Key question asked over financial firepower

"The fiscal and monetary authorities also allowed the initial recession to spread by not taking action to prevent businesses shutting down and people losing their jobs. The result was a vicious circle of lower activity, leading to lower incomes, leading to lower spending, leading to lower activity. This has to be avoided this time."

Magnus, from Oxford University, said it is unrealistic to assume that economies can be shut down temporarily and then experience steep, so-called V-shaped recoveries, with everything returning to normal.

"The longer the lockdowns persist, even if only in partial or reduced form, and the longer people think that it's not safe yet (to engage in economic activity), the greater the chance you have of getting what economists call hysteresis, which is where sharp dislocations in the economy and in employment that we hoped were temporary become permanent," he said.

"This is unquestionably possible because we don't yet know what a reliable exit strategy from the lockdowns is, or the risks of a second wave of mass infections when restrictions are eased."

One thing that is certain is that after the pandemic, economies are going to be burdened with much more debt, even from the emergency financial measures taken to date.

Multiple countries have already had to cope with a decade of austerity measures to reduce debt incurred while dealing with the financial crisis.
Many economists believe it would be dangerous for policymakers to impose such measures this time.

Zhu, from SAIF, the author of China's Guaranteed Bubble, an analysis of how the country's financial system is ultimately marshaled by the government, said everyone would have to get used to higher debt levels for a long time.

"The whole world will be living through an era of higher debt. We will have to maintain low interest rate regimes to alleviate this. The debt overhang will probably hinder any strong economic rebound," he said.

Spence, from New York University, also a senior fellow at the Hoover Institution, a public policy think tank, said it would be a huge mistake to introduce severe austerity measures, and that optimism needs to be drawn from events after World War II.

"Austerity would just kill growth. We have to accept high debt levels for now, and some distortions, and then grow our way out of the debt overhangs, as in the case of the post-war experience," he said.

Sun, from Haitong, believes that of all the major economies, China's is better placed to recover more rapidly and ease the pressure on others.

"China is probably best-positioned to sail through this storm, as it has abundant room for policy responses and more household savings," he said.
"Chinese consumers will also play a big role this time. Consumption has become a much larger growth engine for China today than it was 10 years ago."