The COVID-19 recovery path: The future for the global economy and financial markets

How the world can build back better: Prof. Joseph Stiglitz on the post-pandemic recovery

Nobel prize winning economist Joseph Stiglitz shared his views on the COVID-19 recovery path, the future of the global economy and financial markets with AXA IM clients in October. Below is a summary of what he had to say.

The coronavirus pandemic is likely to be one of the defining events of the century. I have confidence we will eventually get vaccines, but we don’t know how long that will be. And I don’t believe we will really have an economic recovery until we get the virus under control.

The view that was held when lockdowns were first put in place, was that there would be a short interruption, followed by a v-shaped recovery.

More than six months later, it is clear that the disease is not yet under control in Europe or the US. Yet in other nations, in New Zealand, Taiwan, Vietnam and South Korea, it has been brought under control. These disparities are likely to affect the geopolitics of the future.

The virus goes after people with poor health - in the US there is a deficit of social protection and health care systems, so there are more individuals to go after. It is not surprising therefore that the US has been one of the most adversely affected countries. There is no mandatory paid sick leave, and a lot of people are living pay cheque to pay cheque - if you get sick and you can still go to work, you go, and this means the disease spreads.

Economics vs. markets

Some look at the US stock market and how well it’s doing and wonder how this can be? The answer to that is very simple. First, it represents only a small portion of economic activity. The significant gains we have seen, have mainly been large technology companies, but the parts of the economy that have been devastated, are small businesses not on the stock market.

Second, one of the things that marks any major economic downturn is that monetary authorities lower interest rates. Investors are going to take their money to where the returns are potentially higher – equities rather than bonds.

In this case another force bringing market values up is the enormous flood of liquidity from the European Central Bank and Federal Reserve - some of that liquidity is going to go into the market. One aspect of this economic downturn is the unprecedented support from government. I believe this was the right policy - if you don’t maintain the strength of the economy there will be long-term consequences.

The problem is that, in the US, it didn’t design the policies very carefully. The result was that they didn’t succeed in keeping the unemployment rate down and failed to keep workers linked to their jobs – this is particularly important in the US as workers depend on employer-provided health insurance.

Europe did much better, due to furlough schemes that were well designed in countries like Denmark and France - and we saw similar schemes elsewhere like in New Zealand.

How can the world build back better?

I like to use this metaphor - we built a bridge to the post-pandemic world with this spending, and so far, we have built half that bridge. Now, there is the view on the part of some people that the deficits are too large, and inflation is going to be too high, so we need to stop construction. I think that’s wrong - building half a bridge gets you nowhere, you need to complete the bridge. The disaster of cutting back now would be enormous, with long-term effects.

We need to build back better. Some big deficiencies were exposed or exacerbated by the pandemic, like inequalities and the lack of resilience of global supply chains. As we build back better, we want to be a more equal society, a more knowledge-based economy, and a green economy moving away from fossil fuels towards sustainable sources. Leaders around the world have made pledges to be carbon neutral, but whether governments will be able to continue to spend that money post-pandemic is debatable.

That means the money that is being spent today needs to help the recovery from the pandemic, but it also has to help reshape the economy. That kind of vision has been an important part of the European strategy. So far, it’s not been part of the American strategy.

The pandemic has accelerated many changes that were already on their way – the process of digitalisation for working and shopping will be with us when the disease is under control. I will enjoy being back in the classroom but think some of our teaching will be online.

I think there will be some onshoring or reshoring of global supply chains, but that will not solve the problems of the de-industrialised parts of the US and Europe. The failure to be resilient has to do with the short sightedness of markets – we construct cars without spare tyres, we save a bit of money up front, but if you have a flat tyre it has big consequences.

On the positive side, the pandemic has brought home forcefully the fact that we share one world and we need to cooperate, which will mean we will strengthen multilateralism.

What might the challenges be to a sustainable recovery?

However, it may mean emerging markets and developing counties are going to be facing debt crises. If we don’t get a debt restructuring, I believe that the global economy is going to have difficulty returning strongly.

Helping emerging markets should be front and centre. They don’t have the resources to stimulate their economies in the way advanced countries do.

The challenge will be how do we get the cooperation we need to solve problems like climate change and controlling pandemics, in a world where there are these rivalries and profound differences in values and economic and political systems.