2020, a year on a roller coaster

The year 2020 will possibly go down in history as one of the most atypical for the world economy.

In the context of a global pandemic, people are looking for multiple ways to maintain their economic activity while taking various measures to slow the spread of COVID-19. It has undoubtedly been a year in which the creative capacity of man has been put to the test. And economics, whose object of study is human behavior, could not be indifferent to these changes. In this article we will analyze the impact of this peculiar year on the world economy in five major milestones.

1. Uncertainty

The world economy came from a year 2019 marked by a slowdown in growth, in some cases registering slight declines in gross domestic product (GDP). This weakness can be explained by various factors such as the trade war between the United States and China, the exhaustion of stimulus policies by central banks, and the stagnation of consumption and investment. However, despite all this, the world faced the start of 2020 with relative optimism, as demonstrated by the good performance of the markets in January.

This slight rebound in growth was soon weakened by the first news about the spread of COVID-19 in Wuhan, which began to fuel uncertainty among economic agents.

2. Sinking

As we all know, this mistrust soon turned into panic and stock markets around the world registered historic drops, as governments confined the population and restricted the normal functioning of the economy. We already know the consequences: collapse of the GDP, massive closures of companies and destruction of millions of jobs.

The world economy thus suffered a historic blow and since then COVID-19 has starred in the economic agenda of the countries, as the productive fabric is directly linked to the evolution of the health situation.

3. Reactivation

Lhe paralysis of the economy imposed by the quarantine measures was followed by a gradual resumption, although this process has taken place at different times depending on each country. In any case, the factor that has characterized this stage is the attempt to restart economic activities prior to the pandemic.

Undoubtedly, the reactivation process has been limited from the outset by government measures, which in many cases have only allowed partial reopening by sector and depending on the health situation. In more than one country, even the spikes in the number of infections have forced a reversal of social distancing measures, leaving even further the goal of a full economic reactivation.

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It is difficult to find a common pattern beyond the return to normal economic activities of the population, precisely because this resumption has taken place to varying degrees depending on the sector and geographic location. The hospitality sector, for example, is still constrained by health authorities while other activities such as financial services can now operate normally in many countries around the world. At the geographical level, we can also observe profound differences, with very harsh quarantines in Spain or Argentina (both leaders in falling GDP) that contrast with the measures that are more respectful of individual freedom, such as those applied in South Korea.

At the macroeconomic level, the reactivation phase has often been marked by a sharp rise in GDP and even in some cases (such as the United States) by the creation of millions of jobs. However, a less optimistic reading could indicate that at least part of these data is due to the stimulus plans promoted by the governments, which has triggered the public deficit of the world’s largest economies and in the long term makes an increase foreseeable historical debt.

4. Recovery

Although recovery and reactivation are often confused in some media, the truth is that they are clearly differentiated concepts. If the reactivation consists of restarting the economic activities prior to the appearance of COVID-19, the recovery is based on the affected sectors being able to grow in the new situation. In other words, it is about finding a sustainable growth path over time under the new patterns of demand, where consumer preferences and habits have changed suddenly and are expected to continue to be different at least in the medium term.

We can find an example in the private educational sector, obliged in many cases to limit the attendance of students. In this case, the recovery has been led by the teaching of online classes, which also allows expanding the geographical coverage of the services offered. In this way, a sector different from the one we knew is being configured, of a much more globalized nature, open to competition and with a wider offer for consumers, in addition to improving its efficiency through the reduction of operating costs.

In summary, the objective of this process is that the production of the companies is able to adapt to the changes experienced by the demand and thus to be viable again in the long term. The problem is that these transfers of resources force factors of production to move from oversized sectors to others with growth potential. In the case of financial resources, this transition may be easier, but in other markets such as labor, an adjustment process of this magnitude usually takes a long time and could condemn millions of people around the world to unemployment.

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As we discussed in previous articles, the internal flexibility of economies is proving to be an essential factor in mitigating the impact of the pandemic. The reason is that while freer economies may experience even more job destruction in the initial quarantine phase, they also tend to grow faster as the recovery period begins. An example is South Korea, whose GDP is forecast to fall just 0.1% for this year according to its central bank (Bank of Korea, November 24, 2020).

The world economy seems to be going through a kind of “roller coaster”, with a year 2020 marked by sharp falls, recoveries and new reversals.

5. Euphoria

In the last two months of 2020, days of real stock market euphoria were experienced as a result of various announcements about the appearance of vaccines against COVID-19. The reason is that many economic agents foresee that mass vaccination campaigns could bring consumer demand patterns and levels back to pre-pandemic conditions, at least partially. If this were the case, the destruction of the productive fabric could be stopped and the companies would regain their old activity, thus avoiding the difficult adjustment process that we mentioned.

However, it is necessary to point out that the favorable evolution of the stock markets only indicates the existence of favorable expectations, not that they are necessarily being met. It would not be the first time that unfounded optimism has been generated followed by strong corrections when adverse signals appear. In this sense, economic history teaches us that financial markets very often tend to overreact to news that may be potentially positive or negative for the economy.

On the other hand, it must also be taken into account that in many countries of the world the evolution of the stock markets maintains a strong positive trend at the same time that economic activity contracts again as a result of a third wave of expansion of the virus. The truth is that this is a difficult matter to foresee, given, on the one hand, in the Christmas period, consumption usually experiences a strong rebound and, on the other, the increase in infections gives rise to new restrictions on mobility. For this reason, perhaps the most reliable test of the real recovery of the economy will take place in January, when the employment and GDP data for the last quarter of the year are known and we can assess which of the two factors has ended up prevailing.

Although we observe five major stages, the pandemic has had such a disparate impact on the economy that two people who live in the same city may be going through a different one.

All of this can convey the feeling that the world economy is going through a kind of “roller coaster”, with sharp falls, recoveries and new backward gears. An unpredictable reality to which we were not accustomed, where variables of a health nature such as the number of infections or hospital occupancy can be as relevant to the economy as the evolution of the trade balance or the latest unemployment data.

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In summary, we can say that the evolution of the world economy throughout 2020 has been marked by the appearance and expansion of the coronavirus, but from the first wave of infections it has diverged until reaching completely different realities even within a same country. For this reason, although we have pointed out the five major stages that we have gone through this year, the truth is that the passage from one phase to another has taken place at different times depending on factors as complex as the measures of each government or the reality of each. sector.

This is how from one region to another, and even between companies in the same city we can find situations so disparate that go from an indefinite stoppage to a complete readjustment to the new situation, passing through partial limitations of all kinds. The world thus seems to evolve towards a K-shaped recovery, a scenario of winners and losers that presents great challenges for the new year that begins.

1 thought on “2020, a year on a roller coaster”

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