Fall is normally the season when many people get a cold. Sneezing, coughing and blowing one’s nose have quite a different meaning in current times, however, as the number of COVID-infections continues to rise in many countries and time and again new local social distancing measures need to be imposed. But a cold is just a cold, while COVID is COVID; the right diagnosis is not always easy to make in individual cases. But the right diagnosis is of the utmost importance: In case of COVID-19 you must stay at home, if you have a cold, you can just continue to participate.

This is also true for the state of the world economy: only with the right diagnosis the patient can be treated in the right way.

It is now slowly becoming clearer how the lifting of lockdowns and fiscal stimulus are the most important elements in the economic landscape that determine how economies recover from the corona crisis. Also, evidence looms that the side-effects of the pandemic are rising inequality and delays in achieving the Sustainable Development Goals.

How can the right policy choices be made in times of uncertainty, if we may not have the right diagnosis? This is the million-dollar question we try to answer in our quarterly outlooks. Three important decisions must be made the coming period.

1. How far can we take fiscal stimulus?

Many countries have supported their economies abundantly in the first half year of this crisis. Immediate support for businesses and people was needed to prevent a total collapse of certain sectors. The perspective then – early March, seems like ages ago – was that support would be needed for a limited period and that after a few months, economies would reopen again. Reality proves to be different. Consequently, relief packages are sobered, and bankruptcies rise. The damage of the pandemic to the economy is especially large in emerging countries with only limited maneuvering space.  And although no-one wants to talk about the limits to the amount of public debt that is piling up, even developed countries will at some point reach the end of their ability to support the economy.

2. Where do we direct the fiscal stimulus?

The period of emergency relief is over; we have come to the point that we really must think about what should be saved from our current economy and what not. Two guiding principles will help us decide: people instead of jobs and transition instead of conservation. Since this pandemic takes longer than previously expected, saving jobs will not always be possible. Supporting companies to that end would then be a dead-end street. But people can – if they get enough support – invest in themselves to transit from one job to another or to start their own business. This approach aligns with the second guideline: not to preserve the old economy but to invest in the transition to a new, more sustainable one.

3. What do we do in the longer term?

It still seems far away, but hopefully sometime next year we have a vaccine. And can we return to normal. But will that mean that also our policy reflexes turn back to ‘normal’, like they did in the aftermath of the financial crisis in 2008/09? Back then, policy makers gave in too soon to austerity pressure, also from financial markets, and this resulted in unnecessary damage to economy and society. Almost everyone agrees now that this was wrong and that we missed a great opportunity to reform.

This is a lesson we hopefully do not forget. On the other hand, however, debt sustainability will become a huge issue if we stop fiscal support too late. As always, timing is crucial. And this time, it also depends on the right diagnosis; is it a cold or is it COVID.

Read our quarterly outlooks.