Economic blow will be here for a long time, says Raghuram Rajan

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As markets reacted positively this week to promising news of potential vaccines against developing coronaviruses, a senior economist has warned that the economic blow from the pandemic will be here for a long time.According to Raghuram Rajan, a finance professor at the University of Chicago’s Booth School of Business, many of the small businesses that closed in March – when the restrictions on social movements took effect – will not reopen even when the situation will improve.

“I think the blow will be with us for a long time,” said Rajan, who was also the former governor of India’s central bank, CNBC’s “Street Signs Asia” on Wednesday.

“As this continues, more and more businesses are finding that a long period of no income, but at a high cost, means that they just don’t stand a chance and shut down,” he added.

Small and medium-sized businesses around the world have been disproportionately affected by national lockdowns and social distancing protocols. Countries have adopted these measures to slow the spread of the virus, which has already infected more than 14.8 million people and killed more than 615,000 people.

Newly released data published Monday in the medical journal The Lancet said that a potential coronavirus vaccine developed by the University of Oxford alongside pharmaceutical giant AstraZeneca produced a promising immune response in a large early human trial. Earlier this month, pharmaceutical giant Pfizer and German manufacturer BioNTech also reported early positive data on a joint vaccine candidate.

Rajan Raghuram in Jackson Hole, Wyoming on August 24, 2018.David A. Grogan | CNBC

Yet the economic damage will be done even if several of the vaccine candidates gain approval as early as the fourth trimester and the vaccination is rolled out, according to Rajan.

“We need to vaccinate a lot of people. Thus, the first people will feel safe walking into crowded restaurants, probably by the middle of next year. If everything goes as planned, things will not go as planned. plan, ”he says.

Operation below its full potential

Economies are expected to operate below full capacity for some time despite responses from policymakers, Rajan said. He explained that industrialized countries have seen a “huge” political reaction while emerging markets have seen only a fraction of that response.

In fact, this week the European Union came to a landmark deal on a new fiscal stimulus that would see the EU’s executive arm tap into financial markets to raise around $ 857 billion that would be disbursed between countries and countries. sectors affected through grants and loans.

Places that appeared to have contained the infection are now seeing new cases reappear. For example, Australia’s second largest city, Melbourne, has partially closed after a surge in infections. It comes even after the country and its states reported single- and double-digit daily cases last month, Reuters reported.

“You won’t get a full economy back until people have more confidence to mingle, until top-level services like restaurants, travel, tourism – all of that can reopen. Until then, you’re 95% saving, ”Rajan said, adding that countries now need to start thinking about providing long-term support to affected sectors.

Experts have already warned that the pandemic could lead to more protectionism around the world as countries try to protect their domestic industries.

For his part, Rajan said a rise in protectionism would further delay economic recovery.

“A world that has strong protectionism is going to be a world that will recover much more slowly, and a lot of the damage is going to be done in the countries that depend most on commodity exports,” he said, adding that it would also affect many people. poor developing countries as well as emerging markets.

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