Hoping for a restored confidence in the economy
With the great lockdown behind us, in the second phase of the pandemic we step outside and look the fire breathing dragon in the eye, trying to assess from which direction the wind will blow.
The total Corona cases have doubled since last month to officially 5,610,000 worldwide with officially 348,322 lives taken. The USA, Brazil and Russia are on top of the table while China – according to official numbers – has dropped from the 9th position to the 14th position after Iran, India, Peru and Canada as I am writing.
The most recent polls show Joe Biden getting ahead of Donald Trump by 48-40 with 11% undecided, and a 42.9% approval rating of how Trump is handling the Corona crisis versus 49% in the previous month. Putin’s popularity rating is on steep decline to 59% versus 69% in February, and Brazil’s Bolsonaro is coming heavily under fire. Since the crisis he has lost two health ministers, one was fired, the other one resigned and his opponents are calling for his impeachment. The Chinese communist party on the other hand recently held their big annual agenda summit in which they told people that everything is normal in China, and that they have won against the Covid-19, capitalizing their popular image especially compared to the US and the UK’s disastrous response to the crisis. On the other hand the European Union has called out the World Health Organization “WHO” for an independent investigation into the origins of the deadly disease, however given the controversies linked to the role of China and the WHO around the pandemic one may wonder to what extent one or the other will be ready to answer some very legitimate questions.
The ongoing rooster fight over who did what and who did it the best is actually a disguise on the geopolitical power struggle and eventually a reshuffle of the cards that is going on since March – see the article of the last issue “The Geopolitics of the Corona” – with repercussions that the average citizen will notice in the long term only when the dust has settled.
The average citizen, while trying to navigate on the unknown waters is in some cases developing a growing scepticism and a certain rebelliousness to each directive coming from the central power characterized by a lack of confidence in the system, and for now is solely focused on the economies of daily life and its outlook in the near future.
The governments would like people to spend like they did before the pandemic, however the spending will depend on the employment, and the employment will depend on the economy, and the economy will depend on whether or not there is going to be a vaccin to tame the beast.
Nevertheless with no vaccine in sight for the time being, the current conditions are likely to prevail so far for the rest of 2020, with the innovation and cash the only options for relief.
The looming impact of the Corona on the economy is manifested by a shrinking global Gross Domestic Product (GDP). The figures are out and they are not rosy: the American GDP shows a decline of 4.8% in the first quarter of 2020, while the Euro-zone economy has contracted by 3.8% over the same time period. For the first three months of the year the French, Spanish, Italian, and German economies have reported a decline by respectively 5.8%, 5.2%, 4.7%, and 2.2%, with Germany reporting its largest monthly fall in retail turnover since 2007.
With a drop of 5.8%, France reports its largest GDP drop since 1949, knocked down by 8 weeks of lock-down. The fall appears like a monster compared to the -1.6% during the debt crisis of 2009, and more severe than the -5.3% of 1968 caused by 10 million workers going on a nation-wide strike for ten weeks. All those drinks and meals that people didn’t order, all those things and services they didn’t buy, all those entertainment facilities that they didn’t enjoy, all those trade deals and investments that were cancelled or postponed, all those travel and holidays spendings that did not happen under the lock-down, seem to have been more fatal to the economy than a global debt crisis and a paralyzing general strike that even made it to the history books.
China on the other hand, in an unusual move has ditched its 2020 growth target for the first time since 1994 – ever since it began revealing its GDP objectives (usually 6%). While the extent of the Covid-19 impact on the Chinese economy is unknown, we already have a brutal 6.8% drop of its GDP for the first quarter of 2020.
These gloomy GDP numbers so far cover the first quarter of the year, and we still have nine months to go to reach the final outcome over one complete cycle. Economists are expecting an estimated fall of 2.4% of the World GDP in 2020 with -5.2% in the US and -7.3% in the Eurozone, and thus a confrontation with a short-term recession that may be around the corner.
But while the economy in the near future looks like an empty desert, the S&P Global Ratings Economists forecast a rebound in the global growth by 5.9% in 2021. Historical data from the previous pandemics show that in those cases most of the effects were confined within the first three to four months after the outbreak of the pandemic: in case of SARS in Hong Kong in 2003, the economy was severely impacted in the second quarter, but the third and fourth quarters saw a prompt recovery (GDP 1% up versus the previous year) and in case of the Spanish flu in 1918-19, in Canada the retails sales jumped suddenly 8% in January 1919 after four months of negative growth.
First of all we should bear in mind that the ultra weak consumption rate caused by the great lock-down is in fact a positive shock on savings, which will partly be spent in the quarters following the pandemic. Also the reallocation of consumption from one quarter to another, a well-known consequence of major disasters, will surprise us in the recovery phase. For example the 9/11 terrorist attack led to a substantial reallocation of consumption from the third to the fourth quarter in 2001.
According to the ECB, the French have saved nearly 20blnEUR in March, taking the total savings currently to more than 60blnEUR since the lockdown started. Italian households have put aside 16.8blnEUR, the Spanish 10.1blnEUR, and in the UK bank deposits have jumped to 13.1bln£ says the BOE. Only in Germany bank deposits have dropped as it appears the Germans like to have their savings in cash with them in times of crisis, hence the bank withdrawals.
With these savings piled up, the German insurer Allianz sees a total of 400blnEUR extra savings by the end of the year, which amounts to 3% of the EU economy.
Even the Americans have learnt to save. According to the Federal Reserve Bank of Saint Louis, the total amount of dollars held in saving deposits has jumped to 10.2trillion dollars, up 4.4% from March to April, regardless of the 2% drop of the personal incomes nationwide in the recent months.
To help people start spending, a 2.3 trillion dollars of the stimulus package is being deployed by the US Federal reserve, while in Europe the members of the European parliament are calling for a €2 trillion recovery fund, made out of public and private investments. The funding is supposed to come from clean sources, such as taxing tech and digital giants and major polluting companies.
On the other hand according to the Financial Times, with the Coronavirus the world’s richest economies will be facing at least 17 trillion dollars in public debt. The government liabilities of the OECD countries have risen from 109% to 137% this year, and it will continue due to aid packages and the fall in tax revenues. But again the governments can sell their public debt on the markets, and this is when the piled-up savings come in handy. For example in Italy last week in a record-breaking €22bn of bond issue, €14bn was bought directly by retail investors, showing that the extra household cash has found its way into the local bond market, relieving the government debt.
A while ago the subject of Corona bonds was brought up in Europe. Some member states such as Italy, France and Spain were in favor of issuing mutualised European debt papers to raise money on the markets and so to say find a common solution to a common problem, to the dismay of the northern rich member states who categorically refuse to burden the debt of their southern troubled neighbours in the EU within their conserative fiscal policies. The concept of the Corona bonds, taboo for some and an excellent solution for others, has ever since become a divisive factor in the EU.
Italy claims to have lost faith in the EU altogether considering the lack of support of the member states in recent months, accusing the Netherlands for lack of solidarity. In another open letter to Italian mayors and regional governors accused the Dutch Prime Minister Mark Rutte of not being ethical in the current crisis. But on May 18th in an unprecedented move Macron and Merkel announced a Marshal plan of 500billion Euro aid package to be borrowed on the financial markets and to be dispersed into the European economies, especially those that are the hardest hit by the Coronavirus (Italy and Spain).
Under this plan, M&M propose a grant, meaning that the member states receiving the funds will not have to repay in cash but that their liabilities would be added to the EU budget to which each member state’s contribution varies depending on the size and the state of their economy. The plan is still in foundation as the 27 member states should first agree on the grant characteristic of the aid package. In the meantime the “Frugal four “ The Netherlands, Austria, Sweden and Finland have presented their counter-offer to the Franco-German initiative; the aid money must be repaid. The ball is now in the court of the Commission, to be continued.
A restored confidence in the Europe project may be on the way or not, depending on to what extent the European neighbours manage to agree on their money, and a common political approach. The US on the other hand who has been through a rough struggle with the Coronavirus, may or may not come out of this like an American hero, depending on to what extent they manage to curb the toll on human lives and the economy. Last but not least China, amid its ambitions to dominate the world seriously and literally, may or may not benefit from the timing, depending on whether or not they will win the ongoing cold war.
With all the cash and innovation that are going to be deployed in the real economy in the coming months, there is a good probability that the West will be able to absorb the shock post-Covid, provided that the health policies put in place by the central governments start to kick in and the pandemic stays limited in time. The piled up household savings and the direct governments interventions are the luxuries the rich countries can enjoy to fix the damages of a pandemic. The rest of the world however leads a very different life, a topic to be discussed in the next issue.