Corona crisis – Big stimulus packages, bigger debt crisis; we might be hitting double recession

With the outbreak of the novel corona pandemic, the world went into economic shock triggered by global lockdown. To save the plummeting economy, big stimulus packages seemed like the only sensible option. What is fearsome about the rising packages is the accumulating debt. The very stimulus packages which are rescuing the economies today would soon dig deeper holes leading to greater economic crisis in near future, especially given the uncertainty around lifting of the lockdown. It is likely to make recovery harder. The deeper debt crisis would increase default risks for most of the low income countries.

The world economy which brushed past recession in 2019, witnessed hike in global debt by $7.5 trillion. The Institute for International Finance (IIF) predicted that global debt load would go over $255 trillion in 2019, owing much to the US and China rivalry. This staggering figure was predicted last year, well before pandemic entered our world.

Observing the current trend, the economists believe that we might be on the brink of a double recession, also known as W-shaped recession. Double recession is the one in which economies slip into recession soon after recovering from one. This back-to-back recession is far more challenging as it drains out all the money which was pumped-in to save the system from collapsing. In short, it leads to increase in debts, rise in defaults, inflation, demand-supply imbalance, low investor confidence, and eventually a longer road to recovery.

“Debt crises may be coming,” the Economist Intelligence Unit (EIU) wrote in late March. “For now, governments are ramping up fiscal spending to fight the epidemic, maintain basic economic architecture and keep workers in their jobs. As a result, fiscal deficits will rise sharply in the coming years.”

According to International Monetary Fund’s April World Economic Outlook due to the pandemic outbreak the global economy output is set to drop by 3%. It is the biggest fall the world economy would ever witness since the Great Depression. The current scenario makes the global meltdown 2008-2009, when the global output got reduced by 0.1%, look bearable. IMF predicted that the global economy was likely to experience its worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago. 

“Many developed countries may, in the medium term, find themselves on the brink of a debt crisis,” Agathe Demarais, global forecasting director for the EIU, wrote in the report. “This is compounded by the fact that many of the European countries that are among the worst affected by the epidemic, such as Italy and Spain, already had weak fiscal positions before the coronavirus outbreak.”

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