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What Would Be The Economic Implications Of A Second Wave Of Corona?

Uncertainty May Cause Some Companies Not To Rehire Non-essential Workers At All

Published 07/13/2020 | By Kw Now Local News - Joel Blit - U of W

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The Second Wave: What If? And When?
The Second Wave: What If? And When?

Q and A With An Expert On The Economic Implications of a Second Wave

As we move out of the first wave of COVID-19, there is already concern about how the world will endure a second wave, particularly when it comes to our fragile economy.

We spoke to economics Professor Joel Blit to unpack the economic implications of a second wave of COVID-19.

How fragile is the global economy right now as the world is beginning to emerge from the lockdown forced by COVID-19?

The world remains in an economic crisis and hopes for a full and fast economic recovery are misplaced. Depressed wages and profits, and in many cases increased debt loads, will be a drag on consumer and business spending. Lingering uncertainty over potential new waves of COVID-19 and over the economy will also dampen demand.

In the face of uncertainty, many firms are unlikely to rehire non-essential workers in the short term. In fact, if history is any guide, they may choose not to rehire them at all, taking this downturn as an opportunity to automate and reorganize operations. Other firms will either downsize or fail altogether, and over time the labour and capital that they release will be reallocated to more productive or better-adapted firms. We are already seeing such a transformation in the retail sector, with Walmart announcing the first fully cashier-less store and market share being reallocated from brick and mortar to online stores.

What would a second wave of COVID-19 mean for global stock markets?

Global stock markets have made perplexingly large recoveries and some are closing in on their pre-crisis all-time highs. As of this writing, the S&P500, TSX Composite, Euronext 100, and Nikkei 225 were within 5.9%, 12.4%, 15.9%, and 7.4%, respectively, of their all-time highs.

It is somewhat puzzling that stock markets have rebounded so far and so quickly, given that the health crisis is far from over, and that even if there were no future waves of COVID-19, the economy is unlikely to fully recover in the near term. By some measures, the U.S. market is now more overvalued than at any point in history with but three exceptions: Black Tuesday, the dotcom bubble, and prior to COVID. The one explanation for the high valuations might be that governments have made it amply clear that they will go to extreme lengths to support the economy, and that the associated printing of money will inflate assets.

What would a second wave mean for the Canadian economy?

It is likely that we will see a second wave, perhaps as soon as September. The second wave could be worse than the first in that Canadians are unlikely to be willing or able to make the same sacrifices, and that aside from Montreal, no parts of Canada have developed any significant degree of herd immunity (assuming herd immunity is even possible).

The extent to which a second wave would hurt the Canadian economy depends largely on two factors. First, it will depend on our degree of preparedness. A prepared Taiwan, for example, did not need to shut down schools or their economy. Second, it will depend on whether our public health agencies and governments adopt a more balanced response where social and economic objectives are also considered.

It's Up To Us

In a very real sense, our fate is in our own hands. It's critical that everyone takes social distancing and wearing masks seriously. Many are not, and some outrightly refuse! One expert said, "behave like everyone you meet has the virus and act accordingly."

Canadian businesses and workers must prepare for the WORST, But HOPE for the BEST.

U of W Expert

Associate Professor Joel Blit

Areas of specialization: Economics of Innovation, Technology Clusters, Intellectual Property, Entrepreneurship, International Trade

BASc Engineering Science (Toronto); MASc Computer Engineering (Waterloo); MBA (INSEAD); MA Economics (Western); PhD Economics (Toronto)

 
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