This is how governments can curb the impact of coronavirus on the economy

Cash injections are needed in all sectors to keep the world economy afloat

Investors look to a possible tax cut and other measures by the Trump administration to combat the effect of the coronavirus on the economy. AFP

For at least the last two years, the world economy has needed a big injection of cash as prosperity continues to elude many.

Last year, the global economy witnessed a synchronised slowdown. But in the first few weeks of 2020, the situation had improved, with the International Monetary Fund indicating a sluggish recovery of growth.

In January, the IMF’s managing director, Kristalina Georgieva, said that the world avoided a recession in 2019, which had been the worst year for economic growth since the 2008 financial crisis. However, during a briefing at the World Economic Forum in Davos, Ms Georgieva eerily compared the start of the 2020s to the roaring 1920s, a decade that ended with the Wall Street crash of 1929, making way for the Great Depression.

“We are all adjusting to live with the new normal of higher uncertainty” she had said. Her words have proved to be a prescient warning. On December 31 of last year the World health Organisation was notified of the emergence of a type of disease, a novel coronavirus.

As the virus spread into a worldwide epidemic, Ms Georgieva and her colleague David Malpass, President of the World Bank Group, gave fresh assessments of the economic outlook. Their perspective is unsurprisingly far more bleak today than it was in early January.

They have urged governments to take concerted action and spend more money, not just on front line health efforts, but also to support small businesses, spur innovation and build vital infrastructure.

The biggest factors weighing on global growth such as the trade dispute between the US and China and the increased impact of climate change on businesses have not gone away with the advent of the coronavirus.

“Rather than think of it as a temporary stimulus, think of it as an investment by the world in growth,” Mr Malpass said last week.

Ms Georgieva had made the same plea in January but governments have until now resisted making use of near-zero borrowing costs to provide extra cash where it is needed.

But from Washington to Berlin and London, world leaders are becoming more likely to help get their economies back on track with direct cash injections – as opposed to doing so via central banks and monetary policy.

Signs of movement include the US approving $8 billion in spending to tackle the coronavirus outbreak, while Italy is already taking steps in this direction such as suspending mortgage payments to help its beleaguered population. Australia too, is planning its own package of stimulus measures. More countries will likely follow suit in the weeks and months to come as the virus outbreak takes a toll on equity and commodity markets.

These are the exact measures that the IMF had asked for, prior to the coronavirus epidemic. Instead of heeding the call, many countries preferred to play the waiting game, hoping not to have to make a decision.

In the aftermath of the 2008 financial crisis, governments provided historic levels of stimulus to stave off the worst economic scenarios. Still, this did not shield their nations from the social and political upheaval triggered by the crisis.

Some economists do not believe that increased spending will help boost the economy. Others fear such a move would evetually trigger another era of painful austerity.

However, this time around, increased government spending would not target one specific sector, as was the case in 2008 when cash was injected into the banking system. It would instead give a boost to all the different sectors of their economies. Even if governments do act now, a new financial crisis is likely inevitable.

Co-ordinated financial support was long needed to get the world economy over the final hump of the 2008 financial crisis’ legacy. Ms Georgieva’s warning should however spur us to become more resilient to future crises whatever their cause may be – medical, environmental, financial or otherwise.

This requires all businesses, organisations and institutions to invest in technology, reskilling workforces and developing talent to ensure that we can meet the next phase of uncertainty. The most affected industries such as travel, tourism and education have already been permanently changed. Governments must adjust their policymaking and initiatives accordingly.

Once the coronavirus crisis subsides people will quickly return to their thoughts of holidays, retail purchases and other activities that they had to forgo. Businesses will immediately feel this positivitybut industries and markets must be ready for it when it happens.

In the meantime, we should not miss this window of opportunity to adjust and improve our readiness for the uncertainty of the modern world. We mustn’t allow complacency to set in once the mood turns positive again as the challenges will only get more complex.

Mustafa Alrawi is an assistant editor-in-chief at The National