How would the global economy be doing if it weren’t for Covid-19?

6 Nov 2022

Here is a very important question, which very sadly has no real answer: what would the global economy have looked like now if Covid-19 had not happened? It has no answer for the obvious reason that there is no counterfactual. But, you know, it’s nearly three years since the pandemic began, and just as a mental exercise, let’s give it a go.

The most obvious characteristics of the pandemic from an economic point of view are threefold: first, its global nature. The pandemic was akin to a world war in the sense that there were very few people or countries left unaffected. The sheer size of the pandemic wasn’t unprecedented, but was pretty close, I suspect.

Second, the enormous quantity of cash governments spent was extraordinary. Governments spent much, much more fighting Covid than they spent fighting either world war. In total, government fiscal support came in at about $24-trillion, increasing total global debt by around 5%.

Of course, that was not the total bill: if you calculate the loss of the three million or so people who died, and are still dying by the way, as a result of the pandemic, the numbers are just crazy, again, easily into the trillions. Yet, even through the crisis, global population growth was still positive, if dented. But the point is that in today’s money, governments around the world spent $4-trillion on fighting the second world war, which gives you an indication of the quantum by which the Covid spend topped this figure.

Third, the approach of governments to the Covid crisis was very influenced by the 2008/09 global financial crisis (GFC). At the start of the GFC, there was some doubt about whether governments would intervene at all. Gradually, they did, but slowly and reluctantly.

Lessons

By the time Covid came around, lots of lessons had been absorbed. One government that had intervened in the domestic economy in an unusual way during the GFC was the Australian government, which sent its citizens cheques of around A$800 to get the economy going again. It cost the Aussie government around $42-billion. The world laughed. Nuts! they said. Typical Labour Party handouts, they said.

But extraordinarily, Australia was one of the very few countries in the world to escape a recession during the period, and afterwards, Australia was lauded not only for having done the right thing, but targeting the right people: the people. The US, by contrast, focused on funding the very banks which were primarily responsible for the crisis through lax lending, which has to go down one of the most deft manoeuvres in the history of banking. We messed up! Give us money. Ok.

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As a result of this experience, when Covid came around, the watchword was to move fast, spend much more than you think you should, and give it to the people individually. The theory here is simple Keynesian economics: at moments when demand slacks off, often you need the government to jump in and reconstitute the economy’s demand profile.

Now generally, if you encourage politicians to hand out cash to voters, there is going to be a lot of head-scratching and deep thinking in public, and great whoops of joy in private as they pump up the money printing press. But if you compare the immediate aftermath of the GFC and the Covid crisis, it’s obvious how effective this strategy was.

Growth trendline

One way we can test this is simply to assume global growth would have continued on the path it was on before the calamity — and then measure how long it takes for global growth to get back to … let’s call it “normal”. This is a little bit complicated and I’ll explain why in a moment. But the US Bureau of Economic Analysis actually did this calculation for the US, and it took roughly six years for US growth to hit the trendline after the GFC. In the case of Covid, the US economy had hit the trendline even before the pandemic was over. It was just incredible. Viva, Keynes, viva.

The problem, of course, is that trendline. In fact, if you peg the trendline back further, US aggregate growth should have been faster through both crises, to the extent that the US economy should hover around perhaps $25-trillion rather than the roughly $23-trillion it is today. But you know, if and buts, who knows for sure? The real point is the reversion to the mean after the two crises happened sensationally faster following Covid.

Downsides

But this reversion to the mean came with some big downsides, the most obvious is that inflation has taken off around the world. The reason I suspect is that, if you think about it, Covid was more of a supply-side crisis than a demand-side crisis. It is not just that supply chains were bamboozled, although that is part of the problem. It is that the nature of Covid is different as a calamity to the GFC.

The GFC was more a crisis of economic confidence and therefore companies and individuals were unsure about the appropriate level of debt to hold in a declining market. During Covid, the pressure was actually to spend more and governments were certainly feeding that fire.

And that hasn’t been the only problem. Just observationally, there has been an increase in global instability, more volatile fuel prices, higher interest rates as the obvious corollary of higher inflation, and one other extremely curious effect: labour shortages (not in SA of course).

My sense is that this last effect is the most worrying long term because it’s based on a kind of end-of-the-world gloominess — the great resignation. You may disagree, but I really do think the citizens of the world are in an extremely dark place at this post-Covid moment: tetchy, angry with institutions, lacking both enthusiasm and optimism about the future. Perhaps the Covid crisis was bad enough to make people feel miserable, but not bad enough to make people feel they achieved a mighty victory as we eased out of it. I don’t know — hard to say.

If you feel like you are in that category, I would respectfully counsel hope and perspective. Trust me, Covid could have been a lot worse economically; the world generally did the right thing. And ask yourself if you would rather be where you are now, or in a bombed-out city in Germany after World War 2 with little to eat and the future staring you bleakly in the face. BM/DM

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Business Maverick

Lessons

Growth trendline

Downsides