The second wave of COVID-19 will not be the biggest threat: economists have pointed out what is most concerning

At the Swedbank Economic Forum, economists from Scandinavian and Baltic banks reviewed the current state of the world and Lithuanian economies and discussed emerging threats.

Mačiulis: The second wave will not be the biggest threat to the economy

Swedbank Lithuania chief economist Nerijus Mačiulis presented a “new global mess” at the Swedbank Economic Forum.

“For some it is the order they would like, for others it is the biggest mess. (…) Our assumption and prediction that the worst, in the past, will be more waves of coronavirus. The second wave of coronavirus has already started in the US. In the US, new infections have arrived in the UK and Spain, and the number of patients in the Baltic countries has increased slightly, but this second wave and future waves will be different from the first: they will be much less dangerous.

During the first wave of intensive care patients that flooded hospitals, mortality was much higher. In all the countries where the second wave has started, mortality is close to zero, it is not clear why. Maybe people are much more careful, maybe they get a lower dose of the virus, maybe T-cell immunity helps protect them against COVID-19. Another reason may be related to the fact that health institutions are better prepared and have medicines that help avoid the most dire consequences, ”said N. Mačiulis.

However, he stressed that the second and the next wave of coronavirus will certainly not be the biggest threat to the global and local economy. There are a number of other structural changes that are reaching the entire world.

“Several countries have begun to borrow, governments are, trying to mitigate the worst consequences of the pandemic, trying to reactivate the economy.” Thus, the public debt will have reached 300 percent. GDP. This has never been the case before. If we look at the US budget deficit in 10-20 years, we can say that the deficit will not decrease, revenues and expenditures will not be balanced, and there are no plans to do so in the future.

Clearly the financial markets will be lending, central banks will be the last stage lenders. Trillions have risen in the United States and Europe by trillions in recent months. This is how they will continue to behave. This would seem to be the correct policy, but governments are spending money very aggressively, and central banks also print money in unrealistic amounts.

Of course, central banks have worked with governments for economic recovery in the past, but this year stands out. I think it will be difficult for governments in the future to move away from fierce spending policies, as if 2022 will it be possible to stop it? ”Says the economist.

One of the threats is inflation.

Another challenge highlighted by N. Mačiulis is the inflation caused by the current fiscal policy. According to him, the last five years have seen more populism, nationalism and protectionism. All of these things are said to lead to deglobalization.

“Why has inflation been so low in developed countries for the last 20 to 30 years? We have lived in an age of globalization. Everything has been producing where the cheapest and most efficient international trade is 20 percent. GDP rose to 60 percent. GDP. Even before the COVID-19 crisis, we saw many manifestations of protectionism from China and the United States. Production was wanted to move to its Member States. If trade decreases, inflation will also decrease ”, says N. Mačiulis.

According to him, another factor that has kept prices low around the world in recent years is cheap labor from Asia.

“During the last twenty years, a billion cheap workers from Asia have come to our world. But that is changing, China’s population is aging. In addition to globalization, protectionism, this will increase costs.

So all developed countries are used to low inflation. That will probably change. This is one of the risks we must take. However, there is a disagreement: It is not clear whether inflation is a threat. Swedbank economists say that perhaps technological changes will lead to uncontrollably high prices, ”notes Swedbank’s chief economist in Lithuania.

Recovery in Europe is fragile, uncertainty prevails

When asked if the risk of inflation is high, Andreas Wallstrom, Swedbank’s chief economist and head of the group’s macroeconomic research unit, noted during the forum that consumer prices and assets will change.

“Property prices will continue to rise due to very low interest rates. Economists have different views on consumer prices. Compared to what we did a couple of years ago, we will be very competitive and digitized in the future. That will mean a lot of competition. It could be a ceiling on inflation and the cost of purchase, “says Wallstrom.

However, your rapporteur notes that there has been a recovery across Europe since April. However, this recovery is quite fragile and one of the factors that complicates the situation is the spread of COVID-19.

“We see that there is still a lot of uncertainty in Europe. If countries decided to close their companies again, it would create great uncertainty for everyone. (…) It will continue, which will cause both investment and consumption to stagnate. Starting next year, we will start to feel a much faster recovery when the investment pays off. This will mean higher GDP growth, “he predicts.

Evaluating in May, according to the rapporteur, economists have improved the forecasts for Europe and China.

“It just came to our attention then. When we look at next year, we see that the recovery will be quite fast. (…) Although the situation is improving, we cannot deny that we will need a very broad monetary fiscal policy in the coming years.” says Swedbank’s chief economist.

Why have the Baltic countries suffered less than others?

Swedbank Finland Chief Economist Heidi Schauman says the euro zone has been hit harder by the pandemic than other economic areas around the world. She noted that Latvia, Lithuania and Finland were less affected by the pandemic. At that time, Spain, France and Italy were the countries most affected by the pandemic.

“It is common in the euro area for different regions to react differently and face different challenges. Why have the Baltic and Nordic countries suffered less than southern Europe? The closure and quarantine have been much stricter in the region, the industry has been more affected and tourism has come to a complete halt, as Spain, France and Italy are highly tourist destinations, ”he said.

Swedbank Latvia chief economist Liva Zorgenfreija emphasized that the crisis in the Baltic countries was not as deep as in other parts of the world, as the situation in the Baltic countries was better than elsewhere due to the fall in GDP in the first half of this year.

“It was due in large part to the rapid response of our governments that helped us survive the first wave. Our closure was not as severe,” he says.

According to the economist, when estimating the GDP of the three Baltic countries in the first two quarters of this year, there are a number of differences.

“Exports in Latvia and Estonia are different. As we can see, consumption by private farms has suffered more in Latvia than in Lithuania and Estonia. This surprises us, because from a technical point of view, the restrictions were very similar, but the statistics do not reflect it in the same way ”, points out L. Zorgenfreija and adds that several assumptions arise here.

Elections in Lithuania may be the reason the government wants to support the economy

“For example, Latvia had problems last year, which” spread “into this year as well, perhaps due to lower growth. This is due to changes in the transport sector and the financial sector.

As for Lithuania, everyone knows that the elections are coming. This may be the reason why the government is more willing to spend money and support the economy. It is possible that in these difficult times, the Lithuanian economy is being helped by a wave of re-emigration ”, summarizes the chief economist of Swedbank Latvia the situation in the Baltic countries.

According to her, in recent months a carousel has been observed in the areas of consumption and export. In terms of consumption, Latvia and Estonia reached last year’s level, while Lithuania surpassed it. The situation with exports is similar. The decline in Baltic exports has been particularly marked, especially in Estonia, where it has reached almost 30%, but is now recovering.

The economist pointed out that although the recovery is rapid in many areas, the transport sector, for example, will lag behind for some time.

“Good news for the Baltic countries: the debt of our countries was lower than in the rest of Europe.” Governments give our economy a huge boost. Unless there is a second wave that seriously disrupts the recovery and countries have to shut down again, the level of public debt that we forecast should remain below the euro area average in 2019 and significantly lower average in 2020 and 2021. So we look very good in this area ”, says the speaker.

What worries me the most

N. Mačiulis asked the bank’s economists to name one risk, which will be the most relevant in the coming years, which may disappoint and surprise the Baltic and Nordic region.

Swedbank’s chief economist in Finland, Mr Schauman, is very concerned about the possible financial crisis: “I fear that the pandemic will end in a financial crisis in the euro area, regardless of support measures. Obviously this will affect the Baltic and Nordic region, even if it is an indirect effect. “

Zorgenfreija, chief economist at Swedbank Latvia, is more concerned about the Brexit agreements: “Brexitas doesn’t allow you to sleep at night. This topic has become even more relevant. It is unclear whether the parties will agree. This could end in tremendous chaos and uncertainty early in the year. It definitely won’t help the economy and will slow growth again. “

N. Mačiulis highlights the forgotten trade war between the US and China, because this is the biggest fear of the top managers of hedge funds.

“We will see what is right in the coming months. (…) The trade war will not end with the US presidential elections.” I think this is a constant fight between Republicans and Democrats, and will continue the tensions between the United States and China, which will affect the whole world, “he concludes.