Hopefully, we all will now realize how well we are doing, says economist Jan Černohorský

4. 5. 2020

Coronavirus has shaken not only health care services, but even more economics. It will keep dropping for several months to come. And the government is facing many decisions that will be important for the functioning of the state. "Our economy has one huge advantage over many other market economies in the world. We can afford to increase the indebtedness because it is relatively low," says economist Jan Černohorský of the Faculty of Economics and Administration, University of Pardubice.

What are the effects of the pandemic on the economy now?

We are in a huge degree of uncertainty about future developments, and the situation is changing dynamically, unfortunately in a negative direction. None of us has experience with this. Banks, financial institutions and the state have no models with the effects of a pandemic of this magnitude. We do not know how long the preventive measures will last. The impact of health and safety measures is considerable even now.

What originally seemed like a problem for travel agencies or organizers of various events is now becoming a society-wide problem. Revenues from tourism are at the lowest ebb, revenues from services, including transport, have fallen enormously, and factories are being shut down. Carmakers interrupt production for several weeks. All this will have a significant impact on the performance of the economy.

What would have been the development of the Czech economy if it were not for the Wuhan virus strike?

According to analyst estimates, the Czech economy was to grow by about 2 percent per year. It is already certain today that the economy is heading for a recession. This will significantly affect the state budget, which will lose tens of billions in tax revenues and at the same time will have to spend similar amounts to support the economy.

When will a real crisis begin in our country?

No analyst, no institution has yet published a clear outlook. In any case, there is a consensus that the economy will decline. On the other hand, the decline of the economy and its growth belong to the current types of modern capitalist economy. Personally, however, I think it doesn't matter how much the economy declines. At present, it is essential to protect the public's health and respect hygienic rules.

Which economic sectors will see the biggest slump?

The situation will be most pronounced in the services sector. Airlines, accommodation facilities, travel agencies are already the most affected. There will also be significant declines in production in the automotive industry. These sectors, including retail in general, sports and culture, account for about 10 percent of our GDP. According to the estimate by economist David Marek, the monthly emergency regime of the economy means a loss of GDP slightly over 1 percent of GDP. But I think this regime will last longer. The first estimates are already emerging that our GDP will fall by 5 percent. On the other hand, for the average consumer, if they do not work in these sectors, these are non-essential goods as you can easily survive without a holiday and a new car.

How is China, which is now slowly recovering from the disease. Will the situation in Europe help them when they start producing protective equipment and have "customers"?

As the most up-to-date indicator on current economic activity, the so-called Air Quality Index Visual Map, currently shows, factories have already started production in China. But this does not apply to all of them and all areas. At the same time, we do not know with what capacity it now produces. However, the problems in China are currently a far bigger problem than, for example, the SARS epidemic in 2003, when China accounted for about 4 percent of the global economy. Today, 16 percent and through exports and imports it is far more closely connected with the world. The production of protective equipment will not save China, it has its economy built on different industries. Still, in Europe we can be happy to be provided with its protective equipment.

Support measures are being prepared for companies and employees. The state will spend up to a trillion crowns to support entrepreneurs, and 100 billion to direct aid. Can the state cope with such an emergency?

I am not in favour of direct government support for the business sector, for example in the form of subsidies, but at this critical time, it is certainly necessary to support entrepreneurs. For example, in the form of contributions to the wages of employees who are unable to work, tax deferrals, interest-free loans or guarantees. Everything needs to be addressed, not across the board. Not every entrepreneur, employee will be affected to the same extent. Our economy has the huge advantage over many other market economies in the world that we can afford to increase indebtedness, which is otherwise relatively low. And now is the time where the government has to do it. It is basically impossible to do business in many sectors, companies have no income, it is difficult to find resources to pay wages… If these measures are set well, then each decline is followed by growth and growing tax revenues, which should pay these costs.

Safety measures will last for several weeks. It is not certain when children will go back to school. Is the state able to pay nursing allowances at all to such an extent?

Our country is capable of that. Within the state budget, this is not such a large amount. Moreover, even today, the government will have no problem borrowing money on the financial market through government bonds. Now the effort must finally be made to look for savings in the budget.

Where specifically?

It should cut economically unjustifiable costs - such as the cancellation of transport discounts for children, students and seniors and other non-market exemptions. Now there is room, even political, to repeal these populist measures. On the other hand, any fiscal impulse will continue to be dampened by the fact that we are a very open economy - most of our GDP comes from exports. With borders now essentially closed, this reduces the effectiveness of other support measures.

Can further government action exacerbate the current economic situation?

Today, rather than the extent of these measures, which are already quite limiting, but understandable, it is the duration of their effect that matters. It now looks like economies will be in the emergency mode for several months. European economies are built on services - those are severely limited. The longer the quarantine, the more pronounced economic consequences. But I really think that protecting the health of us all is crucial now. This can also be seen in the decisions of the state, local governments and our university.

It is said that some companies could be nationalized. Is it realistic?

I hope it's not. The state is not a good manager in terms of running businesses. On the other hand, the first response of the US administration to the financial crisis 13 years ago was to nationalize a number of major companies that had got into trouble. At that time, the US government owned the greatest value of companies in the world. There, however, it made sense to stabilize the situation, and on the contrary, the government and the US economy benefited from these transactions by selling back to private hands. However, the situation in our country is significantly different, I think that our government is not able to do so yet.

Can also the taxes be increased in the end?

Raising taxes would be the worst possible and pointless step. This would lead to a further slowdown in economic activities and have a counterproductive effect than the intended support for entrepreneurs.

What impact will the economic situation have on banks, on the repayment of loans, including mortgage loans, and on the further development of financial products?

The Czech National Bank (CNB) has adopted stabilization measures for banks, the purpose of which is to loosen conditions for banks. At an extraordinary meeting (and this also indicates the seriousness of the situation), it reduced its interest rates by half a percentage point, offers banks more liquidity to a greater extent, and cancelled the increase in the countercyclical corporate surplus. The CNB's unprecedented step is to recommend to banks not to pay dividends or take steps to jeopardize their stability until the consequences of the crisis have subsided.

Can the Czech National Bank order how to proceed in the event of deferred payments?

The central bank is not allowed to order individual banks how to approach possible deferrals. However, the CNB stated that if a bank allows the deferral of repayment to clients due to preventive measures against the spread of coronavirus, then it sees this as a suitable way to secure repayments in the future. In other words, it will not consider them to be the so-called classified, i.e. problematic.

How will the current situation affect financial markets?

US stocks have plunged the most in thirty years. In the case of this shock to the economy, of course, the psychological factors of investors are coming through. However, the decline is still due to the fact that major global companies are gradually announcing production shutdowns. Originally only in China, now also in Europe and the USA. And they signal a more significant drop in income. On the other hand, after the announcement of President Trump's administration's support package, which has so far been based on a proposal to essentially give away $ 1,000 per person, the markets have recovered a bit and the stock index has risen by a few percent.

And the impact on the European Union?

I think it will have a negative effect on it in the short term. Now it has become clear that, when the heat is on, there is no time for all the countries to negotiate and every country makes decisions independently. We will see how politicians in the EU learn from this.

Who else can benefit from the situation?

For example, dealers of medical supplies. It is a pity that we did not learn from, for example, Taiwan, where, among other things, the price of the surgical mask was stipulated by the state. Certainly, e-shops with food and drugstores also make money. But in my opinion, this is a one-time and rather short-term effect similar to Christmas shopping sprees. Schoolchildren and students can also benefit from the situation. They will get to know new forms of teaching and perhaps will appreciate the classic contact lessons at primary, secondary and higher education institutions all the more. At the same time, hopefully we will all realize at this point that, despite various problems, we are doing as well as humanity has ever been.

 

TEXT: Věra Přibylová/FOTO: Petr Špaček