The post-Covid zombification of superior economies will proceed, warns the EIU

People pass by the New York Stock Exchange.

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LONDON – The coronavirus pandemic is likely to cause permanent “zombification” of the world economy, a leading research company warns.

Agathe Demarais, the Economist Intelligence Unit’s global forecast director, suggested that these “zombie” features, previously associated with “the Japanese economy – slow growth, low inflation and high debt – spread to advanced economies after the pandemic will”.

In the EIU’s fourth quarter economic forecast report released on Wednesday, Demarais said Japan was viewed as an “economic curiosity” prior to the coronavirus outbreak.

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

The Japanese government’s attempt to stimulate economic activity through fiscal stimulus has failed, she said. The debt-to-GDP ratio rose to 240% and inflation remained “persistently low”.

As a result of the coronavirus, these traits of slow growth, low inflation, and high debt would become common in advanced economies in the coming decades, Demarais said.

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

Indeed, these could be viewed as advanced economies that have taken “exceptional” fiscal measures in response to the coronavirus crisis. So far the G20 countries had announced economic stimulus programs worth around 11 trillion US dollars, which is almost the size of the Japanese, German and French economies combined.

Demarais predicted that public debt-to-GDP ratio in industrialized countries will rise to around 140% of GDP.

Previously, this would have raised concerns about the sovereign debt crisis, but this time the central banks have funded and enabled the introduction of stimulus packages. And as inflation remains low, this national debt will “decrease over time and, most importantly, cost practically nothing,” Demarais said.

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

The EIU also warned that government support measures such as vacation programs will keep otherwise unprofitable companies afloat, “put a strain on productivity and innovation, and increase the number of” zombie “businesses”. Rather than investing money in research and development, companies that benefited from government aid would pay those loans for years, Demarais added in the report.

Kevin O’Leary, a judge on ABC’s Shark Tank, has urged that zombie companies should not be incentivized. He said on CNBC’s Capital Connection last week that this money should go to people who really need it.

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