Protracted Gloom?

The second wave of the coronavirus epidemic is proving optimists wrong. The increasing number of infections recorded over the past weeks is a somber realization that the virus is back with a vengeance and there is an increasing chorus of economic analysts predicting an economic crisis that may last for years.

For many people life seemed to return to a sort of normalcy in the summer months following the shock triggered by the coronavirus in March. The spike in infections recorded over the past few weeks, however, has been a painful awakening to the fact that the epidemic is still here and many experts warn that the worst is yet to come. Even though states seem to be adopting less drastic measures than in the spring, the second wave will definitely take its toll on economies around the globe.

Feeble recovery
In contrast to the 2008 financial crisis, which started in the banking sector and gradually swept through other areas of the economy, the coronavirus crisis caused an immediate shock, similar to those triggered by wars and natural disasters. As lockdown measures were lifted in nearly all countries and production resumed in early summer, a feeble economic recovery started to take shape, as evidenced by statistical data. Official figures show that the unemployment rate in the U.S. jumped to 14.7% at the height of the crisis, and by August it declined to 8.4%, which is still uncomfortably high. In the EU, however, data is still deteriorating; the unemployment rate rose to 7.2% in July from 6.5% recorded at the end of 2019. Hungary is no exception, as the July unemployment rate increased to 4.8% from 3.3% at the end of last year.
Overall, the global economic performance is mixed, as some sectors (manufacturing, construction) are back to full operation while others (tourism, air travel, hospitality) may suffer for years before returning to pre-crisis levels and some jobs may be lost for good in these sectors.
In the Western world and in Hungary the economy is now back to about 90% of the pre-epidemic level, but rising further from here will be extremely difficult, especially if further restrictive measures will have to be implemented in the fall, according to Krisztián Kovács, Director of Business Development and Strategic Planning, Concorde Securities in Budapest.

State relief
Virtually every government in the world that has been able to do so has responded to the economic crisis caused by the epidemic by pouring money into the economy through various budgetary programs. Central banks followed suit, using their full arsenal of policy tools. In March, the U.S. Congress passed In the Western world and in Hungary the economy is now back to about 90% of the pre-epidemic level, but rising further from here will be extremely difficult, especially if further restrictive measures will have to be implemented in the fall, according to Krisztián Kovács, Director of Business Development and Strategic Planning, Concorde Securities in Budapest.

Maybe stagnation is not that bad
The best-case scenario at the moment is that we will manage to keep the epidemic in check and there will be no need for a general quarantine and by mid-2021 there will be a vaccine available in large quantities. Under this scenario, the economic rebound will not be swift but it will not take many years, either. Following a steep decline, economic performance in Hungary and the central and eastern European region will rebound to somewhere below pre-crisis level and will stagnate there for at least two to three years.
If, on the other hand, the virus situation gets out of control, there may be a recession instead of stagnation. Given that medical experts unanimously predict that the epidemic situation in Hungary and elsewhere will deteriorate in the autumn and winter months, the virus will certainly affect the economy until the summer of 2021. The most affected sectors may start recovering in the second half of 2021, although the number of airlines, hotels, travel agencies and restaurants that will go under before this happens is impossible to estimate at the moment. Under this scenario, some more resilient economies will possibly return to pre-crisis levels sometime in 2022 while in other countries this may only occur in 2023-2024.
In Hungary, the rebound in the GDP may take longer than in other European countries because the Hungarian government has spent less on stimulus measures than other governments. With many economies probably sliding into recession or stagnating for years, creating new jobs to replace the ones lost to the crisis will be a challenge. As Nobel Prize winning economist Joseph Stiglitz warns, “The pandemic broadens the threat from automation to low-skilled, person-to-person services workers that the literature so far has seen as less affected … The pandemic is likely to be with us for a while and its economic aftermath for a much longer time.”