(Bloomberg Opinion) -- Despite the impressive rebound in China and some other Asian countries, hopes of a V-shaped recovery for the global economy have given way to a realization that the pace of growth is losing steam. More troubling is the material risk of a double-dip recession in some European countries. Understanding why this is happening and reacting accordingly will determine in large part whether, pending the discovery and broad distribution of a vaccine, the world economy faces an even more uncertain outlook – perhaps threatening Asia’s recovery as well.
Five lessons are emerging from Europe that are of broader relevance, particularly for the U.S.:
This second wave of Covid-19 infection is spreading much faster than most governments expected and can handle. The surge in cases can, and does, easily overwhelm the test and trace systems in place. The resulting rise in hospitalization quickly eats up medical capacity. Governments feel obliged to act despite the political cost of doing so. Analytically elegant approaches, including targeting hot spots or specific regions, have proven hard to pull off in practice, leading to a return to national restrictions in several countries, be they “lockdown light,” “firebreaks” or “circuit breakers.”
The situation is compounded by the inherent complexities that liberal democracies face in simultaneously meeting three objectives: sound public health, a return to more normal economic and social interactions, and respect for personal freedoms to work, travel and interact socially. Adding to the mix is the highly unequal nature of the Covid-19 disruptions, with the more socio-economically disadvantaged segments of the population carrying a disproportionate share of the hit to health, income, wealth and opportunity.
Then there’s the notion of a “wasted summer.” While we’ve seen encouraging advances in the development of therapeutic treatments and vaccines, they don’t adequately compensate for the insufficient progress made in efforts to put in place robust test and trace systems that could quickly identify and isolate infected individuals and limit the risks they pose to themselves and others. At the same time, many people put down their health guard too quickly, encouraged in some cases by government messaging aimed at delivering a bigger economic rebound – one that is now proving hard to sustain.
This second round of lockdowns will differ from the one initiated in March in four ways: It will be less universal, with schools and manufacturing activities, for example, seeking exemptions for as long as possible; it will be less uniform across countries; it will likely be harder on vulnerable households, with governments either unable or unwilling to repeat the huge fiscal relief packages that cushioned the blow last time around; and it will face much earlier resistance from disaffected segments of the population.
The challenge for governments now is twofold. First, they’ll need to convince their citizens that this latest period of disruption to their lives and livelihood will be worth it, and will result quickly in real progress toward securing a healthy economic reopening that can be maintained even before the rollout of an effective vaccine. Second, governments will need to take advantage of the likely dip in post-lockdown infections to significantly strengthen test and trace systems, while identifying and focusing attention on the most medically vulnerable groups.
There is a lot at stake in getting this right. The more countries repeat the cycle of unsustainable reopenings, the greater the economic scarring, including rising bankruptcies, longer-term unemployment and increased economic insecurity among households. Europe and the U.S. aren’t the only regions at risk in this scenario. China, other Asian economies and several developing countries will find it harder to maintain their recoveries in a global economy facing the risk of a prolonged secular stagnation. Add to this the great risk to public health of repeat failures, and the stakes are even higher.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. He is president-elect of Queens' College, Cambridge, senior adviser at Gramercy and professor of practice at Wharton. His books include "The Only Game in Town" and "When Markets Collide."
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