What does a post-COVID-19 economy look like? Based on the response we have seen to the crisis so far, some things are already becoming clear.
The number of new COVID-19 infections seems to have peaked globally. While testing is quite uneven, this does offer the prospect the apex of the crisis is passing. More attention must be given to the nature of the eventual recovery.
Recessions have historically heralded significant changes to economic orthodoxy. Talking of V- or U-shaped cycles is therefore misleading in the sense they imply some symmetry to the cycle. This recovery could well be more like untying a huge and complex knot.
The length of the downturn is also likely to have a material influence on these outcomes, particularly in a fast-moving cycle. As Yuval Noah Harari writes in The Financial Times, short-term emergency measures will become “a fixture of life”.
“That is the nature of emergencies,” Harari says. “They fast-forward historical processes. Decisions that in normal times could take years of deliberation are passed in a matter of hours.”
Despite the uncertainties, some aspects of the post-pandemic world are already manifesting. Below are some of the key points. Many of these are premised on the recovery being characterised by living without the virus, rather than living with the virus. If it’s the latter, much more will be different.
“THIS RECOVERY COULD WELL BE MORE LIKE UNTYING A HUGE AND COMPLEX KNOT.”
Zero interest rates
The world started this downturn with low rates but will finish it with rates genuinely at zero; the new normal everywhere in the developed world. Quantitative easing (QE) is now more common than not.
Fiscal balances are deteriorating extremely quickly. There will be no low-debt economies. The lack of room for conventional monetary policy will constrain fiscal repair after the crisis as monetary policy will be less able to buffer any downside shocks.
Advanced economies – and even some emerging markets such as the Philippines and India – now all do QE. None of the countries that undertook QE during the global financial crisis (GFC) had restored central bank balance sheets. Rather than being an anomaly, therefore, QE is the norm.
The Bank of England is even directly financing the UK government. During this crisis, central banks have outwardly coordinated with their governments and deputised banks to exercise forbearance.
We have drifted away from central banks independently targeting inflation under generally accepted rules of prudence. We are now in a misty environment where rules are more ambiguous and accountability less clear.
Excessive private sector optimisation
Regulators focussed heavily on the banking system in the wake of the financial crisis. Outside a handful of other specific sectors, the invasiveness of regulation in the broader corporate sector across many countries has been more limited. Expect the focus elsewhere to rise.
As independent strategist Gerard Minack has suggested, there’s a not-insignificant chance of “at least temporary restrictions on stock buy-backs and perhaps also changes to the tax treatment of debt to discourage leverage”.
“Corporate bailouts are likely to require equity haircuts,” Minack wrote. “That is, the public sector taking an interest in return for assistance.”
Attitudes to risk
After the GFC, investment and consumption in many economies took a long time to return; dread risk was hypothesised as one driver of those behaviours.
Dread risk is the idea catastrophic events can lead to an “exaggerated sense of fear and insecurity, [causing] people to over-estimate systematically the probability of these dread events re-occurring”.
The current global shock is more correlated and much sharper then the last crisis, suggesting the impact on behaviour is likely to be larger and longer lived.
Fast, aggressive policy
The Overton Window has broadened. Throughout the crisis governments have delivered strong and experimental policy extremely quickly. This has likely widened perceptions of what is possible.
Policies such as universal basic income (in Spain, for instance) and wealth taxes might become more mainstream. This shift in perspective may even have positive knock on effects in areas like climate change as we realise what can be done.
The policy response across countries has been aggressive and multipronged. There has been a particular focus on ‘protecting companies’ which has some appeal if the downturn is very temporary.
The more the downturn is protected, however, the more firms that are unfit for purpose will survive. This is not a new problem but will likely take a leap forward this downturn and impact the speed of the recovery.
Supply chain simplification
Long, complex, opaque and just-in-time supply chains no longer seem fit for purpose. Some supply-chain simplification and onshoring (perhaps aided by other influences such as 3-D printing and robotics) seem likely, with differentiation between human and product supply chains perhaps a focus.
Casualisation has grown in a number of economies since the financial crisis, with technology and insufficient demand both likely playing a role. Substantial rises in unemployment typically take quite some time to unwind.
Many advanced economies will face double-digit unemployment levels at some stage through 2020, and unemployment is arguably now China’s largest policy challenge.
As the global population ages, funding retirement was already a creeping global crisis, particularly following the fall in interest rates after the GFC. The collapse in yields across countries and durations during this crisis, as well as the decline in equity values, is worsening the problem.
Centrally directed economies, particularly in Asia, seem to have done better at managing the crisis. China and Russia also seem to have leveraged the crisis to raise their ‘soft-power’ status.
Francis Fukuyama makes the argument that the main dividing line governing effective crisis response has been “whether citizens trust their leaders and whether those leaders preside over a competent and effective state.”
Tech, government and privacy
The importance of ‘track & trace’ to the medical aspect of this emergency has heightened the urgency of resolving the tension between technology and privacy.
The reality is the more personal privacy is subordinated to the requirements of health authorities, the more effective we are likely to be in battling the pandemic.