PCR podcast: 'A light-switch' for the global economy

The National’s new limited podcast series explains how the coronavirus pandemic and the economic rebound have been unprecedented in scale and magnitude

The coronavirus pandemic has created an economic crisis such as the world has never seen. The economic downturn was followed by an unprecedented rebound. It all happened so fast. It left us with a torrent of numbers and seemingly inextricable questions.

Welcome to PCR, a special limited series by The National, in which we try to make sense of the numbers and answer important questions on the Post Covid-19 Recovery.

Listen to prominent economists and business leaders as they explain the challenges and opportunities of a unique and often complex economic recovery.

Join Mustafa Alrawi, assistant editor-in-chief, as he explores the many features of the Post Covid-19 Recovery.

Episode 1 : The light-switch effect

What happens when the economy shuts down and then reopens almost overnight? Two years ago, this question would have sounded far-fetched. The scenario was simply unthinkable.

Today we are navigating through the complex reality of a light-switch-type economic recovery. The rebound has been uneven across countries and industries, creating mismatches and disruptions. Will the world emerge from the pandemic with wider fault lines between rich and poor countries or will the recovery be strong and even enough to bring prosperity and growth for developing countries?


Petya Koeva Brooks, Deputy Director in the IMF's Strategy, Policy and Review Department

Mahir Rasheed, US economist at Oxford Economics

Haitham Mattar, Managing Director of India, Middle East & Africa at IHG Hotels and Resorts

Ezra Greenberg, Partner, Strategy and Corporate Finance Practice at McKinsey and Company

Martin Hirt, Senior Partner at McKinsey and Company

Narrated by: Mustafa Alrawi, The National's assistant editor-in-chief

Episode transcript

0:07: Away from Wuhan, coronavirus numbers are rising. China is urging its citizens not to travel abroad.

0:14 The coronavirus is the biggest threat this country has faced for decades and this country is not alone.

0:20 The Labour Department is out with jaw-dropping new numbers.

0:26 The coronavirus pandemic isn't just raising the spectre of recession. Economists are worried about the possibility of something even worse. And we are nowhere near the end point.

0:35 The coronavirus [speaks in foreign language]... Bureau area real GDP contracted by 11.8 per cent.

0:42 (News reports in foreign languages.)

1:00 The unthinkable – just as President Emamanuel Macron of France said earlier this year during the World Economic Forum in January, when describing how leaders and governments did something extraordinary. Governments shut down their economies in order to save lives, as the Covid-19 virus was spreading and wreaking havoc.

1:28 What the world faced in 2020 was simply unthinkable. 2020 was the year when governments had one absolute priority, and that was saving lives.

1:41 The world didn't know what hit it. Right. We were all very surprised, unprepared in many cases.

1:47 I think the unevenness starts with how the crisis hit.

1:54 Fast forward to 2021, it is the year of the economic recovery. Now, it seems it's time the world acts to save lives and livelihoods. While health is still a priority and in many cases a matter of great concern, restarting the economy and ensuring healthy and robust growth is now a pressing matter. The Covid-19 pandemic is not over, yet the economic recovery is well under way. That's probably what makes the current recovery unique. It comes, not following the end of the virus. Rather the global economy is recovering with the virus still around.

2:40 Welcome to PCR, the Post Covid-19 Recovery, a limited podcast series from The National. I’m Mustafa Alrawi. In this special series, we will get a sense of what the post-Covid-19 recovery looks like. We'll answer questions, like exactly how strong is growth? And what are the challenges and risks to the recovery across countries and industries? For more than 18 months, PCR tests have become a part of our new sanitary routine. Today as the world is emerging from one of the worst crises, those three letters – P C R – also stand for post-Covid-19 recovery as the global economy is witnessing an exciting yet complex rebound.

3:26 What we're seeing is an economic recovery that's durable and strong. The Biden plan is working we're getting results. America is on the move again. But the risks and obstacles to a balanced global recovery have become even more pronounced.

3:47 The world of 2021 is by all means a very different place from the world we knew in 2020. The economic crisis caused by the coronavirus pandemic is unprecedented in scale and impact. The world has faced crises before – financial crises, recessions, and even great depressions. But what sets this crisis apart is probably the speed at which the economy is shut down. Almost overnight.

4:13 Haitham Mattar, Managing Director of India, Middle East and Africa at IHG Hotels and Resorts:

4:19 The world didn't know what hit it. Right. We were all very surprised, unprepared in many cases. However, I think, the reactions of some countries although volatile, yeah – open, close, open, close. What do we do? Learning quickly, being on our feet. I think this industry, the hospitality industry, is known to be quite on our feet and we make decisions fairly quickly. And I think a lot of these decisions that were made allowed the industry to bounce back a lot faster than anticipated. So, in a nutshell, if you think [about] the impact that really hit the globe so suddenly: We knew it was in China in 2019, right? Everybody was living a normal life. We were all travelling like everything is okay until March, right? March hit and everything went just lights out, right? Everything locked down, lights out … sanitisation of the roads, sanitisation of everything. I think, look, there were great decisions by governments across the world. There were some good decisions and in some cases maybe not-so-great decisions because everybody has a different way of dealing with a crisis.

5:39 There were good and bad decisions made. I mean, the world wasn't ready for the Covid-19 pandemic, although the virology experts would argue it should have been, but governments and companies were not prepared to face a crisis of this sort. At the start of the pandemic, everyone was learning. A year on from the start of the crisis, the world may have learnt valuable lessons from the pandemic. One fact we know about the recovery is that it is correlated to containing the virus. Remember that what makes this economic recovery so unique, is that the problem that triggered it is still out there. Covid-19. And in some places, governments are still struggling to contain it. Any new variant of the virus, any flare-up in cases in any country, might cause economic setbacks and disruptions – that much we know.

6:29 Mahir Rasheed, US economist at Oxford Economics:

6:32 I think the most important part of this recovery is that any progress that, not just the US, but any economy makes, is very highly correlated to containing the pandemic. As I mentioned, when Covid cases were falling, earlier this summer, we started to see economic activity really pick up and again, the main reason for that is because once consumers feel more safe and comfortable travelling and spending, that's when economic momentum really starts to accelerate. Now, we obviously don't really have a reference point for a health-driven question, where spikes in a virus can impact economic activity. So it's certainly the case that this recovery was very unique. And aside from that, the speed of the recovery compared to past recessions is also something that's extremely unique. As I mentioned, we had this historic contraction in Q2 of 2020. But also, for us to have recouped output within a year is a pretty impressive feat. And again, the credit should go to policymakers who were able to learn from past mistakes and really targeted the Americans that needed the most help.

7:40 Martin Hirt, Senior Partner at McKinsey and Company:

7:43 It's very visible now that this has been a light-switch-economy type of crisis, where it has been shut down faster than any economic crisis in history. But at the same time, it almost instantly recovered when the lockdowns were ended, when people were able to and willing to move around again. So for many of the countries in our purview, economic activity has almost returned to pre-crisis levels, meaning that the outlook is a continuation. And that's a combination of things going back to normal, but also people having learnt how to live with the virus and how to keep economic activity going.

8:49 If we want to get a real sense of how good or better the economy is today, we only need to be reminded of how bad it was a year ago. According to the latest forecasts in the World Economic Outlook released by the International Monetary Fund in October, the world's economic output for 2021 is up 5.9 per cent compared to minus 3.5 per cent in 2020. That's a change of a 9.4 magnitude on a year-on-year basis. That is truly unprecedented. And when looking at numbers and indicators for specific economies, the magnitude of the recovery becomes even more obvious. The Euro area's GDP growth for 2021 stands at 5 per cent compared to minus 6.3 per cent in 2020. In our attempt to measure the economic rebound, one of the most telling indicators is perhaps world trade volume that went from minus 8.2 per cent in 2020 to plus 9.7 per cent in 2021. So there is an economic rebound and that rebound is strong, maybe not the same strength across countries and industries. Nevertheless, what we're seeing is a real recovery. Does that mean we're out of trouble and the economic growth is on a safe track?

10:12 Petya Koeva Brookes, Deputy Director in the IMF Strategy, Policy and Review Department

10:17 We are not completely out of trouble, but we are on a reasonable path, I think, is the way I would put it. So I think there's still a lot more things to be done in order for us to feel secure about the recovery.

10:35 There are still things to be done before we can safely say that the economic growth is robust, and more importantly sustainable, capable of maintaining healthy development, employment and improving living standards. In fact, when comparing the October World Economic Outlook by the IMF to that of July 2021, we note a 0.1 percentage point drop for the global 2021 GDP projections. A small even marginal change one might think. Not really. This small revision is very telling and indicates that the recovery might be losing steam. The downward revision for 2021 reflects a downgrade for advanced economies, in part due to supply disruptions – a new feature of the rebound. And for low-income developing countries, largely due to worsening pandemic dynamics.

11:30 One of the problems with the current economic recovery is the unevenness we're seeing across countries and industries. For now, this unevenness is not a serious problem, and one can say divergences were predictable. Why? Simply because countries had different resources, different policies, and responses during the pandemic. Also, not all sectors and industries were impacted the same way by the pandemic and related restrictions. What matters, though, is whether the recovery will continue to become more uneven, or whether the gap between developed economies and developing economies will close as we edge towards pre-pandemic levels. In other words, will the world emerge from the pandemic with wider fault lines between rich and poor countries? Or will the recovery be strong and even enough to bring prosperity and growth for developing countries too.

12:29 Petya Koeva Brookes, Deputy Director in the IMF’s Strategy, Policy and Review Department:

12:34 This is the question that we've been trying to address over the past year – and also in our report now. What we are seeing is a global recovery that is proceeding in this pandemic. We are expecting growth to be 5.9 this year, moderating to 4.9 next year. But, as in our previous vintages of the reports, what we see is these divergences that you're referring to, and what that means is, essentially, if one were to look at, where countries would be under our current forecasts in 2025, and where the output is going to be – real activity. And if we compare that to where they would have been if there hadn't been a health crisis, basically our forecasts back in 2019. And if we compare those two numbers, for the advanced economies as a whole, essentially, advanced economies are above that level, and about 0.9 per cent above that level. And if you do the same computation for emerging and developing economies, especially if you exclude China from that, you end up with a gap, we end up with minus 5.5. And that's really very striking. It's stark. And what we're seeing already is that some of these divergences in the recovery that we're seeing in the near term, there's a risk that they translate into lasting scars for much of the developing world. And again, if you go back to our forecast for this year, even though for the world as a whole, we had a downgrade of 0.1 for the low-income countries as a group, that downgrade was 0.9. So overall, I think the picture does not look good when it comes to the divergences. Now, we can talk about what's behind them, why they're happening and what one can do about it. There are two aspects that strike us as particularly important. One is the access to vaccination. And the second one is the ability of countries to provide policy support, both fiscal but also monetary policy support. The other channel, to address the problem, is to make sure that these countries have the adequate resources and buffers in order to be able to provide support to their domestic economies. And here, you've heard about the largest allocation of Special Drawing Rights, which is kind of our contribution, our membership’s contribution, of trying to resolve the problem. One thing that can be done – and I think this is something that we're working on, and we're hoping that there is going to be strong support from our membership – is to channel some of the SDRs that the advanced economies or more generally, the economies with very strong external positions have, to channel those resources so that they could be used by those countries that have much more limited scope for manoeuvre. And we think that that will certainly help address the problem.

16:20 We've just heard from Petya Koeva Brookes of the IMF talking about the divergences playing out in the recovery. I’m Mustafa Alrawi, your host in this special podcast from The National, in which we discuss the post-Covid-19 recovery, PCR. On this episode, we're focusing on understanding the dynamics of the current economic recovery. And what makes this rebound unlike any other previous recovery. One area of concern is that not all countries are recovering at the same pace and with the same strength – the unevenness, or asymmetry, is also observed across industries. We asked Martin Hirt, senior partner at consultants McKinsey and Company, about the reasons behind the asymmetry and how he thinks this would evolve in the coming months. He offered a very interesting analysis.

17:17 I think the unevenness starts with how the crisis hit. The crisis hit sectors very unevenly and hit regions and countries very unevenly. And that laid the foundation for an uneven recovery as well. So it's no great surprise that industries like the tourism industry, travel industry, logistics, and many related activities, the restaurant sector, hospitality in general have been devastated by the crisis early on, and with very high levels of unclarity about by what rules people have to play – and what's possible, what's not possible – the recovery is very uneven. What is telling, though, is we ran pretty sophisticated analyses on what the stock market thinks about the recovery. Because the stock market, as you know, is not a rear-view mirror. The stock market is a predictor of what is likely going to happen. So we looked at all the profits that are being made – economic profits. So that's about the cost of capital. So how much value was created in each of the sectors of the economy globally? And we then looked at the current market valuations of companies in these sectors, and said, what is the expectation about future profit and value generation of the sectors that the stock market holds today? And what was fascinating was the following: Those sectors that had been doing well since, let's say 2016-2017 and had accelerated, so sectors like pharma, like semiconductors and so forth, those sectors are expected based on current valuations, to do even better going forward. Sectors that were struggling before – let’s see banking, airlines and so forth – are predicted to do even worse in the future. Now, what is that sort of a market valuation snapshot worth? We were wondering as well. So we went back to 2011 and said: What would the markets have predicted about future value creation in sectors in 2011? And what did actually happen over the following decade? And the answer there was that the markets got it right for the mega trends. The markets predicted the high tech, the biotech, those types of mega trends. On few smaller things, they weren't quite right. But if you look now at the big things that the markets predict, we could actually be quite confident that the unevenness in recovery, which is very much stipulated by the shock of the pandemic, and the government reactions, and public health measures as a result of it, will translate back into those long term trends, that the markets seem to just extend from what we have seen over the last three, four, five years. So in terms of unevenness, if I were a corporate leader, I'd be more concerned about the unevenness created by trends, rather than the unevenness emerging from the pandemic, because that will smooth itself out relatively quickly. That light switch off, the shock, the light switch on was a shock, everything got sort of a little bit messed up. But that's likely going to smooth out now and the underlying trends will be what drives value creation going forward.

21:05 The strength of the recovery during 2021 and 2022, will determine the future of the world economy in the coming decade. Decisions and policies made today will decide if the economic growth will be strong enough to sustain job creation and development for years to come. But what are the various scenarios? And exactly what impact will the recovery today have on the future of the world economy?

21:31 Ezra Greenberg, Partner, Strategy and Corporate Finance Practice, at McKinsey and Company:

21:37 How do we think about this going forward? There's kind of three outcomes. So either you take the view, and this is kind of the consensus view, that we're going to get through this and that growth trajectories will return to what we saw before the pandemic and nothing will really change. But there are two alternative views as well. One is that, you know, we've taken some kind of shock here, and we have seen what the impact has been because of all the government stimulus and the monetary actions that we've seen. And therefore, there's something underlying structurally broken in the economy – and call this kind of the limitations scenario. I personally believe that's pretty low probability at this point, there doesn't seem to be evidence for that. But on the other side, we also have to remember that there's no reason why the global economy has to get stuck in this kind of relatively slow growth pattern that we've seen, for the previous 10 years before the pandemic. Indeed, there are many decades across time in the 60s, the 80s, and 90s, and some in the 2000s in some countries where global growth is actually significantly higher. And so we think that there is upside potential in the longer term if the right decisions are made, and particularly if you get a proper handoff, if you will, from the government stimulus to private sector activity. I tend to lean a little bit more to the positive side of the puzzle. But I think that it's important to have both those views in the conversation.

23:08 In this first episode of PCR, the special series dedicated to the post-Covid-19 recovery, we discussed some of the aspects of the economic recovery that makes it unique, and in some ways very unusual compared to previous recoveries. In coming episodes, we'll be discussing the recovery with a focus on employment, the current job mismatch and the future of work. We will also try to better understand trade disruptions, shortages and supply bottlenecks. How long will these disruptions last? What impact they have on the global recovery? And what does it say about globalisation post-pandemic?

23:53 Thank you for listening. If you've enjoyed the show, please do subscribe on Apple Podcasts, Spotify, or wherever you get your audio content.

Updated: December 23, 2021, 11:03 AM