As global recession seems inevitable with demand shock becoming much larger than the initial supply shock, governments must ensure that workers get paychecks and firms receive enough cash flows to avoid bankruptcy, else the present health crisis will turn into a mega financial crisis within no time, a new report from London Business School has warned.
Government spending should be now and as large as the predicted economic costs, focusing directly on cash disbursement to firms and households, said the report titled ‘The economics of a pandemic: the case of Covid-19’.
The immediate tasks at hand must be to ensure households delay mortgage/rental payments and have cash-on-hands, workers receive paychecks even in quarantine or if temporarily laid off; firms have enough cash flows (to pay workers and suppliers), especially small and young businesses and can avoid bankruptcy.
According to the International Monetary Fund (IMF) chief Kristalina Georgieva, the new coronavirus has taken the world economy to a recession, that will be as bad or worse than the financial meltdown of 2009.
The LBS report said that governments must support financial system to avoid the health crisis becomes a financial crisis.
“Central banks should provide financial backing to the government, not just through their own reserves but also by printing money if necessary. Global shock needs global response. No country has fiscal capacity to stand alone,” the findings showed.
To avoid a financial meltdown, governments must start from health expenditure.
“Invest in testing and expansion of supply. Too late now for the first peak but still time to contain the second peak in the fall of 2020,” said the report.
Use a coordination of fiscal and monetary interventions to maximize and multiply impact and provide financial backing to each other policy and be global — interconnected society and economy requires global coordination.
“Government spending should be now and as large as the predicted economic costs, focusing directly on cash disbursement to firms and households,” it added.
The IMF chief has said that though in recession, a recovery is very much possible in 2021 if the virus is contained across the globe.
“We do project a recovery in 2021. In fact, there may be a sizeable rebound but only if we succeed in containing the virus everywhere and prevent liquidity problems from becoming a solvency issue,” Georgieva said.