The first wave of the coronavirus pandemic sent the world economy into a tailspin. The real GDP of the US crumbled by over 8% in the second quarter of 2020, the biggest quarterly fall since World War II (even bigger than in the global financial crisis).
Politicians quickly realised that the usual relief measures would be woefully inadequate for stabilising the economy. Throughout the world, governments implemented emergency relief packages for the business sector. The European Union’s massive outlays to tackle the crisis were linked to its previously launched Green Deal. Once again monetary and fiscal policy are working in tandem. This energetic political response is boosting confidence and paving the way for a rapid recovery, despite the ongoing pandemic.
Surveys of companies and consumers show that sentiment has improved greatly since spring. Indeed, manufacturing businesses in the US and Europe are now more confident than they were a year ago. Their present confidence level is actually higher than the average for the last 15 years. Business confidence in the service sector is more subdued, but here too the mood has improved since the spring.
Improved confidence is an important precondition for reactivating shelved investment plans or launching new ones. Investment is a much smaller component of total demand in an economy than private consumption, but it tends to show bigger rises and falls. In critical phases these fluctuations make it a more important factor than private consumption in determining the economy’s direction. If we measure the impact on changes in economic performance over the last 30 years, investment has been just as influential as private consumption. And if we look simply at the turning points, i.e. when the economy started heading towards recession or towards a post-recession recovery, investment was the key variable.
Public spending, too, plays an important role at these turning points in the business cycle. Public spending and public investment tend to be deliberately countercyclical and therefore have a stabilising effect at difficult times. In response to the coronavirus crisis, governments are deploying an expanded countercyclical armoury. Short-term economic stimulus packages are now at the top of the agenda. This time politicians are now focussing not simply on growth per se but on low-emission growth. Every euro and franc of public money that is invested must be viewed through the prism of climate neutrality by 2050.
Europe is moving forward with its Green Deal. Climate is also high on the agenda in China, the world’s biggest emitter of CO2. In America President-elect Joe Biden is planning major investments in a greener economy and has promised to get the US back into the Paris Climate Agreement.
Governments’ leverage is not limited to direct investments. A clear example is the EU’s Action Plan for Sustainable Finance, which contains strong regulatory incentives for the financial services industry. Added to this are long-term trends like the switch to electric vehicles. All in all, the next recovery is already taking shape – and it will definitely be coloured green.
Note: Find the full article in the latest edition of Telescope.
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