Page 11 - economic report 2020

The external environment of

the Andorran economy

I. The international economy

1. The main features of economic development in 2020

2020 will be remembered as the worst economic 2020 saw the sharpest fall in world
year in peacetime due to the global pandemic GDP since World War II.
caused by the SARS-CoV-2 virus (COVID-19).
The COVID-19 health emergency, which started
in China at the end of 2019, became a global pandemic in March 2020, paralysing the global
economy for weeks and incurring the highest economic losses since World War II.

The financial markets were the first to feel the negative impact, in February and early March.
Investors suffered from the major surge in risk aversion and volatility, which set off a chain of
historic falls in the stock markets and in commodities. Faced with this situation, the main central
banks acted rapidly and robustly to ensure abundant liquidity and favourable access to credit,
while anchoring the low interest rates. There was then a sudden drop in the indicators of business
activity, consumption and investment, due to the lockdown measures that governments were 9
forced to impose, restricting the movements of the population and stopping non-essential
activities in order to contain the spread of the pandemic. Although social distancing policies were
absolutely essential to avoid a higher mortality rate, they caused the worst decline in economic
activity since World War II.

Rapid, robust response from the There are three features of the economic
economic authorities to combat crisis caused by COVID-19 that distinguish it
the COVID-19 crisis. from the 2008 global financial crisis. Firstly,
the shock was not the result of accumulated
macroeconomic imbalances (excess credit and
a property bubble) but a double shock, the combination of a drop in productive capacity (supply
shock) and an unprecedented fall in aggregate demand as businesses and consumers stopped
investing and consuming during lockdown (demand shock). The second difference is that, in
this crisis, health factors determined how business activity and policies developed, leading to a
zigzag trend in GDP based on the waves of virus. Finally, the third difference is that this time the
measures taken by all the governments and economic institutions to soften the impact of the crisis
were rapid and robust. Firstly, in Europe, the remarkable actions of the ECB that enabled states
to finance the increase in public spending without increasing the cost of the debt. Secondly, the The external environment of the Andorran economy | I. The international economy
European Commission announced on 20 March that it was temporarily easing the fiscal rules of
the EU Stability and Growth Pact so that member states could take on debt without restrictions. In
addition, for the first time in EU history, the European Council managed to pass a European fiscal
instrument on 21 July 2020 that was financed by a joint debt issue, called NextGenerationEU.
Added to these European measures, also taken in other regions of the world, are those adopted
by the governments of advanced economies, focussing especially on guaranteeing liquidity for
businesses and maintaining workers’ and businesses’ income. According to IMF estimates, the
economic collapse could have been at least three times worse without these support policies that
were set up rapidly around the world.