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Radio Interview on Recession (in German)

ECRI’s Anirvan Banerji joined ARD to discuss recession, recovery and the long-term impacts of the global shutdowns. Read his notes below:

Q: Who are the winners and who are the losers?

A: Health care aside, the winners are businesses that are busier because of the virus, and whose services are more popular during the shutdowns or help in working online rather than offline. The losers are companies that depend on discretionary expenditures that take big hits during recessions, especially consumer facing services that won’t stage a comeback anytime soon, due to the fear of the virus. Also, producers of commodities like crude oil are more vulnerable to the global demand destruction.

Q: In a way, a functioning economy had to come to a halt, like a railroad engine. Technically this engine can start moving again after the pandemic has winded down. Can you explain why it is not that easy?

A: When a functioning economy slows to a stop, like a railroad engine, technically it can start moving again after the pandemic has ended. But if you have a sudden stop, like a steam engine crashing into a concrete barrier, and breaking some of the pistons and cracking the boiler, it makes it much harder to get it going again.

Q: What will things look like in six months?

A: Like the fog of war, the fog of pandemic is hard to see through. Ultimately, the timeline for this recession will be dictated by the progress of the pandemic.

But if things start opening up even gradually by summertime, a recovery will begin. The recovery could be slow and halting, because so many small businesses will be bankrupt or too badly hurt to rehire everyone they had fired, and people may still be afraid to go out to gatherings until they have reliable medical assurances, like a vaccine, which is unlikely very soon.

Q: What will be the long-term economic impacts of this, having in mind that the US has to amass more debt on federal and state level for relief programs for businesses and consumers?

A: Unfortunately, the U.S. federal government had started running trillion dollar annual deficits before the coronavirus hit, and after this, its debt will balloon. In the years ahead, once the economy recovers, if interest rates start rising, the interest expense on the debt can become a major drag on growth. And at the state and local government level, without massive federal government assistance, big debt loads will make it hard to borrow money even to fund worthwhile public investments, and that could once again hinder long-term growth prospects.

Q: When it comes to businesses potentially not surviving this, especially retail chains, will there still be companies like department stores or will everything move (or stay) online?

A: This crisis will certainly accelerate the ongoing shift from offline brick and mortar stores to online shopping, so there could be great value destruction for traditional retailers. And many of those retail stores may go out of businesses, but some niche retailers will still survive. Of course, successful online retailers will thrive. And this is not an all-or-nothing scenario. Retailers will need to embrace creative solutions: not only becoming omni-channel retailers, but pioneering innovative shopping experiences including virtual reality or augmented reality based sales.

Q: How long will this impact the US economy, and what are the indirect long-term effects that we might not think about?

A: The effects of this coronavirus crisis will be long lasting, even after the recession has ended. This is because some structural shifts will be long-term and permanent, like a much faster move from offline to online modes of work

After this, the U.S. will have much higher debt, which will be a drag on trend growth. Even with rates at zero for years, high debt and low trend growth means it’s easy to fall back into recession, so that Japan is now in its fifth recession since 2008. And with the Fed slashing rates to zero, and highly unlikely to raise them for years, they have floored the gas pedal on the U.S. economy’s road to Japanification.


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