This Week in COVID-19 and Economic Diplomacy: ‘Pandemic Wreaks Lasting Damage on Living Standards’

Our weekly COVID-19 and Economic Diplomacy tracker looks at policies that impact the coordination of international governments and central banks, ongoing commentary and analysis, and asks what these turbulent times mean for economic diplomacy. 

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The Highlights

• Global public debt is expected to hit almost 100% of global GDP; however, the IMF says that most advanced economies do not need austerity. 
   
• 8 million Americans have fallen into poverty as the stimulus’ effects run out. 
   
• The G20 will extend debt relief and suspend payments for 6 months. Zambia is likely to be the first African country to default due to the pandemic.

Global Developments

• The IMF stated that austerity is not needed for most advanced economies and that developing and emerging economies will need to be careful about their fiscal strategies. Global public debt is expected to hit almost 100% of global GDP. However, the fund forecasts that by 2025, overall deficits will be similar to the levels the IMF estimated before the pandemic for advanced economies, without public spending cuts or tax increases. The reason for this is borrowing costs; the IMF expects the cost of servicing government debt will be below the expected growth rate it expects advanced economies to achieve. The fund’s advice is a 180 turn from the advice it gave a decade ago as countries recovered from the financial crisis. 
   
• The IMF warned that the pandemic will wreak “lasting damage” on living standards. The fund also stated that governments may need to increase taxes on the wealthy and ensure companies pay taxes. The pandemic resulted in huge job losses, bankruptcies, and whole sectors of the economy left unviable. Global economic growth will be negative and the worst since the Great Depression, and the IMF expects the global economy to contract 4.4% in 2020. By the end of 2021, the fund estimates that advanced economies will be 4.7% smaller and emerging economies 8.1% smaller than the projections at the beginning of this year. 

U.S. Developments

• As the American people have exhausted Cares Act aid, the number of poor people has grown by 8 million since May according to a Columbia University study. The safety net provided by the Cares Act resulted in the number of poor people falling by 4 million at the pandemic’s start. A study by the University of Chicago and Notre Dame found that poverty has grown by 6 million people in the past three months, with Black people and children impacted the worst. The rise in poverty despite an improving job market indicates that the economy is rebounding too slowly to offset lost benefits.  
   
• Fed Vice Chairman Randal Quarles expressed a need for the Fed and other regulators to examine what could be done to insulate the Treasury market. At the beginning of the pandemic in March, a mismatch between Treasury buyers and sellers prompted the Fed to buy huge quantities of bonds and take other measures to soothe conditions. Quarles posits that the Treasury market may have grown so large that it has outpaced its ability to cope with periods of stress without help. This would be a major issue given that the Treasury market is among the deepest and most liquid in the world.

European Developments

• The OECD warns that the UK economy is at risk of long-term damage due to the pandemic and Brexit. Britain’s economy is one of the hardest hit with GDP estimated to shrink 10.1% by the end of the year. As the deadline looms for negotiating a deal with the EU, a disorderly exit could depress GDP by 5% over two years. The OECD recommends that the UK invest heavily in digital infrastructure, support low-income housing, and getting people into good jobs.
   
• As a second wave of COVID-19 cases hits Europe, governments are enacting new restrictions but no national lockdowns. The UK announced a three-tier alert system to curb the spread of the virus. France has announced a national curfew while Spain has prevented travel in and out of Madrid. Despite the surge in cases, politicians are unlikely to institute another round of national lockdowns– “a full lockdown is off the political agenda.”
   
• The British government faces criticism for its ad campaign encouraging people who have lost their jobs to pursue cyber and tech skills. The ad shows a ballet dancer and suggests that they retrain for a cyber career; the pandemic has eviscerated the performing arts in the UK and globally. It dovetails with broader criticism for the government’s failure to communicate effectively with unemployed workers or those with tenuous employment. 

Emerging Markets

• The G20 will extend debt relief for the world’s poorest countries but critics stated it is not enough to face the crisis in emerging economies. The G20 is expected to announce a 6-month extension of the debt service suspension initiative (DSSI) wherein 73 eligible countries can apply to postpone debt repayments due this year and spread them over four years. Beneficiary countries have requested that DSSI be extended to the end of 2021 with others criticizing the G20’s failure to consider the debtor countries’ views and only represents creditor interests.
   
• Zambia warns that it may be the first African country to default as a result of the pandemic. The country is attempting to restructure its $12B of external debt and has asked to suspend payments on $3B worth of US dollar bonds. Bondholders are likely to reject the proposal to suspend interest payments for six months. Creditors cite concerns about lack of transparency on Zambia’s Chinese debts, plans to rein in public finances, and unequal treatment of creditors as reasons for their reluctance.  

Odds and Ends

• This week’s edition of the Economist is all about the pandemic’s effect on the global economy and its impact on a deeply uneven recovery. The report includes articles on how the pandemic should change the role of the state; how the pandemic will strengthen forces that were already acting, accelerating changes in trade, technology, finance, and economic policy; and the uncertain prognosis for financial crisis in emerging markets.  
   
• Valentina Romei and John Burn-Murdoch do a deep dive in the Financial Times into city centers becoming ghost towns with New York and London suffering the most. 
   
• The editorial board of the Financial Times warns of an uneven global economic recovery with China taking the lead. 
   
• Jessica Grose writes in the New York Times that mothers are the shock absorbers of society, and the pandemic is forcing moms out of work at great financial, societal, and marital costs.