Prof. Witold Orłowski, polish economist: This crisis is quite unique
What is the mechanism of the pandemic crisis? What are the options for reducing losses?
Each major shock – be it political, social, or caused by factors beyond human control – is reflected in the economy. This is, of course, also the case with the pandemic. At the root of the crisis there is an epidemiological phenomenon – an outbreak of a disease that threatens the life and health of millions of people, and, above all, threatens our sense of safety. Governments have responded to the crisis by taking action to limit the spread of the plague, mainly to buy the time needed to prepare the health services and give scientists and pharmaceutical companies time to develop vaccines. They limited the scale of interpersonal contacts and people’s mobility by means of various restrictions. Unfortunately, this has a direct economic impact, as some companies will have to be closed down (if their business cannot be conducted without extensive contacts with customers), some will face supply chain disruptions, and some – temporary or permanent increase in employee absenteeism and the need to work remotely. Economists call this effect a supply shock, because it directly affects the ability to generate GDP. But it is followed by a demand shock, i.e. a drop in market demand. Consumers limit their purchases because they are afraid of losing their jobs, companies limit their investments because they are afraid of unfavorable economic conditions. As a result, we get a long-lasting recession, even after the government “unfreezes” the economy and lifts the restrictions.
Which sectors of the economy are most affected and which are still to experience the crisis in the future?
This crisis is quite unique, different from anything we have seen so far. For most companies, of course, it means hard times, and for some – such as hotels and restaurants – a dramatic struggle for survival. But for courier companies or those specialized in online sales, this is a period of real harvest. Reduced demand for investment affects machine manufacturers and specialized construction, but does not impact ICT equipment vendors. Consumers limiting their purchases may buy less durable goods, but this leaves more money in their pockets for food or equipment that makes spending time at home more enjoyable. Not to mention pharmaceuticals.
The industries most affected by the crisis so far are those facing direct restrictions of their operation, usually linked to government efforts to limit physical contact between people. Such as the hotel industry, food and beverage services, transportation, leisure, and some areas of trade. But now we are experiencing the second wave of recession, impacting demand. It is already strongly affecting the construction industry as well as manufacturers of machines and durable goods. After some time it may start impacting the housing industry or the banking sector, which is rapidly losing profitability.
What is the effectiveness of the anti-crisis packages implemented by individual states, and are we going to experience a banking crisis?
Countries had virtually no choice: if they shut down parts of their economy, leading to 10-20% drops in GDP in the lockdown quarter, then, to avoid a real catastrophe, they had to support the economy. Otherwise, we would have had a gigantic increase in unemployment and massive company bankruptcies – and then the short supply shock would have turned into a gigantic and long-lasting depression, perhaps similar to the one that occurred during the Great Depression of 1929-33, when governments decided not to intervene. The consequences were unimaginable. Let me just remind you that this crisis, which lasted several years, caused a decline in GDP in industrialized countries by over 30%, an increase in unemployment to 25-35%, and, as a consequence, an explosion of populism and collapse of democracy in many countries. Many people may argue that the outbreak of World War II was also a consequence of the Great Depression.
There is, of course, also the other side of the coin, i.e. the gigantic increase in national debt. For now, it is financed by printing money. To be more precise, by a mass purchase of government bonds by central banks, including the National Bank of Poland. I don’t think this will have any immediate inflationary consequences, because in the face of enormous economic risk, private investors will be willing to buy these bonds back, considering them less risky than other financial assets, even if they do not bring any profit. In the long run, however, there are many unknowns. The most important question is: are we going to have a serious financial crisis in the next 2-3 years, caused by the risk of bankruptcies of large corporations, banks, and the most heavily indebted governments? I’m afraid that this threat is real, although today it is still difficult to judge who will be most affected.
Which parts of the world are most affected? Which countries, considering their debt, will face with bankruptcy?
The risk of bankruptcy is greater for those countries which are more indebted and more significantly affected by the recession. It also depends on the structure of their economy, such as the degree of dependence on tourism. There is no doubt that the countries of Southern Europe are particularly at risk, although they may benefit from the protective shield provided by the euro. The European Central Bank, like the Fed, can freely issue huge amounts of new money and buy massive amounts of bonds from euro area countries. Of course, for countries with a weaker currency, including Poland, the risk of such an issue is much greater. For now, however, we are saved by the fact that we are much less indebted – before the outbreak of the pandemic, in Italy the public debt to GDP ratio was 135% of GDP, and according to the IMF this year it will grow above 160% of GDP, while in Poland it was 46% and probably will rise to just over 60%. In addition, the decline in GDP in Poland will probably amount to about 4-5%, and in Italy to over 10%. Italy also has a very vulnerable banking sector, ours is healthier. So we have a chance to do better, provided, of course, that our politicians do not cut us off from EU funds and start tinkering with banks.
Will the crisis caused by the epidemic accelerate the transition of the Polish economy, still competing with low costs, towards a more innovative model?
In general, the crisis will accelerate the changes related to the 4th Industrial Revolution in the world, including, in particular, digitization, robotization of production, the use of artificial intelligence, and the development of the Internet of things and services. It is often said that the crisis and the accompanying recession will have the shape of the letter “K” – first a strong decline in production, then… a rebound and development in those countries who are able to actively join the process of technological change. And, in turn, economic regression in countries incapable of doing so. Who will belong to which group remains to be seen. However, it seems obvious to me that if Polish companies try to rebuild their position on the market by competing mainly with low costs, especially labor costs, they may be in for an unpleasant surprise. It is no coincidence that Tesla is not building its European car factory in Poland, the Czech Republic, or Romania, but near Berlin. In a factory manned by robots, labor costs do not matter much. In Poland, we tend to disregard these trends and believe that we still have a lot of time to join the industrial revolution, because we are still protected by low labor costs. This was almost over anyway, and the current crisis will only accelerate these changes, perhaps radically. Without an increase in innovation, or rather without realizing that it is an absolute necessity – if we do not want our companies to be at the bottom of this “K” curve – we may quickly find ourselves in trouble. And if you believe in a golden age ahead of us, brought about by the shortening of value chains and transferring part of production to Europe, please remember that every European company shortening the supply chain will have a choice: to build their new production center in the countries of Central and Eastern Europe or in their own country, but operated by robots and computers.
Is it possible to assess the state of the economy in the world today? Can we construct plausible scenarios for 2021?
Although the media is full of information about vaccines introduced to the market, it is still a long way until the crisis is over. Even if the vaccines prove to be really effective and the virus does not mutate (which is not certain), we still have many months to live with the virus circulating around us. It is likely that even a third, early spring wave will not be avoided. Besides, it will not be easy to break the powerful recession mechanisms related to the rise in unemployment that is currently taking place, and somewhere in the distance looms a financial crisis caused by the increase in debt.
This year is obviously lost for the world economy, with GDP falling by around 5%, and closer to 10% in developed countries. It should get better next year, perhaps from the middle of the year growth will return, but it will take at least 2-3 years to rebuild the production level. We will see what happens next. When it comes to the Polish economy, this year it will probably lose about 4-5% of GDP, while next year it will recover only some of these losses. Well, unless we start Polexit with a bang, because then the crisis may last for many more years.
Last Updated on April 13, 2021 by Karolina Ampulska