a vaccine and urged governments to continue their measures to support businesses and workers.
"This crisis, however, is far from over," she wrote in a column for Foreign Policy magazine, co-authored with IMF chief economist Gita Gopinath. "The recovery remains very fragile and uneven across regions and sectors. To ensure that the recovery continues, it is essential that support not be prematurely withdrawn."
However, the US monthly job statistics also showed that it may be premature to be optimistic - the 1.371 million jobs created in August are fewer than the 1.734 million in July as the Labour Department also reported a slowdown in the hiring rate in July to 4.1 per cent from the 5.1 per cent in June.
With major economies showing similar signs of a long and slow recovery, governments around the world will need to pull out all the stops and use all the available levers to get their economies moving again.
First, is government spending, which is perhaps the easiest and most direct. But it can also be the costliest. In times of recession, governments could consider borrowing more to spend on infrastructure projects - some of which might already be shovel-ready.
This Keynesian approach could help alleviate unemployment immediately and infuse economies with much-needed cash. But it relies on governments knowing which goods and services will add most value and produce the highest fiscal multiplier.
A multiplier of greater than one could create more jobs while anything less could lead to lesser jobs created and possibly even a net loss of jobs.
It would nice to think that government spending would be both job and value enhancing. But a study by Valerie Ramey and Sarah Zubairy for the National Bureau of Economic Research found that multipliers tend to be lower - between 0.6 and 1.
But governments still choose to spend anyway. It helps to keep people - who might otherwise be unemployed - gainfully in work as infrastructure building, for instance, could help stimulate demand, investments and, consequently, growth in the economy.
But it could also lumber some countries with enormous debts that might never be repaid. Their hope, though, is that economic expansion could eventually whittle down the debt as a proportion of GDP.
But the interest payments on the loans could cripple some economies beyond repair, too. That is unlikely to be an issue right now, whilst interest rates are low.
What’s more, some economies, such as Japan, have even learnt to cope with debt to GDP in excess of 100 per cent for nearly three decades.
Japan can be viewed as a special case because Japanese Government Bonds (JGB) are bought by the Bank of Japan. The central bank’s insatiable appetite for the bonds has helped to keep yields low. Effectively, the government is being financed by its central bank at very low interest rates.
Apart from the central bank, JGBs are also sought by risk-averse investors, savers, banks, and insurers who prefer return of capital rather than return on capital. The bonds are also denominated in yen, which is perceived as a safe haven in times of economic upheaval.
But there can be a price to pay. Low interest rates can deter lending, and high levels of savings can deter consumer spending. The consequence could be anaemic economic growth because business could delay investments and households could put off spending.
Debt is not a problem until it becomes one. It is an issue that can probably wait to be resolved when the more immediate problem of dealing with the pandemic is settled.
PARADOX OF THRIFT
Encouraging consumers to spend more can be another useful lever and an impactful one if the economy has a strong consumer base. But it is also difficult to achieve, especially when consumers’ confidence may be affected.
The on-going COVID-19 is an example where despite some governments, as in Malaysia, distributing cash handouts to citizens, that didn’t translate to higher consumer spending, as consumers may have been worried about the impact of the pandemic and job security.
Understandably, estimates that hundreds of millions of people could be out of work globally both during and after the pandemic could, in turn, leave many people wondering if they might be next in line to be fired.
According to the International Labour Organisation, the pandemic could have resulted in a 14 per cent reduction in global working hours. The fall was the equivalent of 400 million full-time jobs, based on a standard 48-hour working week. The global decline was multi-factorial, and included shorter working hours, temporary leave, and job cuts.
Consequently, demand for goods and services could fall victim to the paradox of thrift that John Maynard Keynes highlighted as a possible threat during recession. He said that people should collectively spend more to avoid a deeper recession. But he also admitted that they, instinctively, tend to do the opposite and instead save more.
Consultants McKinsey & Company found that even as some countries have reopened, many economies are continuing to see their incomes fall. It concluded that with many consumers expecting COVID-19 to negatively impact their finances, they are mindful about their spending and trading down to cheaper products.
Keynes argued that interest rates, another lever at governments’ disposal, should be lowered to stimulate more borrowing and spending.
But it is hard to see how this would work today with interest rates already at historic lows. Among the G7 economies, the US and Canada have the highest interest rates of 0.25 per cent. Japan has the lowest of -0.1 per cent.
Unless there are tangible signs of consumers resuming spending, businesses are unlikely to invest, which could render another lever of economic growth, namely, private sector investments, ineffective. No business will want to put their capital at risk, unless there is a predictable return on the money invested.
Another McKinsey & Company report has found that businesses around the world have planned cuts of 10 per cent to 80 per cent with immediate effect to stabilise cash flows. With many businesses fighting for survival during this downturn, it may be a while before they consider ramping up investments again.
A fourth lever of growth is net exports. It can be a powerful driver of economic growth, especially for countries that are rich in commodities or those that can add significant value to imports. This could be an attractive proposition as many businesses look to relocate their supply chains to more politically-stable countries.
But the World Trade Organisation is not hopeful. It believes the decline in global trade to be worse than the trade slump brought on by the global financial crisis of 2008.
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It said the unavoidable declines in trade and output will have painful consequences for households and businesses, on top of the human suffering caused by the pandemic itself.
MANY HANDS MAKE LIGHT WORK
The old proverb that says many hands make light work has never been truer. We can all do our part to drive a bit more consumer spending because it is a lever that could have a big impact and one that we have some control over.
If we constrain our spending it will only hurt us in the long-run, in terms of overall lower economic growth a dampened business environment, which will not help us.
The upshot is that we all have a role to play in digging ourselves out of this economic slump.
This is not the time to be an armchair critic, to be a hand-wringer or to be a finger-pointer. Instead, it is a time for us to spend a little more, if we can afford to.
David Kuo is the co-founder of The Smart Investor and previously the CEO of the Motley Fool Singapore.