Recession expected to come sooner than expected
|Antonio Fatas, economics professor at INSEAD|
He warned that a potential global recession triggered by the COVID-19 pandemic will arrive much sooner than expected as its economic fallout is sending a shudder through the world paralyzing economic activities everywhere.
The Ministry of Economy and Finance, the Bank of Korea (BOK) and the Financial Services Commission are in an unprecedented emergency mode, as the outbreak and rapid spread of COVID-19 brings bigger- and longer-than-expected economic damage.
The financial authorities have introduced a comprehensive package of strong pump-priming measures amid growing probability that the economy will enter a recession soon. On Tuesday, President Moon Jae-in announced plans to inject 100 trillion won ($80.8 billion) in emergency aid to local firms suffering damage in sales and exports due to the virus.
But Fatas urged the government to keep monetary easing and expand fiscal policies, as the looming fear of the global recession will possibly pose bigger threats to the export-driven local economy.
"Given the extent of the shock, we need to push the most aggressive monetary and fiscal policies we can," he said in an interview. The economist has worked as an external consultant for major international organizations ― such as the International Monetary Fund and the World Bank. He is also a research fellow at the London-based Centre for Economic and Policy Research.
He underscored the need for the BOK to lower interest rates "as much as possible" and continue introducing policies in a way to ensure liquidity.
The BOK recently announced a surprise base rate cut of 50 basis points to a record low of 0.75 percent. The decision came shortly after the United States Federal Reserve slashed its baseline interest rate range to 0 percent to 0.25 percent.
"The government is also urged to use fiscal policy to make sure that the most affected sectors do not completely stop, so that there is no separation between workers and companies and we can restart the economy once we control the virus," he said.
For the past month, the pandemic shock seems to have reached its peak in Asian territories ― such as China and Korea ― and is now rapidly spreading in the U.S. and Europe.
Even if the number of confirmed cases in Korea is slowing daily, the country should not lower its guard against the virus-related economic impact due to the industrial structure here, he said.
"Asia is in a different situation as activity in Korea and Singapore has not come to a halt," he said. "Workers are still going to work. Massive disruptions have not reached the level of Europe or the U.S.
"But the problem is that they cannot be immune to what is happening abroad. Exports to those countries are likely to collapse, and supply chains are being disrupted or stopped."
The economist also shared his view on the growing recession fear.
"This is the fastest recession ever," he said. "Typically, recessions happen over a couple of quarters. This drop just happened over a matter of weeks."
The period of the global economic shock will depend on when governments contain the virus, he said.
Some critics argue the government's anti-virus economic policies may not appear to generate tangible, short-term effects, as is shown from the continuous plunge in local stocks and currency.
But the professor underlined the policies are crucial in that they consolidate a foothold for the economy to bounce back quickly after the virus shock ends.
"Economic policies can ensure that the economy is ready to rebound when the spread is over by maintaining companies afloat and workers engaged, not just fired," he said.
The government's fiscal and monetary policies play an important role, as they give a "massive stimulus" once the economy is ready to rebound, according to the professor.