GLOBAL ECONOMICS

GLOBAL ECONOMICS Where to from here? Four COVID-19 scenarios for the global economy

Todd Hirsch, Vice President and Chief Economist ATB Financial, Calgary, Canada

Photo Credit: Phil Crozier (University of Alberta)

We all experienced it — the shock, fear and uncertainty of the COVID-19 outbreak in early 2020. For most of us, the lockdown months of March, April and May will be etched in our minds forever.

But like those living with chronic pain or diseases, now that the initial shock has subsided, we are learning to live with the pandemic. The virus has not gone away, and a vaccine is not yet available so it’s not over. Nonetheless, life goes on and the global economy is starting to re-open and we’re trying to salvage what we can of the year.

We’ve been told all along that restarting the economy isn’t a light switch that goes on-and-off — it’s more of a dimmer switch. And the speed at which we turn the light back on will have a bearing on the second wave of the virus.

How do we navigate this gradual reopening? What can businesses expect? And what will 2021 look like? There are no straightforward answers to these questions, but it is helpful to imagine some scenarios. Here are four ways the COVID crisis could impact the global economy in the coming months.

The koala

A koala is possibly the most adorable creature on the planet. It is also completely harmless and defenseless. Nothing but cuteness all day long.

In the koala scenario, we let down our guards, we open up the economy with no hesitation, and we relax. And nothing happens! The COVID-19 virus simply goes away and the economy rebounds almost overnight in the much-desired V-shaped recovery. This isn’t a complete fantasy. The SARS virus, which was a similar type of coronavirus, did just that. But it’s almost a complete fantasy. Scientists are telling us that the COVID19 virus is highly unlikely to simply disappear.

Belief in the koala scenario — that this is all much ado about nothing — was more popular back in February and March. And there are still those convinced it’s a hoax or have a conspiracy theory to explain it. These are the people who argue that we are destroying our economy for nothing. However, those voices are becoming less credible as time goes on.

The tarantula spider

They look terrifying but are harmless to humans. (They get their bad reputation from Hollywood. When the movie scene called for a dangerous spider, they used tarantulas specifically because they looked scary but posed no harm to the actors.)

In the tarantula scenario, we discover that the economic damage is not as bad as we feared. Slamming shut the global economy for a few months caused a lot of short-term pain, but we flattened the curve and the V-shaped recovery we were hoping for is still in the cards. The recession that some had predicted would last for months (or years!) will be over before we know it. The global economy will rebound quickly.

This scenario is also unlikely. Will the economic impact of the pandemic prove to be as harmless as a tarantula? So far, that doesn’t seem to be the case. Because of the health impacts of the virus and the shut-downs put in place to contain it, 2020 is already on track to being one of the worst economic years on record. It’s too early to tell if the economy will rebound in 2021, or enter a prolonged, multi-year downturn, but the economic pain is real and its aftereffects will be around for some time. This tarantula is deserving of at least some of our fear.

The grizzly bear

In a photo they appear cute and cuddly, but any prudent hiker knows that a face-to-face encounter with a grizzly bear is terrifying. If you react badly or get between it and its cub, the bear will rip you to pieces. But if you do what the experts advise and back away calmly and slowly, the bear is more likely to lumber away and leave you unharmed.

COVID’s impact on the global economy may be the grizzly bear. Most countries have been reacting with the appropriate fear and proper respect — like the hiker dropping everything and backing away. But does the grizzly bear attack us anyway, or does it eventually wander off back into the woods?

Again, we don’t know for sure. But it’s likely that the precautions we are taking by closing the economy and allowing only a very gradual reopening — as painful and frustrating as this is — will

result in a non-fatal economic outcome and a rebound in 2021. However, if we do nothing and re-open too quickly (i.e., show the bear no respect), things are likely to go very badly for us indeed.

The hippo

They’re big and dopey looking, the staple of any child’s bedtime storybook library. Who could be afraid of this cute and cuddly looking beast? Yet they’re deadly, accounting for more human deaths in Africa than any other animal. Don’t let their bumbling cuteness fool you.

The hippo scenario would see the global economy ravaged because we take no precautions at all. Like the inexperienced safari tourist, you get too close to the hippo and you’re in big trouble.

This scenario could play out if people throw in the towel on COVID precautions and quit trying. Government officials can warn people, shame people and even ticket people for not social and physical distancing — but if we ignore the warnings and drop our guards, the virus’ second wave is likely to come back with a vengeance. That, like a hippo attack, could be fatal, sending the global economy into a multi-year recession or even something approaching a depression.

Where to from here?

What economic scenario will it be? The koala, where we do nothing and nothing happens? The tarantula, where we panic for no good reason? The grizzly bear, where we react with fear and respect but come out of it alive? Or the hippo, where we ignore the warnings and the economy gets mauled?

The koala is the most desirable by far, but sadly it’s the least likely. The tarantula is more probable, but COVID-19 has already proven that it’s not harmless. The hippo is also possible, but at least so far most global citizens have proven they’re (mostly) willing to take precautions.

That leaves the grizzly bear as the most likely scenario. We’ve encountered

a deadly animal on the trail, but we’re doing what we’re supposed to do — slowly and carefully backing away. The grizzly could still attack, sending the global economy into a longer, multi-year tailspin. Yet chances are better that the bear will turn and run away. This year is still going to be brutal on the economy, on businesses and on workers. But if we do the right thing and use extreme caution as we learn to live with a pandemic, 2021 holds the promise of a gradual — if not hesitant — global economic recovery.

Todd Hirsch is the Vice President and Chief Economist for ATB Financial. He holds degrees in economics from the University of Alberta and the University of Calgary. For over 20 years, he’s worked as an economist at numerous organizations including the Canada West Foundation and the Bank of Canada. He’s also the author of three books. His latest, “Spiders in Space: Successfully Adapting to Unwanted Change,” was released in 2017.

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