[The Editors' Verdict]Did COVID-19 Monetary Easing Only Bail Out Investors?

Last week, the International Monetary Fund (IMF) projected in its "World Economic Outlook" that out of 189 member countries, 170 will experience negative growth this year. The global economic growth rate is expected to be -3%, which amounts to a loss greater than the combined Gross Domestic Product (GDP) of Japan and Germany. Significant losses are anticipated in advanced countries that initially failed to respond adequately to the novel coronavirus disease (COVID-19), such as Europe (-7.5%), the United States (-5.9%), and Japan (-5.2%). South Korea (-1.2%) is considered to be performing relatively well compared to these countries.

The IMF also predicted that global trade volume will sharply decline by 11% compared to last year. The World Trade Organization (WTO) forecasts a decrease of approximately 13 to 32%. This highlights the severe challenges South Korea’s exports will face this year.

China’s economy shrank by 6.8% year-on-year in the first quarter of this year. Although sanctions were lifted this month, port cargo volume is expected to decrease by 10 to 15% year-on-year in the second quarter as well. This is due to a significant drop in overseas import demand and the fact that each country’s COVID-19 pandemic cycle is not synchronized, preventing the smooth operation of the global value chain (GVC).

In the United States, over 20 million people were laid off within four weeks after COVID-19 became widespread. Experts predict that more than 10 million people will lose their jobs going forward. The unemployment rate is expected to soar to 13% by June. South Korea’s employment situation is also unfavorable. According to the "March Employment Trends" released last week by Statistics Korea, the number of employed persons decreased by 195,000 compared to last year, marking the largest decline since May 2009. Employment fell across all age groups except those over 60, and in all industries except agriculture, forestry, fisheries, electricity, transportation, communication, and finance.

Nevertheless, the stock market, which had been in a panic, is now blazing. The Dow Jones Industrial Average’s stock price increase this month is the largest in the past 80 years. The surge in stock prices likely reflects investors’ confidence that the pandemic will soon subside and that companies will be able to make up for lost earnings.

But is this confidence justified? Most would probably answer "no." When the pandemic eventually ends, companies whose cash flow was blocked will have deteriorated financial conditions and weakened debt repayment capacity. The same applies to individuals.

Of course, some investors who invested in stocks and other assets may have made significant profits, but companies and individuals facing bankruptcy risk with excessive leverage ratios will have no choice but to tighten their belts to restore financial soundness. As a result, it is inevitable that unemployment will rise and consumption and investment expenditures will contract compared to before the pandemic. This is why it is difficult to expect a rapid economic recovery. If COVID-19 continues into the second half of the year, the global economy will contract more than expected.

Considering the structural problems of the real economy, investors’ confidence can only be attributed to the central banks’ monetary easing. The U.S. Federal Reserve (Fed) has purchased assets worth more than $2 trillion over the past five weeks. It even established special purpose vehicles (SPVs) to supply credit in order to buy risky assets that are legally prohibited. The Fed’s measures are financial market rescue efforts aimed at preventing the deterioration in the real sector from spreading to the financial sector.

However, the root of the crisis lies not in finance but in the real economy. The pandemic crisis is not a liquidity crisis but a bankruptcy crisis. Going forward, the Fed is likely to face criticism for rescuing investors instead of companies and unemployed individuals. Considering the enormous government debt caused by the pandemic, ultra-low interest rates are bound to last a long time unless inflation, which some fear, occurs. The problem is that the real economy cannot recover as easily as the stock market. The curtain is rising on the second season of the global economic depression.

Kyungsoo Kim, Professor Emeritus, Sungkyunkwan University

This content was produced with the assistance of AI translation services.