Kuntarahoitus: Corona – not just a temporary disruption


Info box

Who: Timo Vesala, 45 years

Education: University of Helsinki, PhD, 1994-2005, economics

Career in MuniFin: From the year 2019

Current role: Chief Economist

I am old enough to remember the bursting of the dotcom-bubble twenty years ago. It was a painful correction in the stock market but there was not much impact on people’s daily lives.  When the global financial crisis hit in 2008, I was already in the business of making economic forecasts. In December 2008 – more than two months after the Lehman disaster(!) – I was afraid of being too bearish as I was projecting mildly negative growth for Finland in 2009.

Little did I know… Finnish GDP tanked by a whopping 8.1 % in a single year. In fact, on GDP per capita basis, we are still to reach the previous peak level of 2008.

Having experienced all the uncertainty in those years, and again during the Eurozone debt crisis, I thought the visibility of economic conditions could not get any worse. Unfortunately, the current corona crisis is again challenging my judgement.

The corona pandemic is not a manmade financial crisis but a health emergency. The economy is experiencing a severe drop in activity as heavy containment measures lock down schools, ban travelling and prevent ordinary citizens from consuming basic services and entertainment.

Markets are panicking because nobody knows how long the acute phase of the pandemic will take. As long as the global supply chains remain disrupted and households cannot access the services they normally like to consume, uncertainty remains high. Many small and medium sized enterprises and households may face a potentially dramatic contraction in their income stream.

The good news is that monetary and fiscal authorities seem to have the 2008–2009 experience fresh in their minds and understand it is much better to err doing too much than too little. We have already seen faster and bolder stimulus than after the Lehman collapse. Central banks have taken strong and coordinated actions to support the flow of credit to the real economy and to maintain adequate liquidity in the financial markets. Governments, in turn, have deployed various measures to prevent broad-based insolvency in the corporate sector and to avoid unnecessary layoffs.

Monetary and fiscal stimulus will soften the impact of the corona shock and help the economy recover once the pandemic is contained. The stronger is the fiscal back up, the steeper is the ultimate recovery and the less we see permanent damage to economic fundamentals.

These are very exceptional times that nobody would have wished to live through. A well-functioning welfare state will turn out to be an invaluable asset. There will also be many lessons to be learned. If societies play their cards right, people come stronger out of the crisis. We need to figure out, how communities and businesses can become more resilient against global shocks such as a sudden outbreak of a pandemic.

Such a disruptive experience will probably make some business models obsolete, but also give rise to new ones. Many books will be written about how global value chains, politics, and consumer behavior are likely to change. As future corporate managers and business leaders, current university students will play a key role in capitalizing that insight for the common good.