Assignment Sample on 7BSP0353 The Global Economy
Introduction
On January 17, 2020, the World Health Organization also known as WHO recognized COVID-19 as one of the global health emergency. In furtherance, it was declared as a pandemic on March 11, and was stated to be the highest ranking global health emergency (Liu et. al. 2020). During that time, the emergency developed into a global crisis affecting the health of the public and the economy across the globe. It impacted $90 trillion global economies to a degree not seen for nearly a century. COVID-19 has a highly heterogeneous impact on regional and local communities worldwide, with serious impacts for policy responses and crisis management. Thus, the present answer explores the different dimensions of the COVID-19 crisis, including economic, health, fiscal, and social, from a territorial perspective.
COVID-19 economic effect, fiscal deficits, enhanced debts, and future policies: An Analysis
COVID-19 is a pandemic that requires all levels of government to act under conditions of great uncertainty and intense fiscal, social, and economic pressures. As new waves of infections are emerging in many countries since mid-2020 and variants are emerging, governments are faced with limited options for sequenced policy action. The United States saw its GDP growth rate drop to 9.0% in the second phase of the year 2020 as compared to the previous phase (Fernandes, 2020). This represents a -31% drop on an annual basis, the biggest decline during the past 70 years. As a result of these factors, US Gross Domestic Profit increased by 7.5% in the third phase, or a 30% annualized rate, primarily due to increases in personal usage resulting from higher income and government subsidies. During the fourth quarter of 2020, US GDP expanded by an annualized rate of 4.5% in comparison with the growth rate of 1.0% over the third phase. But on a year-over-year basis, economic growth in 2020 is estimated to have decreased by 3.4% from 2019. According to the Bureau of Economic Analysis, the US Gross Domestic Profit increased by 2.0% in the third quarter of 2021, after surging by 6.3% and 6.7% in the first and second quarters, respectively.
Responses to Economic Policy
A late response towards economic conditions lead to an continuing series of interventions in the market that is the financial market by central banks in developed and emerging markets, as well as various fiscal policy initiatives taken by national governments to stimulate their economies (Weiss et. al. 2020). According to the Bank for International Settlements (BIS), a large fiscal, monetary, and prudential response was elicited following the pandemic, surpassing that of the global financial crisis that occurred in the year 2008-2009. BIS also argued that if the economic recovery were delayed, the evolving health crisis would have evolved to a solvency crisis, changing from a liquidity crisis to one of liquidity. During the second quarter of 2020, banks began reducing their asset holdings in response to improving economic conditions, and by the end of that year, loss provisions were back to pre-pandemic levels.
Fiscal Deficits
International Monetary Fund helps in the estimation of the revenue measures and government spending to sustain activities of the economy adopted until September 2021 to the tune of $16.9 trillion, as one measure of the extent of the government’s monetary responses and global fiscal. In Figure 3, the International Monetary Fund estimates that global borrowing by governments to finance fiscal stimulus will rise to 10.2% of GDP in 2020, then fall to 7.9% in 2021 and 5.2% in 2022. According to other estimates, I observed that central banks had committed $17 trillion to counter the impact of pandemics on their economies.
In 2020, the fiscal deficit will be 14.9% of the US economy. It will fall to 10.8% in 2021, then to 6.9% in 2022, although the ratio is still projected to be higher after 2020 and after 2021; the US deficit to GDP will be 10.8% after 2020 and 8.8% after 2021. As economic recovery takes hold, the IMF expects debt ratios to fall in most countries and areas as a percentage of GDP in 2022, but they will fall more substantially as share percentages of GDP in 2021 (Stellenbosch University, 2020). With low-interest rates, government deficits must be financed by borrowing, which has led some economists to raise concerns about an increase in interest rates and the impact of refinanced accumulated debt on interest rates. They also believe that government debt service costs will rise if central bank interest rates rise.
Economic Policy Challenges
Policymakers encountered changing economic and pandemic conditions as they implemented the policies that addressed what was assumed to be the problems at short-term levels without causing economic distortions that could outlive the virus (Klenert et. al. 2020). The speed at which the global health crisis was changing and the immediate economic impact on policymakers initially overwhelmed them. As a result of the virus-related supply shocks, there was concern that it may create more widespread and prolonged shocks of demand, as lower rate of activities by businesses and consumers in many countries and regions decreased the rate of economic growth. As government levels of debt rose in order to attain the obligations of spending during an expected recession of economy, markets also anticipated a rise in bond issued by the government in the United States, Europe, and elsewhere. This included increased fiscal spending against the effects of COVID-19.
The economic impact spread to an ever-larger number of countries, firms, and households through trade and financial links as the economic effects endured through the spring and summer of 2020 (Lidz, 2021). The growing economic impact could lead to tightening credit market conditions and liquidity constraints in global financial markets as firms hoard cash, negatively impacting the global economy. In an effort to deal with these issues, the government focused on macroeconomic and financial market issues utilizing monetary, fiscal, and other policies, including closing border crossings, enforcing quarantine periods, and imposing social restrictions. In response to the current crisis, some monetary and fiscal policies aimed at limiting economic damages may have benefited nonfinancial firms and households. However, such policies may have also resulted in higher debt levels for most countries and lower growth rates for the future.
Living standards between developed and developing countries are expected to widen as the economy recovers slowly. According to estimates, such differences in living standards would reflect differentials in total annual per capita income, with losses in 2020-2022 estimated to be equivalent to 20 percent of 2019 worldwide gross domestic product, or $18 trillion. Low-income countries and emerging market economies are expected to bear the greatest losses.
Debt Crises and Debt Relief
COVID-19 Global debt levels could trigger a worldwide default reached their highest level ever in Q3 2019, totaling nearly $253 trillion, about 320% of global output (Auerbach et. al. 2020). The advanced economies hold about 70% of global debt, and emerging markets hold about 30%. Nonfinancial corporations (29%) hold the majority of the world’s debt, followed by governments (27%), financial corporation’s (24%), and households (19%). State-owned enterprises have primarily driven the growth in debt in emerging markets since 2010.
The effects of high debt on borrowers can be adverse, leading to diminished inflows of new financing and disruptions in revenue streams (Didier et. al. 2021). COVID-19’s disruption will significantly make it harder for borrowers, private and public, worldwide to repay their debts due to the wide-scale exogenous shock associated with it.
Figure 2: The impacts of Financial Crisis on tax mixes
(Source: Tax and fiscal policy in response to the Coronavirus crisis: Strengthening confidence and resilience, 2020)
Conclusion
In conclusion, we can say that the outbreak of COVID-19 is causing a health crisis and an economic slowdown without precedent. As containment and mitigation measures are relaxed, the concern can shift from providing assistance to limiting hardship and maintaining the economic capability to stimulate economic recovery. In developing countries, where healthcare systems are weak, containment conditions are short, informal economies are more significant, and fiscal and monetary policy is limited, specific assistance will be necessary. The health and economic challenges they face are made more challenging by these factors.
References
Auerbach, A.J., Gale, W.G., Lutz, B. and Sheiner, L., (2020). Effects of COVID-19 on Federal, State, and Local Government Budgets. Brookings Papers on Economic Activity, 2020(3), pp.229-278.
Didier, T., Huneeus, F., Larrain, M. and Schmukler, S.L., (2021). Financing firms in hibernation during the COVID-19 pandemic. Journal of Financial Stability, 53, p.100837.
Fernandes, N., (2020). Economic effects of coronavirus outbreak (COVID-19) on the world economy. Available at SSRN 3557504.
Klenert, D., Funke, F., Mattauch, L. and O’Callaghan, B., (2020). Five lessons from COVID-19 for advancing climate change mitigation. Environmental and Resource Economics, 76(4), pp.751-778.
Lidz, V., (2021). Afterword: A Functional Analysis of the Crisis in American Society, 2020. The American Sociologist, 52(1), pp.214-242.
Liu, Y., Lee, J.M. and Lee, C., (2020). The challenges and opportunities of a global health crisis: the management and business implications of COVID-19 from an Asian perspective. Asian Business & Management, p.1.
Stellenbosch University. Bureau For Economic Research, S.U.B.F.E.R., (2020). Economic activity expected 2020-2021: second quarter. BER: Economic Prospects: Full Survey, 35(2), pp.1-44.
Tax and fiscal policy in response to the Coronavirus crisis: Strengthening confidence and resilience, (2020) [Online]. Accessed Through < https://www.oecd.org/coronavirus/policy-responses/tax-and-fiscal-policy-in-response-to-the-coronavirus-crisis-strengthening-confidence-and-resilience-60f640a8/>. Accessed on 10th January, 2022.
Weiss, M., Schwarzenberg, A., Nelson, R., Sutter, K.M. and Sutherland, M.D., (2020). Global economic effects of COVID-19. Congressional Research Service.
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