The recovery will be geographically uneven. It may follow the path of the virus’s spread.
Let us not be optimistic. But, it is important to begin thinking about the post-pandemic life, even though we can only speculate, rather than forecast, at present. Let us say that sometime during the July-September quarter, the global economy would begin to recover.
The recovery will be geographically uneven. It may follow the path of the virus’s spread. Thus, unless China suffers a second wave of infection, it is tempting to think that the timeline of recovery will see China, South Korea, and Singapore recovering first. The virus then jumped to Western Europe and the US.
It seems to have hit Latin America only in Brazil mostly, but it is early times yet. India is now climbing up the left arm of the bell-shaped curve, and the spread of the infection will accelerate in the next four weeks. So, most countries will recover in late summer.
The output effect will be of around a 25-30% fall during the lockdown period. The fall of output in annual data will be influenced by the rate and shape of recovery. Consumer goods output and services will recover first, with manufacturing following.
For India, the effect on agricultural output will depend very much on harnessing the labour—with protective clothing—for harvesting. Social distancing, key to fighting the spread of Covid-19, should be easy in the fields. The drop in output and recovery, as soon as it starts, will be shaped like the square root sign—sharp down, and then up to the old normal within two quarters, with full recovery at the end of the fourth quarter after the end of the epidemic in the relevant country. As of now, I am sticking to output flows.
The destruction of stocks of infrastructural capital, the depreciation of capital unreplaced will have to be looked after. During the two or three-quarters of the pandemic, all the countries would have let loose their purse strings to compensate workers for their lost jobs—not entirely, but up to 75%. Currently, this money replaces lost income, and the lockdown reduces opportunities for demand to manifest itself. So, inflation should not be high.
Inflation surge will come when the recovery starts. Some of that would be due to restocking, and indeed, splurging as soon as people get a chance to go out again. There will be attempts to recover profits, to make up for old losses. For durable goods, it will depend on whether there are unsold stocks.
Countries may end the lockdown in a gradual way, releasing workers first, and opening retail shops and eating establishments. This may start recovery early, and hold inflation from exploding. India had problems before the pandemic. The growth rate of income was heading to 4%. The credit market was broken. The compulsion to recoup the extra spending during the pandemic should encourage massive divestment of PSU banks, and other public properties. Such a chance may not come again for a generation.
(The author is a Prominent economist & Labour peer. Views are personal)