While markets reacted positively this week to promising news of possible developing coronavirus vaccines, a leading economist warned that the economic impact of the pandemic will be here for a long time.
A large number of small businesses that closed in March when restrictions on social movements went into effect will not reopen even when the situation improves, according to Raghuram Rajan, a professor of finance at the Booth School of Business at the University of Chicago.
“I think the coup will be with us for a long time,” Rajan, who was also the former governor of India’s central bank, told CNBC’s “Street Signs Asia” on Wednesday.
“As this happens, more and more companies discover that a long period of no revenue, but high cost, implies that they simply do not have a chance and are closing,” he added.
Small and medium-sized companies around the world have been disproportionately affected by national blockades and social distancing protocols. Countries enacted those measures to curb the spread of the virus, which has already infected more than 14.8 million people and killed more than 615,000.
Recently published data published Monday in the medical journal The Lancet said that a possible coronavirus vaccine developed by the University of Oxford in conjunction with pharmaceutical giant AstraZeneca produced a promising immune response in a large early-stage human trial. Earlier this month, pharmaceutical giant Pfizer and German drug maker BioNTech also reported initial positive data on a joint vaccine candidate.
Rajan Raghuram in Jackson Hole, Wyoming, August 24, 2018.
David A. Grogan | CNBC
Still, the economic damage will be done even if several of the vaccine candidates get approval as early as the fourth quarter, and the vaccination is implemented, according to Rajan.
“You have to vaccinate a lot of people. Therefore, the first people will feel safe going to crowded restaurants probably in the middle of next year. If everything goes according to plan, things will not go according to plan.” , said.
Operating below full potential
Economies are expected to operate below full capacity for some time despite responses from policy makers, Rajan said. He explained that industrialized countries saw a “huge” political reaction while emerging markets only saw a fraction of that response.
In fact, this week, the European Union reached an innovative agreement on a new fiscal stimulus that would see the EU’s executive arm take advantage of the financial markets to raise around $ 857 billion that would be disbursed between affected countries and sectors through grants and loans.
The places that seemed to have contained the infection are now seeing new cases re-emerging. For example, Australia’s second largest city, Melbourne, entered a partial closure after an increase in infections. That occurs even after the country and its states reported daily single or double-digit cases last month, Reuters reported.
“A complete economy does not recover until there is greater confidence for people to mix, even high-contact services such as restaurants, travel, tourism, all that can be reopened. Until then, it is at 95% economy” Rajan said, adding that countries should now start thinking about providing long-term support to affected sectors.
Experts have previously warned that the pandemic could lead to greater protectionism worldwide as countries try to safeguard their national industries.
For his part, Rajan said an increase in protectionism will further delay the economic recovery.
“A world that has strong protectionism will be a world that will recover much more slowly, and much of the damage will be done in countries that are most dependent on commodity exports,” he said, adding that it would also affect many countries in poor development as well as emerging markets.
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