The World, as we knew it, has changed. The global pandemic of the new coronavirus (COVID-19) is a major paradigm shift in all spheres of human activity - from economic to political to societal. Regardless of whether this passes relatively quickly or lingers on for many months, its impact is likely to be substantial and long-lasting. First and foremost is health emergency and the efforts to protect life - through identification, containment and treatment. This itself is a herculean task.
Simultaneously, efforts are under way all over the world to deal with the economic consequences of this crisis - through both monetary and fiscal policies operating in unchartered territories. Finally, the societal impact is yet to fully manifest itself as life is reorganized in ways not considered before - whether it is social isolation / distancing, accelerated digitization of work and relationships or rethinking globalization of trade, supply chains and human travel and tourism - with their collective reshaping impact on industries, sectors and professions.
Post-crisis economic activities
Different parts of the world will likely reorganise themselves differently post the immediate crisis management. In developed economies (G-7 and other advanced European countries, out of the G-20 group) there is going to be a permanent shift towards building greater resilience in their health care systems; greater focus on senior living facilities and conditions; a 'new-normal' acceptance of work-from-home (WFH) arrangements along with associated IT security risks; increased use of technology in B2C activities; fundamental rethinking of education delivery and e-learning systems; accelerated deployment of 5G communications infrastructure to cope with significantly higher Internet usage; greater use of robotics in domestic manufacturing to reduce dependence on global supply chains; significant and long lasting rise in-home entertainment systems, a gradual move away from urban density towards rejuvenation of suburban living (with a difference from the past suburbia defined by 'hypsterbia' - for more on hypsterbia please see www.hocroftgroup.com Nov-Dec 2019 Newsletter ) as well as acceleration of the already started trend towards less international immigration, to mention a few areas.
The demand shock will not dissipate quickly
In most economies of the developed world, the demand shock will not dissipate for quite some time even after the crisis is brought under control. The economic disruption is far widespread than the health problem. Initiatives to contain the illness via lockdowns has closed down vast swathes of these economies.
The demand shock is unlikely to be just a short-term phenomenon. Consumer habits will change for the long term. Spending on non-essential / luxury items will remain subdued for quite some time as uncertainty about employment and income coupled with negative wealth effect of asset price depreciation constraints spending. The lower income groups will of course be most impacted but the middle-class in the developed economies will also rein in their spending. The real estate sector has been a major asset class in the overall savings and wealth portfolio of the middle class, both in terms of long-term capital gains as well as income generation via rentals. With the hospitality industry expected to be down and out for a long while and cashflow constraints of individual tenants as well as commercial tenants, rental income will continue to be supressed.
The biggest impact has been on the 'gig economy' where contractual and free-lancing jobs had grown significantly in importance in the last few decades even as core full-time jobs were reducing due to offshoring and automation. Small and medium sized businesses have taken the biggest brunt and it will not be easy to get back to normal business once employees have been shed, customers shifted to other distribution channels and supply chains disrupted on top of long-term credit becoming uncertain. This will be the case even after massive short-term liquidity support being lined up by the governments - which cannot be substituted for sustainable operating cashflows, the life blood of these businesses. The same is true of the supply side, because the demand of one sector means the supply from another sector. There is already anecdotal evidence that in China, while factories are beginning to restart, the demand for their products remains down and out so they won't be producing at their pre-crisis capacity anytime soon.
A paradigm shift in macroeconomic policies
Faced with this reality, governments all over the world and particularly in the developed economies, have thrown the mantra of neo-classical economics out of the window and have fully embraced Keynesian economic solutions on a huge scale through ultra loose monetary policies and massive fiscal stimulus. In fact, there is now a growing overlap in monetary and fiscal policies as central banks have started lending directly to the business sector while the finance ministries / treasuries have opened the spigots to get cash directly to consumers and unemployed people. Some commentators say that the so-called 'helicopter money' (a term coined by former Federal Reserve Chairman Ben Bernanke) has already come into play, while others have suggested that the era of 'universal income' is almost at hand. According to the IMF, over US$ 8.0 trillion worth of stimulus has already been approved all over the world (mainly in the developed economies) and more will be required if a global economic depression is to be avoided. The so-called 'free market' is no longer a free market as capitalist governments order private manufacturers to switch from whatever they were manufacturing (e.g. cars / electronics) to producing ventilator machines and face masks. Plans are afoot that if the crisis drags on for more than a few months, governments might consider equity injections in their major companies - opposite of privatization).
Impact on developed countries' finances, asset prices and wealth distribution
What will this mean for fiscal deficit, public sector debt burden and balance sheet expansion of the central banks in the developed economies? And what will be the long-term implications for government finances, credit ratings and taxation? These issues will soon come to the fore and their political implications will define what the capitalist economies look like in the not-to-distant future. One thing appears clear though. There is likely to be wealth re-distribution from the very wealthy to the less wealthy over time via increasing taxation on unearned income and capital gains, reversing the trend of the last thirty years. Further, the bargaining power of labour is likely to increase in western democracies vis-à-vis the capitalists and the huge financialization of these economies will also likely begin to reverse as the Main Street (real economy) gains greater leverage over Wall Street (financial economy) with commensurate implications for financial asset pricing.
With major economies experiencing deep recessionary conditions, there will be knock-on effects on support for the lower income countries in terms of aid and loans. Despite the proclamation by multi-lateral lending organizations such as the IMF (US$ 1.0 trillion facility being lined up) and the World Bank, it remains to be seen how the full external financing needs of the low-income countries can be met. In view of this, policymakers and political leadership of countries such as Pakistan need to think deeply and strategically on how they will navigate the post-crisis global environment. This will require deep research and understanding of the post-crisis world economy and how Pakistan can participate in that economy in a sustainable and growing manner. This is the topic of another article soon.
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