The world economy has been decelerating since 2018, and without stimulus we would probably be in a modest global downturn. That is changing for the worse.
The arrival of Covid-19 is already exacting a toll on the weakened manufacturing sector. Even if the disease were to vanish tomorrow, the first of half of 2020 will see global manufacturing slipping well into recession territory. Monetary and fiscal policy cannot now prevent what has already happened.
It is increasingly unlikely the United States will dodge a recession in 2020. The challenge to policymakers is that there are two distinct types of business cycle pressures currently affecting the global economy. Both are largely immune to policy intervention, so we can do little to rescue the short-run economy.
Global responses to Covid-19 are mixed. Large-scale quarantines failed to stop the spread of the virus that causes the disease. So, in the coming weeks, those extreme quarantine efforts will be dropped. Instead of trying to halt the spread of the disease, governments will try to slow the speed of transmission. The policy goals will be to prevent a rush on local medical services and to buy time for the creation of a vaccine.
These different responses illustrate the dueling types of downturns we face. The strict quarantines interrupt supply chains, drive down the production of manufactured goods and reduce commodity prices. This type of downturn is more like the oil shock of the 1970s or the Persian Gulf War. Academic researchers refer to these as "real business cycles" because they involve the actual production of goods and services, not consumer sentiments. These types of recessions are highly resistant to public policy, and must simply run their course.
The efforts to slow the disease will include local closings and cancellations, along with lots of smaller preventive measures. These will be less disruptive to the national or global economy, but they come at a cost. These costs can be very high, particularly in industries that depend on travel, tourism and the gathering of crowds. This will look like a demand shock or loss of consumer confidence, in which a sudden decline in spending pushes us into recession.
In this type of downturn, traditional policies to boost the economy should work more effectively. But, in the case of a global disease, the tools to restore confidence are unlikely to rescue the economy. With interest rate cuts, the Fed might convince us that the stock market declines are transient, but they aren’t going to convince folks to visit an amusement park or take a cruise.
We might as well face the fact that governments don’t possess the tools to prevent downturns of these types. We should not realistically expect much support for the economy in the coming months. Instead, we should use this episode as an instructive moment on the limits of government.
The long term holds far more uncertainty. Right now, data about mortality, morbidity and infection rates of Covid-19 are ambiguous. Some serious analysis reports that Covid-19 is similar to the 1918 Flu in mortality, but is more likely to affect those already at risk. This means it will kill fewer healthy young people, and more of those with existing conditions.
However, if the death rate from Covid-19 is like the 1918 Flu, it could kill more than 2.1 million Americans over two years, which is five times our casualties in World War II. Of course, we have much better medical care than in 1918-1919, so we should be hopeful it is less deadly. Still, with a death rate of 2% and a 50% infection rate, a large nation such as India could anticipate an astonishing 13 million deaths.
It is far too early to do serious economic analysis of long-run effects of this disease. However, it is not too early to conclude that this virus has the potential to have a large and enduring impact on the world’s economy. Perhaps the disease will fade away with summer, and be controlled long enough to develop a vaccine. In that optimistic scenario, we still face a modest downturn in the middle of 2020. We may not slide into a technical recession, but this slowing will have all the hallmarks of a recession and be with us until at least the end of summer.
Michael J. Hicks is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University.