The unfolding coronavirus pandemic can become a critical turning point in changing the world order and many political, social, and other relations in the system. Along with the infection, the recession that had been expected for a long time began. Both processes have created a synergistic effect of a significantly negative impact on the economy and life. This paper will discuss whether the period of sustained growth for the world economies will come to an end. The report will cover risks associated with the unfolding negative processes, how they will affect the economy in the current year and the medium and long term, and why low volatility benefits all people worldwide in the situation of economic changes.
It is a known fact that economic development is cyclical. The explanation for the existence of cycles in the economy is explained by the fact that opportunities for economic growth are being exhausted: resources are becoming too expensive, competition for them is increasing, sales are being disrupted, credit is being spent, bubbles are inflating, production costs are rising, etc. (Dorman, 2014). As a result, the economic cycle ends with a cyclical crisis, resulting in different forms. People have observed it during the Great Recession of 2008 and nowadays due to the coronavirus pandemic (United Nations, 2020).
Often, crises are associated with a collapse in exchange values, a sharp drop in production, and mass losses. Sometimes they are realized in the form of a relatively slow decline, which has a protracted character. Analysts claim that the period of low volatility when there had been a decrease in the economic fluctuations, came to an end in 2007 (International Monetary Fund, 2007). After that, organizations and authorities have only stated that the crisis, recessions, and a period of low economic growth were looped in the cyclical economic development that could achieve neither expansion nor depression, according to the theory. Therefore, it can be concluded that recessions are back and become more vital than previously.
Crises and economic development challenges are caused by fluctuations and volatility in the markets that experience severe changes and a sharp decline in growth. In this sense, low or fewer fluctuations and mild shifts are desirable for world economies because it is found that the vast volatility has a significant adverse impact on the long-term economic growth, is costly for a business to recover after the major decline, and triggers the fast rise of an unemployment rate that bring other adverse consequences (Dickens, 2010). Moreover, the negative correlation is found between the degree of volatility persistence and countries’ long‐term growth rates (Khan, 2018).
Some analysts state that high volatility in any form is unavoidable and can be a factor that encourages growth for organizations that detect new opportunities in the recession cycle. Thus, sustained growth can also be achieved after the period of crisis and high volatility, supported by authorities and business organizations (Khan, 2018). Nonetheless, most economists agree that low fluctuations are more predictable and can be managed to avoid significant financial and other losses.
According to the theory, economic growth depends on fundamental factors, such as capital, labor, and technology in the long-term run. In contrast, in the short-term run, other variables affect the economy. In the short run, shifts in aggregate supply and demand result in changes in the output level and prices of goods, leading to the emergence of overproduction and growth of prices or lowering of output and increase in prices (“Introducing aggregate demand and aggregate supply,” n.d.).
Coming with decline in the demand or an inflation, aggregate demand is more likely than aggregate supply to be the primary cause of a short-run economic event like a recession occurs due to shifts in aggregate demand and supply and fluctuations (Khan Academy, n.d.). Furthermore, it can be suggested that the black swan events, such as the coronavirus pandemic, might cause both short-term and long-term economic changes and downturn.
Compared to the stable growth period or the Great moderation period until 2008, it can be predicted that several emerging risks in 2021 and onwards can occur. The International Monetary Fund (IMF, 2020) experts suggest that countries in 2021 will experience significant output loss, tourism-dependent, and commodities-based states will also suffer significantly in the upcoming year. The IMF (2020) also states that the considerable risks in 2021 and further will be associated with the public health and economic factors as well as with the uncertainty in the demand curve, weak tourism, lower remittances, and financial market sentiment.
For the Kingdom of Saudi Arabia and nearby countries, the general and specific risks will be related to oil price wars, oil consumption, and instability in the Middle East region, which will affect other oil exporters and countries globally. The IMF (2020) projects that the Saudi Arabia government will deal with the negative account balance, increase in consumer prices, and public health issues, which will affect the economy of the state and should be tackled in the nearest future.
To conclude, one can state that so far, the period of sustained growth for the world economies has come to an end. Nevertheless, it is crucial to assess essential questions related to emerging risks, for instance, how quickly the world economy will recover after the quarantine measures are lifted, whether it will be a fast decline and recovery or a slower and more difficult one since many supply chains will be destroyed. This can happen in the configuration of business relationships and consumer preferences. If countries and authorities can coordinate their actions and provide effective decisions to deal with the situation, world economies’ growth can again be created as the economic development cycle theory also suggests.
References
Dickens, W. (2010). Long-term consequences of economic fluctuations. New America. Web.
Dorman, P. (2014). Macroeconomics. A Fresh Start. Springer. Web.
International Monetary Fund. (2007). World economic outlook, October 2007: Globalization and inequality. Web.
International Monetary Fund. (2020). World economic outlook, October 2020: A long and difficult ascent. Web.
Introducing aggregate demand and aggregate supply. (n.d.). Lumen Learning. Web.
Khan Academy. (n.d.). The building blocks of Keynesian analysis. Web.
Khan, S. (2018). Business cycle fluctuations: Why are they so undesirable?Munich Personal RePEc Archive. Web.
United Nations. (2020). Recover better: Economic and social challenges and opportunities. Web.