I remember that in 2009, three messages were repeated over and over again: “In this crisis, the measures are different, as governments are investing in the recovery by increasing public spending”, “The funds of the stimulus packages will strengthen the recovery” and “central banks are contributing to a recovery by lowering rates and increasing liquidity. “
Then 2010 arrived and the eurozone entered a deeper crisis. In many ways, this recession is similar.
Many governments are doing the same thing they did in 2009. Go on and pretend. Prolong structural imbalances and pretend this time will be different.
It is worrying to see the same level of excessive optimism of 2009 these days, and we need to prepare for a complex environment and a difficult recovery if we are to emerge stronger from this crisis.
A recent analysis by Ned Davis Research shows that as public debt increases, growth slows and the recovery in employment is weaker. Using a multifactor fashion analysis with data from 1951 to 2020, as public debt to GDP exceeds 100%, real growth per year falls to 1.6%, non-residential investment declines and the recovery of the non-agricultural wage bill is weakening to 0.6% per year.
Two factors tell us that the recovery in 2021 is likely to be disappointing. Massive injections of liquidity, with $ 26 trillion injected by central banks, have been used primarily to perpetuate high government spending, fundamentally current spending, and to finance public debt. The second is that corporate balance sheets have been damaged to a level that will make it difficult to see meaningful growth in investment above depreciation. SP Global expects global investment spending to remain low in 2021.
Global growth estimates seem overly optimistic. The consensus assumes a 4% recovery globally in 2021, reverting to 2019 GDP by the end of 2022. This assumes an extraordinary and unprecedented fiscal multiplier of debt and liquidity. One of the most important concerns is to see a GDP recovery driven by inflated public spending and record debt that would not generate enough job growth. This is called a K-shaped jobless recovery, where some sectors rebound quickly (technology, high value-added sectors) and a majority (small and medium-sized enterprises, independents) either do not recover or are ‘worsen.
In this crisis, developed countries have had enormous fiscal space at their disposal to deal with the pandemic. An economy boosted by high liquidity and low interest rates. Some countries have used part of this fiscal space to preserve the fabric of businesses and help create jobs. Others, a majority, seized the opportunity of the crisis to accentuate structural imbalances and current spending without real economic profitability. This means that there is a significant risk of a jobless recovery when the jobs on leave are not fully absorbed.
A solvency crisis cannot be solved with cash. Not all central bank quantitative easing programs prevent the domino of bankruptcy from accelerating in 2021, as we saw in Europe after the optimism of 2009. This financial crisis after an optimistic period arises because that the challenges of the economy do not come from a lack of access to debt or low interest rates, but from working capital that far exceeds sales.
Expectations regarding the impact of the European Recovery Fund appear to be exaggerated. Too much hope is placed on the magic of the Keynesian multiplier effect of these funds, despite the evidence of their low effectiveness, already mixed after the disappointment of the Growth and Employment Plan 2009 and the Juncker Plan. The likelihood of these funds being misused and unproductive is high.
When I look at the GDP growth estimates for 2021–22, I see that the consensus estimates assume a multiplier of 1.5x to 2x compared to the stimulus packages implemented in 2020. This is almost impossible because it does not. has not happened in the last three decades, there is evidence that the multiplier is very low or zero. The study by Ilzetzki et al. “How big (small?) Are the budget multipliers?” (Journal of Monetary Economics, Volume 60, Number 2, March 2013) shows the history of the cumulative impact of public spending in 44 countries, showing the very low efficiency of fiscal stimuli. Even if we accept positive fiscal multipliers, empirical data for the past fifteen years shows a range which, when positive, is barely between 0.5 and 1 at most. However, in most countries this has been negative (as stated in the FT article “Has the IMF proven that multipliers really matter?” And “The errors in growth forecasts and fiscal multipliers », IMF study).
What can we expect? Some relevant downward revisions to GDP growth estimates in the most indebted countries and where fiscal space has been used to sustain current public spending and finance automatic stabilizers.
We could also see a sharp increase in debt as GDP growth exceeds expectations and deficits remain high, which will also have an impact on the 2022 estimates. As governments may decide to raise taxes to finance part of the increase in the deficit, the impact on employment and growth will probably be greater.
There is also an important factor to consider. Gross capital formation could probably disappoint as 2020 saw an unprecedented zombification of the economy which led to an abnormal increase in overcapacity for such a short crisis with a strong rebound in the third quarter of 2020.
Fiscal and monetary space are no excuses for counter-reforms and waste of money. Countries have the unique opportunity to use these tools to strengthen the productive fabric and create jobs, but unfortunately much of it has been wasted.
There is only one way to strengthen the recovery: reduce structural imbalances by regaining fiscal sanity and by implementing serious measures to attract capital. To fall back into propagandist optimism would be a mistake.
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