The „Great Lockdown“: A new kind of economic recession?

This week the International Monetary Fund said the global economy is expected to contract by 3% because of the coronavirus crisis, causing “the worst recession since the Great Depression of the 1930s". But what will the human face of this recession look like. Political economist Philippe Legrain gave us a foresight.

By Joanna Bostock

The uncertainties that lie ahead of us are huge, the IMF’s forecast sounds very negative, but for Philippe Legrain this is still a very optimistic forecast. So what can we expect for post-Corona-times?

Joanna Bostock: What do you make of the IMF forecast, and what does it mean in human terms?

Philippe Legrain: I think the IMF is being more optimistic than other forecasters. If you look at what official statisticians are saying in some European countries the economy is currently operating at about two thirds of capacity. That means some people are still working from home and other people, other companies are not functioning. Whether you’re a small business, a restaurant or bar or someone who used to work for those companies – you are suffering a catastrophic loss of income; the likelihood of bankruptcy, the probability that you are going to have to incur debt to try and get through it and the likelihood that even when the lockdown passes and the economy slowly creeps back to life, you’re going to be scared of spending and desperate to improve your financial position.

So basically, it’s ordinary people who are going to be hit the hardest?

Yes. In various countries governments have put in support measures which provide a measure of insurance, but they don’t provide full insurance against the catastrophic losses, and the longer this goes on, the more likely there are going to be enduring scars, and economies unable to spring back to life, as the IMF assumes. They call this a V-shaped recovery, where you recover as fast as you fell, and I think that’s unlikely to be the case. I think it’s much more likely that we’re going to see a much slower, delayed recovery because even when the lockdowns are lifted it’s going to happen gradually, there’s going to be continued social distancing and indeed continued uncertainty. And governments are going to be in a big hole because they will have borrowed massively – and rightly so, in order to try and provide some sort of insurance to workers and business throughout this difficult time – and after that they’re going to have to close their deficits and repair their finances.

What about the growing inequalities within societies – does a deep recession have the potential for social and political unrest?

I think it could. If you look at the after effect of big, collective experiences such as wars, you tend to find that it increases a sense of social cohesion and a desire to ensure that everyone in society reaps the benefits of growth, and I think if that isn’t forthcoming, if the rich and the big businesses which sail through this crisis virtually unscathed aren’t politically aware enough to recognize that we need a a fairer society coming out of this crisis, then I think the political repercussions in terms of those people who have suffered at the brunt of this crisis, the young and the precarious, they are rightly going to be demanding a much fairer society and if they don’t get it they’re going to be very angry.

Would it be fair to say that recessions are different according to the phenomena that bring them about and therefore that might affect what happens in a recession?

Absolutely. This is a completely new kind of recession in the sense that it isn’t caused by a build up of inflation leading central banks to raise interest rates, as most post-war recessions have been. It isn’t caused by problems in the banking system, like the financial crisis of 2008-2009. It isn’t caused by government austerity and a panic about government debt as in the Eurozone recession in 2012 was. It’s caused by a pandemic for which European economies especially were unprepared and where governments have taken, for medical reasons, the decision to shut down large swathes of the economy. Therefore, in a sense it’s a recession of choice in order to avoid a greater harm which is many more deaths, and therefore a very strange sort of recession. Whereas normally in a recession the task of government would be to try to sustain economic activity, here the task of government is to suppress economic activity while minimizing the long-term damage, which is why it’s so important that governments provide this insurance function of trying to keep support businesses and individual workers, so that they are able to reassume activity once the suppression ends.

The IMF is also warning that this recession could reverse decades of gains from globalization: what gains is it referring to and how would that turn back the clock?

Since the fall of the Berlin Wall and the end of the Cold War we have lived through a period of intensifying globalization where China and other poorer countries have massively increased their share of world trade. As a result, they have got much richer, people in Europe and other rich countries have benefitted from much cheaper products and global growth in general has been boosted. Now, since the global crisis a decade ago, globalization has been stalled, and since the election of President Trump it’s probably been going into reverse with the trade wars he’s launched. I think that the coronavirus crisis has the potential to accelerate that de-globalisation, first of all because businesses are going to be wary of relying on suppliers in places such as China because of the disruption that happened during the coronavirus crisis, and they are much more likely to have supply chains that are based closer to home. We might even see for example an increase here in Europe of production based on robots and 3D printing, rather than relying on cheap foreign workers.

Also, this crisis has been a gift to nationalists. We’ve seen that economies have become much more national and politics much more nationalistic. We’ve seen European countries limiting their exports of medical supplies, we’ve seen all sorts of governments saying we need to produce food, pharmaceuticals, all sorts of things domestically or at least within Europe. And you’ve seen governments doing things that only nationalists did before, like closing borders, treating foreigners as a threat. I think therefore there’s a very strong risk of an increase in nationalism and a closing of national borders. Indeed there are risks even within Europe, where you see the huge resentment that has been created in places such as Italy by the lack of solidarity the Italians feel other Europeans have shown towards them.

The way you put it, it sounds as if the world is standing at a crossroads and it could go one way or the other...

What’s very clear at the moment is that there’s huge uncertainty: about how the pandemic is going to pan out, about how great the economic devastation is going to be, about whether it’s going to provoke a financial crisis, not least within the Eurozone, and there’s huge uncertainty about the political consequences. In part that uncertainty will reduce over time as we see how things turn out and in part it’s up to wise decisions by political leaders to try to push things in a positive direction. For now what we see is it’s each country for itself. And this week Donald Trump taking the extremely worrying decision to pull US funding for the World Health Organisation in the midst of a once-in-a-century pandemic. That doesn’t make you very positive about the future of international cooperation in the post-crisis period.