Despite overly optimistic predictions of quick recoveries and the supposed cure-all of lifting lockdowns and reopening businesses, the real statistics of where the global economic collapse is headed are far more bleak. Based on the most recent predictions, the economic collapse will bring a 4.1 percent contraction worldwide this year, followed by moderate growth of 4.3 percent in 2021. So what does this mean? It means that the closest thing we have to compare this current disaster to is the great financial collapse of the 1930s–the Great Depression. While Western Europe and Latin America experienced the sharpest decline, there is a spot of good news. Their losses will be offset to some degree by less severe GDP declines in Asia, as powerhouse and heavily populated countries like China and India prop up the region with their growing economies.
In this video, we are going to discuss global attempts to reopen, and the challenges–both health, political, and otherwise–that come along with that. We will hear expert predictions on recovery, as well as risk factors that may prevent the global economy from bouncing back as quickly as we’d like.
Economic collapse, weak outlooks, and rising geopolitical tensions are just a few of the serious issues the world is grappling with now. There are four risks in particular that could very well cause even further waves of catastrophe. First, as countries across the globe come out of long periods of lockdown and ease safety precautions in waves, they run the risk of a second spike in the health crisis. In a brutal spiral, this would necessitate reinforced lockdowns and further economic distress, as well as more strain on an exhausted health care system. The risk for resurgence is much higher for developing countries than developed ones.
Experts remain unsure if it is even realistic for countries with high density populations to properly implement social distancing measures as they reopen their economies. Countries like Indonesia, India, and Brazil top the list of most at-risk. Unfortunately, countries like these are also not up to speed with their testing capabilities–neither breadth nor depth–which means that they would have no early warning of a second wave.
There is a very thin line between this remaining an economic crisis versus plunging into a financial crisis, which means financial institutions like banks get into serious trouble as well. For one example, a sharp increase in declared bankruptcies could lead to liquidity issues for banks and put their operations and ability to help at risk. As a result, businesses would be unable to secure necessary loans, and more companies would go under. Again, a brutal spiral.
Thankfully, banks have learned at least a few things since the Great Recession of 2007-2009 and do have better buffers to prevent complete collapse. Furthermore, central banks around the world are providing sufficient liquidity to the banks of individual countries. As a result, we have seen less violent ups and downs in the global markets than we did towards the start of the pandemic.
The last longer term risk is that we may see an increase in the number of zombie companies. Zombie companies are, as the name suggests, businesses that are teetering on the brink–making little to none in the way of profit and without much hope for future turnaround. These particular companies actually feed off an environment of low interest rates and a financial system that rolls over loans to loss-making companies, because it allows them to stay up and running. On the flip side, poor monetary policy created by central banks actually incentivizes so-called “zombification.”
After the Great Recession, there was a notable spike in the number of zombie companies in the US. In 2019, it rose to 15 percent among all listed companies. In Japan, some estimates put the figures at as high as 21 percent. When recovery rolls around, zombie companies hinder economic growth because they are largely unproductive and do not stimulate the economy in the same way that functioning, healthy businesses do. According to a worrying study from the BIS, even just a one percentage point increase in the proportion of zombie companies in a country can cause a decline of 0.3 percent in annual GDP growth.
Clearly, there is plenty of cause for concern. While there is some hope that a recovery will be on its way next year, there are also many risk factors and potential wrong turns that could still wreak havoc on the global economy and push us further into economic collapse.
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