Pandemic’s economic hit will be here ‘for a long time’ even if a vaccine is approved, economist says

While markets reacted positively this week to promising news of potential coronavirus vaccines in development, a top economist warned that the economic hit from the pandemic will be here for a long time.

A large number of small businesses that closed in March?? when restrictions around social movements went into effect?? are not going to reopen even when the situation improves, according to Raghuram Rajan, a professor of finance at the University of Chicago?s Booth School of Business.

?I think?the hit is going to be with us for a long time,??Rajan, who was also the former governor at India?s central bank, told CNBC?s ?Street Signs Asia? on Wednesday.

?As this goes on, more and more businesses find that a long period without revenue, but high cost, implies that they simply don?t have a chance, and they?re closing down,? he added.

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

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

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

?You have to vaccinate a lot of people. So, the earliest people are going to feel safe going into crowded restaurants is probably going to be by the middle of next year. If everything goes according to plan?? things are not going to go according to plan,? he said.

Operating below full potential

Economies are expected to operate below full capacity for some time despite responses from policymakers, Rajan said.?He explained that industrializedcountries saw a ?huge? policy reaction whereas emerging markets saw only a fraction of that response.

In fact, this week the European Union reached a breakthrough agreement over new fiscal stimulus that would see the EU?s executive arm tap into financial markets to raise about $857 billion that would be disbursed among countries and affected sectors through grants and loans.

Places that appeared to have contained the infection are now seeing new cases reemerging. For example, Australia?s second-largest city Melbourne went into partial lockdown after a surge in infections. That comes even after the country and its states were reporting single or double-digit daily cases just last month, Reuters reported.

?You don?t get a full economy back until?there is greater confidence for people to mingle, until the high-contact services like restaurants, travel, tourism ? all those can open up again. Till then, you?re at a 95% economy,? Rajan said, adding that countries need to now start thinking about providing long-term support to affected sectors.

Experts have previously warned that the pandemic could lead to more protectionism around the world as countries attempt to safeguard their domestic industries.

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

?A world which has strong protectionism is going to be a world that recovers much more slowly, and much of the damage is going to be done in the countries that are dependent most on commodity exports,? he said, adding it would also affect many poor developing countries as well the emerging markets.



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