The 90% Economy: The New Normal

The recovery of the economy will only take place when the virus is extinguished. Controlling and directing the behavior of such a contagious virus is a mistake that will take its toll on the economy.

Since the pandemic began, there have been many hypotheses that have been generated about what the recovery of the economy will be like at the global level, while other questions have been raised about how the different economies will behave in said recovery , as well as the different periods in which the economy, taking into account all the countries that make up the planet, will have fully recovered. For this, presenting levels such as those that, in moments before the pandemic, presented the different economies across the planet.

These scenarios even include some counterfactuals that give room for new studies on how to strengthen different economies, which suffer from structural problems that hinder their recovery, in order to make them more resilient for the future. A future where new recessive scenarios can continue to damage and reopen those wounds that do so much damage to these economies. However, the uncertainty surrounding the situation today, and despite the number of hypotheses raised and the action of experts, makes it difficult to make predictions with a certain degree of confidence.

In an article we wrote in Economipedia (Can crises and recessions be predicted?) A few months ago, we alluded to forecasts, as well as the precision of these forecasts. To do this, we took a sample of the forecasts made by the International Monetary Fund (IMF), analyzing in which situations, the organism, was correct in its forecasts. Based on the data we collected, between 1991 and 2016 the IMF correctly forecast 47 recessions out of a sample of 117 countries. In contrast to this figure, there were actually 313 recessions. These calculations lead us to the conclusion that only 15% of the time, the IMF was correct in its predictions.

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As we can see, analysts, as well as experts in the field who try to shed light on the matter, are faced with a situation in which, as shown in the cited article, in line with what some academic economists of the portal Nada es Free, where they affirmed the difficulty of projecting variables, in such an uncertain scenario, more than two weeks away, making projections about a recovery with substantial confidence is an impossible mission.

The 90% economy

According to the forecasts offered, the economy could begin to recover its dynamism during the next fiscal year. The forecasts cited to date conclude with a recovery in the economy that will begin, as reported by the IMF, in the third quarter of the year. The situation that the economy has experienced during the second quarter, in a scenario in which measures to contain the virus forced the economy to paralyze, caused that practically all the economies that make up the planet experienced contractions in their respective GDP that they do not attend to precedents in their recent historical series.

However, the dissipation of social distancing measures, in order to favor economic reactivation and, with it, recovery, have allowed the reopening of industry, shops, as well as other sectors that were paralyzed, thereby allowing , in turn, that this situation occurs and we see a greater dynamism of the economy during that penultimate quarter of the year. However, the uncertainties that we mentioned, and that lurk on the horizon with great probability that this event will not happen as expected, continue to hinder the path to these economies.

The first wave of Covid, as we know, forced the set of economies to adopt preventive measures that caused, in the face of the stoppage, a drastic supply shock in the global economy; which, as we will see and for certain sectors, ended up becoming a demand shock. Thanks to this, and with the sacrifice that these measures imply for the economy, as well as all those agents that were operating in it, the virus was able to contain itself, thus allowing the reopening. However, this possibility of new outbreaks, which no one dares to rule out in the forecasts we mentioned earlier, could even end that reactivation that the economy is expected to register during the third quarter. And, as we will see now, we are talking about a very asymmetric recovery.

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As much as we try to live with the virus, it is quite possible that this will not be possible. As we can see, the economy does not react well to coexistence with the virus and, despite being able to reopen the industry, many other sectors, in light of the data, continue to show those internal weaknesses that, if this situation is perpetuated, could become structural . Such is the degree that, according to the figures given by the World Tourism Organization (UNWTO) in its projections, tourism, for example, may not recover its previous levels until 2024.

In this sense, The Economist magazine used a name for this economy that is presented among us today, an economy that the magazine called “The 90% economy”. This is because, as we see, the recovery is being completely asymmetric. Many sectors, due to this proximity and the threat posed by the virus, do not expect to recover in the coming years. Taking into account that these sectors, with tourism standing out among them, have a great weight in world GDP. Well, taking into account a contribution of 10.4% to the world GDP of the tourism sector, we must be aware that, without this sector, we cannot speak of total economic recovery.

Changes in the production model?

With the arrival of the pandemic, another of the mechanisms that were activated, at least in the main economies of the planet, were the counter-cyclical mechanisms that, through expansionary economic policies and the mobilization of resources, allowed the economy to cushion the blow . This could be observed, for example, in the lower coupling experienced by the countries in terms of falling GDP and job destruction.

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However, since they are nothing more than measures to cushion the blow, many of the sectors that require proximity and do not find recovery in the indicators that are collected, are leading those companies that operate in this sector to have to extinguish employment or close their businesses. Not being able, in this way, to use these temporary measures in the face of the extreme uncertainty that occurs, as well as that inability to know for sure, when the previous normality would recover.

The 90% economy is a fact that will only find consolation in the extinction of the greatest threat known to date: the virus. If the virus does not dissipate, economic recovery is a utopia that, not even in the minds of the most optimistic economists on the planet, could materialize properly. Well, sometimes, we try to insist on living with a virus that, as an example, does not allow coexistence with the economy.

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