Unfortunately, these challenges won’t end once this exceptional period of crisis-management subsides. They’ll also extend to the next two stages: the economic restart and the post-crisis policy landscape.
It’s increasingly clear that the economic reopening may not be as immediate — or as generalized — as we would all hope. The growing likelihood of a sequential restart of both national and global economies will raise a new set of challenges for central banks and governments, companies and households.
After that, we’ll need to navigate a landscape that involves more than simply disentangling what is quickly evolving into a spaghetti bowl of public-sector involvement in private-sector activities. We could also be facing an environment of more sluggish supply and demand responsiveness.
With an expected shift in corporate emphasis from efficiency to resilience, we should anticipate that many global companies will revisit their supply chains, even if it means sacrificing cost-effectiveness and just-in-time inventory management. This rewiring, while not instantaneous, will accelerate existing trends toward deglobalization, which have been driven by concerns for the marginalized, trade wars and the weaponization of economic tools.
At least in the short-term, all this will involve a decline in productivity accentuated by a higher risk of “zombie companies” due to the immense financial subsidies now being provided by governments and central banks. Meanwhile, corporate indebtedness continues to rise, as does government debt. Both trends may end up putting pressure on the Fed to resist interest-rate increases in the years ahead.
Turning to the demand side, households may well become more risk averse. To the extent they do, they’ll prove less responsive to the stimulus policies that will follow the current phase of relief. And the longer the crisis stage lasts and the harder the restart phase, the higher the possibility of a recurrence of a more frugal “great depression generation.” This would be especially likely if economies were inadvertently pushed into a “W”-shaped recovery — that is, a repeat of the lockdown-restart cycle, due to a resurgence of health concerns.
It’s important to stress that the optimal central bank response to all these uncertainties is not paralysis. Rather, it is to continue with intense work on scenario analyses, internal and external communications, contingency planning, feedback and mid-course adjustments as needed. To avoid repeating the errors of the financial crisis, these efforts will need to be supported by a “whole of government” approach that combines stimulus with a range of structural reforms aimed to counter the downward pressure on productivity and growth potential.
Otherwise, central banks may once again help to win the war against a depression, but be part of a system that fails to win the peace of durable and inclusive growth.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. He is president-elect of Queens' College, Cambridge, senior adviser at Gramercy and professor of practice at Wharton. His books include "The Only Game in Town" and "When Markets Collide."