The following text is an introduction from my article prepared for CASE seminar: „Is the economy doomed for a long recession?” The seminar took place in May and the entire post-seminar publication is available here.
Is the economy doomed to a long recession? This is a difficult question, mainly due to the nature of the shock that the global and Polish economies are experiencing.
It’s a result of the pandemic – an unpredictable and to a certain degree uncontrollable phenomenon. What we know today is that a return to the levels of activity from 2019 will take at least a few quarters. In the meantime we’ll be grappling with various types of shocks. At the beginning comes a supply shock – which we’re already experiencing – resulting from disruptions in value creation chains and restrictions to halt the spread of the pandemic. Next comes a demand shock, where the drop in income and higher propensity to save translate into lower purchases. In turn, if the pandemic lasts longer or makes a strong comeback, a feedback loop of demand-supply shocks may occur: a drop in demand and liquidity problems prompt companies to impose permanent limits on investment spending, which in turn over the medium term adversely affects the pace of growth in productivity, income and demand. These effects may be strengthened if in parallel a financial (banking) crisis occurs, or a fiscal crisis connected with excessive public sector debt enforces spending cuts to restore the balance. That’s also why decisive actions are so important for the purpose first of ensuring liquidity, and later the fastest possible restoration of economic activity (with a high number of tests and tightened hygiene requirements), even if the pandemic is still going on.