EKIP– Expert Club for Economics and Politics A Different Opinion
Mass restrictions have returned. With the escalation of the pandemic in recent weeks, a number of countries in Europe have re-introduced closures of most public facilities and commercial establishments. Given the fact that we are only at the beginning of the “cold” season of the year, the horizon for clearing the current escalation in the pandemic situation is very uncertain. The horizon for loosening the re-imposed restrictive measures is also uncertain. In such a situation of extremely high uncertainty, we must be prepared, at least psychologically, for the worst.
Covid-19 strikes back
Ireland was the first to impose a state of emergency again more than a week ago. As of yesterday, the largest European economies - France and Germany - also joined in with an almost universal lockdown. In some respects, this re-closure is softer (borders, for example, remain open for now), but it is close to the level of that of the spring. In other EU member states, some softer additional measures have been introduced, such as mandatory masks on the street and a ban on large gatherings of people in public places (Portugal). In Spain, a nationwide curfew was introduced, and in Greece, one was implemented in the regions most affected by the pandemic. In Italy, gyms, cinemas and theatres were closed, and restaurants are prohibited from operating after 6 p.m.
For now, measures remain partial in many places, but with new Covid-19 cases rising everywhere, things look set for another mass lockdown. It is unlikely to be identical to the one in the spring, as many governments are now concerned about whether economies can withstand a second lockdown of the same scale. But even if it is at least as restrictive, a second lockdown would have catastrophic economic consequences. Especially considering that businesses everywhere are already vulnerable to the financial hit they took earlier this year.
Pessimistic scenarios look increasingly realistic
Against this background, it is already abundantly clear that the “baseline” economic forecasts will not come true. The decline in economic indicators will certainly be more severe than previously expected, and instead of the “baseline” ones, the “severe” (pessimistic) forecasts will be fulfilled. The forecasts of most governments, which were already rather optimistic, will most likely have to be revised downwards in view of the escalation of the pandemic in recent weeks. Institutions such as the International Monetary Fund predicted a GDP decline of over 10% in countries such as Greece, Italy, Spain and Portugal even before the current escalation of the pandemic situation. In the event of a re-closure, the realization of such forecasts would actually be the “dream” scenario.
Bulgaria will be no exception. Even if we don't end up with a mass lockdown like we had in April, the blow to economic activity will be felt here too, even indirectly. After the summer season, the tourism sector will have to prepare for a collapse in the winter season as well. Possibly even more severe, because the pandemic situation still seems to be influenced by weather conditions and the virus spreads faster in cold weather.
The government’s forecast of a mere 3% decline in GDP in 2020, from “relatively unrealistic” a few weeks ago, is increasingly starting to look like “absolutely impossible.” At the moment, the BNB’s latest forecast of a 5.5% decline in GDP this year looks much more likely. This would be the worst recession we have had in more than 20 years. It is also important to note that with the continued escalation of the pandemic and repeated mass closures in the last two months of the year, even a 5.5% decline in GDP may turn out to be an optimistic scenario.
At the moment, any prediction is uncertain speculation.
At the moment, economic forecasts can only be speculative and uncertain. Simply because the main variable on which they depend – the development of the pandemic, both in our country and around the world – is extremely unpredictable. Although an increase in the number of cases was expected in the fall, it seems that no one expected it to be of such a magnitude. And among governments (especially ours) there was certainly a smoldering hope that such an increase in cases would not occur and the autumn-winter period would pass without crisis situations for the health system and the imposition of new restrictive measures.
Since we have entered the realm of speculation anyway, it is appropriate to ask ourselves here – what is the likely horizon of the current escalation of new Covid-19 cases? Let's start with what we know – our healthcare system has very limited capacity and currently cannot handle tens of thousands of cases requiring hospitalization. What we do not know is when the current escalation in the number of new cases will stop.
In the spring, some speculated that as the weather warmed, the dynamics of the virus would calm down. Other experts dismissed the validity of this theory, but in view of the current escalation, maybe there is some truth to it? Or maybe not, and in fact the current situation is due to an entirely different factor. For example, the opening of schools as a catalyst for faster transmission of the virus to different households through close contact between children during the day. Also speculative, but also at first glance at least somewhat plausible theory. Will closing schools again solve or at least limit the problem?
The consequences of a "long winter" could be catastrophic
The truth is that we have no idea. That’s the big problem. So it’s a good idea to prepare as much as we can, at least psychologically, for the worst-case scenario. And that is that the current escalation of the pandemic will not last just a few weeks, but will continue until the end of winter. Remember how the current global pandemic began. The first cases in China appeared in mid-November and the spread of the virus began to gradually escalate locally in Wuhan throughout December and early January. The biggest increase in cases in China (at least the officially documented ones) was in the second half of January and in the first three weeks of February. Then it spread to the rest of the world and in many European countries the biggest peak of cases was reached towards the end of March.
The possible re-escalation of the pandemic within such a horizon seems extremely frightening. But we must admit that it is entirely probable. The worst thing is that we are talking about two quarters in which economic activity will be severely crippled. If restrictive measures are maintained for such a long period, even if they are not on the same scale as in the spring, the crisis will begin to spill over into 2021. That is, the current deterioration in the pandemic situation is also beginning to have longer-term economic consequences.
All economic forecasts so far assumed that in 2021 we will see the first steps of a serious recovery in economic activity and in 2022 GDP levels will reach and even surpass those of 2019. Employment and unemployment levels for most countries are expected to return to their 2019 levels as early as 2021. What if this does not happen? What if, due to a prolonged escalation of the pandemic, the first quarter of 2021 is also a recession? What if the crisis in the labor market deepens? What if businesses are unable to withstand a second closure and a wave of bankruptcies becomes inevitable? What if it happens that we are actually in recession throughout 2021, or at least GDP growth turns out to be extremely low – for example, 1-3%? What happens to the long-term horizon – will we reach the levels of economic activity of 2019 again in 2022? or is this being pushed to 2023?
Debt crisis, banking crisis – real risks
Let's not ignore public finances either. What would happen to state budget deficits if the horizon of the economic recession were to lengthen? If the decline in tax revenues did not begin to ease over the next 6 months, but deepened? The question is rhetorical. Deficits would swell even more – and with them the state debt. This is clear, but it has important implications for anti-crisis measures. They are almost entirely under some form of state subsidy (directly or in the form of interest-free/low-interest loans). If the recession continues, at some point the capacity of public finances to provide such forms of support will be completely exhausted. And if these economic aid measures are not discontinued, there will be a serious risk of a debt crisis.
This moment is not as far away as it seems. What allows us the luxury of not thinking about it for now is the policy of central banks around the world, which, through unprecedented money printing, keeps interest rates on government debt low everywhere. The effectiveness of these actions is also limited, however, and they risk a serious acceleration of inflation at some point. And speaking of central banks – what will happen to the banking system if the moratoriums on credit payments are extended and central banks continue with their extremely low interest rate policy? Does anyone actually know how banks would make money, if they make money at all?
The point is not to worry unnecessarily about such apocalyptic-looking scenarios. But right now it is extremely important to ask ourselves these questions and think about them. Because these scenarios are entirely possible to come true. And the more the pandemic escalates, the more likely this becomes. In such a situation, something that is entirely possible to happen is to see governments begin to abandon the restrictive measures related to the pandemic. On the one hand, because they may not work, but mostly simply because keeping them would already have an unbearable economic burden. And human lives also depend on the economic situation.
The government should think responsibly, not pre-election
It is particularly important for the Bulgarian government to consider each of the above-mentioned risks. Because they are interconnected and therefore seem increasingly likely in view of the acceleration of the pandemic. One mistake that seems to have been made in the spring and summer is that the government did not prepare for the acceleration of new cases of Covid-19 in the fall. Developments in recent weeks seem to have caught the government completely unprepared. Although 6 months have passed, the healthcare system does not seem to have even a relatively greater capacity now compared to March.
The new fiscal measures in Budget 2021 were aimed almost entirely at the social sphere – at sectors that have not actually suffered in any way from the pandemic and the crisis. If we did not know that there was a pandemic and a crisis, we would not have known just from reading Budget 2021. But the pandemic is in full swing, and the crisis is deepening. These are very serious mistakes by the government with serious consequences for all of us, but we are already in a pre-existing situation.
This may be an absolutely hopeless call in a pre-election environment in which a fading regime is desperately trying to survive, but it is necessary. The government should carefully consider what it will do in the next 5-6 months until the elections to deal with a potentially catastrophic health and economic situation. The authorities must act responsibly, and not in a way that will bequeath to the next government a completely depleted treasury, a completely collapsed health system and an economy in deep crisis. Statesmanship is most evident in severe crisis situations.
