The Global Economy Still Uneasy Under the Shadow of COVID-19... Struggling to Define Recovery Policy Directions

IMF and World Bank Hold Annual Meetings This Week... Discussing "How Long to Use Economic Stimulus?"
Modest Recovery Expected for Businesses, but Central Banks Emphasize Need for Additional Fiscal Policies

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] As the novel coronavirus disease (COVID-19) crisis prolongs, governments and central banks around the world are deeply concerned about the policy direction for global economic recovery. Although corporate earnings and other indicators show slight signs of recovery, unemployment rates remain high, and uncertainties due to the resurgence of COVID-19 are significant, leading to strong calls for additional fiscal policies to support the economy.

According to Bloomberg and other sources on the 11th (local time), the International Monetary Fund (IMF) and World Bank (WB) annual meetings will be held from the 12th to the 18th. One of the main agenda items to be discussed at the meeting is how long stimulus measures should be deployed. Bloomberg reported that "(this issue) is the most difficult challenge for politicians when considering national budgets."

Fiscal policy has a strong effect on stimulating the economy during crises because it can directly support businesses and households. It is especially effective in targeting support for groups such as the unemployed. Compared to monetary policy, which indirectly injects liquidity into the economy to facilitate smooth capital flow, fiscal policy is more useful in crisis situations.

The problem is that such policies lead to massive fiscal deficits, which burden national finances. In the United States, the fiscal deficit was 10.1% of gross domestic product (GDP) in 2009 but is expected to reach 16.8% this year. In Europe, the fiscal deficit as a percentage of GDP, which was 6.2% during the same period, is expected to expand to 9.6% this year. Japan and the United Kingdom are also estimated to see increases in fiscal deficit ratios from 9.8% to 11.0% and from 10.2% to 13.9%, respectively.

It is now crucial to find the appropriate timing to withdraw fiscal policies while considering both economic recovery and debt expansion. Some argue that after the 2008 global financial crisis, major countries including the United States withdrew fiscal policies too early due to debt concerns, which hindered economic recovery, and that this time, it is necessary to wait until private sector sentiment improves.

Central bank governors emphasize the need for additional stimulus measures. One foreign media outlet described Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), as a 'cheerleader' for fiscal policy, citing his recent statement that "even if the stimulus is larger than necessary, it will not be wasted," amid heated negotiations between the Donald Trump administration and the Democratic Party in Congress over stimulus packages.

Currently, the global economy is showing slight signs of recovery in various regions. The Wall Street Journal (WSJ) reported that major U.S. companies are expected to announce their third-quarter earnings soon, with S&P 500 companies’ profits projected to decline by 20% compared to last year, which is somewhat better than the earlier forecast of a 25% decrease made at the end of June.

Frank Panayotou, Managing Director at Swiss UBS Bank, explained, "The actual earnings companies report will be more important for the market to interpret the current situation and estimate how much the patient has improved." However, experts noted that the upcoming U.S. presidential election next month, future discussions on additional stimulus packages, and the COVID-19 situation will influence the pace of economic recovery, highlighting the high level of uncertainty.

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