Will the economic recovery survive the end of the emergency measures?
IN “GAME OF TRNES”, a fantastic drama, a duel takes place between Khal Drogo, a formidable warrior, and a rival. Khal Drogo comes out barely scratched, suffering only from a scratch on his chest. But the wound escalates, weakening the fighter. A few scenes later, he falls from his horse and ends up dying.
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Many economists fear the recovery in the rich world will meet the same fate. The past 18 months of lockdown have left surprisingly few economic scars. But has the damage of covid-19 been avoided, or simply postponed? As the stimulus packages put in place last year come to an end, the question may soon be answered.
When they first imposed lockdowns, governments across the rich world introduced a range of measures to support businesses and households, ranging from handing out checks and setting up holiday schemes to offering low interest emergency loan and tax and rental exemptions. Many of them are now coming to an end, or have already done so. In the euro area, at least three quarters of the debt holidays have expired. In the United States, half of the states cut a weekly top-up of $ 300 to unemployment benefits in June and July; the rest follows in September. A federal moratorium on evictions ends July 31. The job retention programs for Great Britain and Canada end in the fall.
Taken together, these diets have prevented much of the economic scars usually seen after a recession. This does not mean that many people have not suffered from deprivation; extreme global poverty, for example, has increased sharply. Yet in the rich world, family finances seem surprisingly strong. Real disposable income per person increased by 3% in 2020 even as GDP tank (see graph 1). Public spending on supplementary benefits and cash transfers, which accounted for 2.3% of rich countries GDP, definitely helped. In America, the poverty rate increased only slightly, from 10.7% in January 2020 to 11% in June of this year, although with fluctuations in between.
Resilient household finances have ensured strong demand for goods and services, even in times of lockdown. That, added to a series of bailouts, means the companies also appear to be unharmed. Unlike usual recessions, corporate bankruptcies have not soared but fell sharply in most rich countries last year (see Chart 2).
The uncertainty now is how this image will change after the stimulus ends. In a recent report, the Bank for International Settlements, a club of central bankers, identified a “wave of corporate insolvencies” as a “big question mark clouding the outlook.” There are three areas of concern: that reducing cash transfers reduces people’s incomes and affects spending; whereas the end of leave schemes puts millions of people out of work; and that deferred bills come due, reducing expenses or forcing bankruptcies.
Consider cash transfers first. Just as unemployment insurance is becoming stingier in America, Britain is also cutting its main welfare payment by £ 20 ($ 27) per week. Some people will surely cut their spending accordingly.
Still, overall spending doesn’t have to suffer much. All in all, households saved much more than normal (see graph 3). Our analysis of OECD the data puts “excess” savings in the club of mostly wealthy countries at $ 3 billion, representing one-tenth of aggregate annual consumer spending. The big concern of consumers in 2021 is not that already large cash flow will no longer be recharged, but that people are choosing not to spend their savings.
The second concern relates to employment protection regimes. Search by UBS, a bank, suggests that about 5% of employees in the four largest eurozone economies and Britain remain on these programs. If they cannot find work after the programs end, the average unemployment rate in the five countries will exceed the peak seen during the global financial crisis.
Here Australia offers hope. Its job retention program, which a year ago supported 3.5 million people, ended in March. Since then, the unemployment rate has fallen to its lowest level in a decade. Nine out of ten people participating in the program have returned to work. As in many wealthy countries, the problem in Australia is not an abundance of labor, but a shortage. The pandemic has created new demands and vacancies.
The third concern is perhaps the most important and is also the most difficult to judge. These are invoices due but still unpaid, taxes and interest on rents. The Bank of England Financial Stability Report notes that “companies can face substantial repayments VAT [valued-added tax] and rent deferrals begin to expire. The extent of these is difficult to assess. Although businesses rushed to borrow at the start of the pandemic, debt has grown less rapidly since. But it’s far from clear how businesses or national accounts deal with overdue or deferred invoices.
Debtors themselves may not know where they stand. The non-payment of rents by U.S. companies in 2020 “happened in a private and somewhat disorganized manner,” according to a document from Goldman Sachs, a bank, leaving “lingering disagreements over whether rents have been really reduced or simply postponed ”. Estimates of the “back rent” owed by American households to their owners vary by a factor of six.
Overall, the magnitude of the problem can be manageable. Take commercial rent in America. Estimates of unpaid rents vary, but a report from the city of San Francisco estimates that local businesses did not pay up to $ 400 million in the nine months leading up to December. Raising this as an inevitably rough guide suggests missed rent of around $ 30 billion across the United States, or roughly 3% of the annual commercial rents paid in a typical year.
So far, the evidence suggests that the bills are largely paid off. In Britain, over 80% of households with deferred mortgage payments have since returned to full repayments, suggesting that many people may have used the program out of caution rather than out of need. In the euro area, loans resulting from the moratoriums have so far performed only slightly less well than the rest of the banks’ loan portfolios.
But as with so many things in the pandemic, the most likely outcome is that the withdrawal of stimuli will hit people at the bottom of the ladder the hardest. Cutting welfare can push some into poverty, and millions of tenants in America could be evicted. The least productive companies could go bankrupt. In 2020, governments were quick to launch universal and generous stimulus packages. The task now is to reduce them and enable creative destruction, while protecting those in need. ■
This article appeared in the Finance & economics section of the print edition under the title “Peering down the cliff-edge”