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The post-Covid ‘zombification’ of advanced economies is here to stay, EIU warns

The coronavirus pandemic is likely to cause a long-lasting “zombification” of the global economy, a prominent research firm warns.

Agathe Demarais, global forecasting director of the Economist Intelligence Unit, suggested that those “zombie” features previously associated with the “Japanese economy — slow growth, low inflation and high debt — will become common across advanced economies” following the pandemic.

In the EIU’s fourth quarter economic forecast report, published Wednesday, Demarais said that before the outbreak of the coronavirus Japan was considered an “economic oddity.”

Japan’s economic crash, after its stock market and real estate bubble burst in 1989, was followed by a ”‘lost decade’ of feeble growth between 1991 and 2001,” said Demarais, who wrote the EIU report.

The Japanese government’s attempt at boosting economic activity through fiscal stimulus failed, she said. Its debt-to-gross domestic product ratio climbed to 240% and inflation remained “stubbornly low.”

As a result of the coronavirus, those characteristics of slow growth, low inflation and high levels of debt would now become common among advanced economies in decades to come, Demarais said.

“The pandemic may not last once a vaccine is found,” she stated in the report. “However, the post-coronavirus zombification of advanced economies appears to be here to stay.”

Indeed, this could be seen as advanced economies implemented “extraordinary” fiscal measures in response to the coronavirus crisis. G20 countries had so far announced stimulus programs worth around $11 trillion, which is nearly the same size of the Japanese, German and French economies combined.

The public-debt-to-GDP ratio will rise to around 140% of GDP across developed economies, Demarais predicted.

Previously this would have raised concerns about government debt crises, however, this time around central banks have been financing and enabling the roll out of stimulus packages. And as inflation remains low, this public debt will “erode over time and, crucially, cost virtually nothing to service,” Demarais said.

On the other hand, an unexpected pickup in inflation was a “significant risk” as central banks would be forced to raise interest rates, causing the cost of government borrowing to “spiral out of control.”

The EIU also warned that government support measures, such as furlough schemes, will keep afloat otherwise unprofitable companies, “weighing on productivity and innovation and fueling a rise in the number of ‘zombie’ firms.” In addition, instead of putting money into research and development, businesses that benefitted from government help would be paying those loans for years, Demarais added in the report.

Kevin O’Leary, a judge on ABC’s “Shark Tank,” has urged against giving stimulus to “zombie companies.” He said on CNBC’s “Capital Connection” last week that this money should go to people who really need it.
Source: CNBC

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