12 minute read
IS THERE LIFE AFTER DEATH?
The tens of thousands of views that “The countdown has started!” post has received are for me the measure of impatience and hope with which the public waits for even a partial return to an economically active life, aware that the current situation can only be temporary. It can only be a short-term solution that, the longer it lasts, the higher the risk of deep and harmful effects on the economy, similar to an economic ‘death’.
BY RADU CRACIUN
Advertisement
This is why I think it is worth taking a closer look at how the return to work and social life is set to happen. The answer lies in the very reason of us having to stay home. We are basically dealing with two as yet unresolved issues: the ability to detect and isolate the sick and the under capacity of hospitals to treat all those in need of medical assistance. Hence the three critically important conditions that the European Commission identified that would allow Member States to lift containment measures and resume economic activity: a) reduction in the spread of the virus, b) large-scale testing and higher monitoring capacity and c) setting up a significant reserve of medical capacity.
So, for the economy to stand any chance of a safe restart, we have a maximum of two months to meet the three conditions. To be honest, though, the three criteria will not guarantee a return to pre-containment normalcy. Fears will continue to haunt both employers and employees. The spell that we are going through will have businesses realize that people are in fact the weak link in the production chain. The famous adage “people are our most valuable asset” could for some take the meaning of “people are our main vulnerability”.
At the end of the day, it is not the human viruses that attack machinery and robots (a different kind of bug is at play there...). This is why, before any fundamental changes to current economic models occur, the pandemic will act as an accelerant of some trends that pre-existed the crisis. That is clearly the case of digitization and robotization. Companies are therefore, expected to allocate in the near term vast amounts of money to tech upgrades that would reduce their reliance on human resources, in particular on those who need to leave home to get to the production site.
That would mean that only a portion of those left unemployed will find work, with the rest at risk of social and economic marginalization. These changes would probably speed up the introduction by some countries of a universal basic income, meant to provide a standard of living on the verge of decency to those left out by the new economic makeover.
Businesses will also realize the following fact: supply chains will have to become more flexible, and bear the incurred cost. The justin-time delivery model may lose its attractiveness, as it becomes a significant weakness during times of crisis similar to the one we are experiencing. The poor management of a pandemic by a state that is the lynchpin in the production chain may bring whole industries to their knees in other countries, irrespective of their preparedness to respond.
In these circumstances, I expect to see a rethink of the cost-flexibility balance where an increase in costs to achieve more flexibility might be considered acceptable. The lowest price will no longer be the priority, but whatever is more predictable, easier to control and even geographically closer. We are already seeing plans to relocate from China to other areas and European companies may be tempted to bring their offices back to Europe. Globalization may be replaced, at least in part, by regionalization. Such a trend may be boosted by lower reliance on human resources and therefore, lower human resource costs in emerging economies. Eastern Europe may benefit from these relocations, but the selection criteria cannot focus on labor costs alone, already on the rise, but also on the quality of infrastructure and HR.
Restarting the economy, however urgent, will involve mistakes and hesitations, more so as new waves of the epidemic will occur until herd immunity is achieved and/or a vaccine is found.
Studies thus far show that we should expect to live with SARS-COV-2 and not its disappearance in the next months. This entails more moderate measures of social distancing to allow for progressive and manageable immunization of populations. It could also mean that countries where contagion has been limited may see a stronger second wave of infections.
Which countries will be the most prepared to resume economic activity? Those which not only have robust detection and treatment systems in place, but also the ability to inject considerable amounts of money into the relaunch. A Bloomberg title sums it all up: “Germany Will Be RADU CRACIUN a Post-Coronavirus Winner. Fiscally sound governments will be able to pump money into their companies unhindered by state aid rules.”
Romania, for example, which entered the crisis with a 4% budget deficit, the highest in the EU, due to the unfounded economic expe¬riments of the past, will be in a bad position insofar supporting its companies is concerned. The calls from the business environment for financial packages worth 15% of GDP are unrealistic, as they cannot be financed at a reasonable cost. Romania’s low external debt ratio is irrelevant when that debt will have to be paid back from the lowest budget relative to GDP in the EU.
Actually, all countries that the crisis found in a frail fiscal position or highly indebted are now turning to the international financial institutions. IMF’s chief economist recently announced that 100 of the IMF’s 189 mem
bers asked for stimulus packages to help them overcome the economic shock. It follows that the $1 trillion worth of funds will have to be supplemented to cope with the requests.
The European Union will also throw in huge amounts of money to beef up the economies of Member States, EUR15.6 billion to be more exact.
Not all industries of the national economies, however, will start at the same time. The first to resume operations are those that cover people’s basic needs: food, clothes, services that help social distancing, etc. The ones to be among the last to restart will most likely be the non-essential services replace able by activities providing similar benefits which, however, do not enable to socially distance. This category includes long distance travel, tourism, leisure activities that involve crowds, etc.
Restarting the economy, though, will not only rely on governments or external aid stimulus packages. Central banks will have a major role to play. The “money printing” policies are important, but they cannot go on indefinitely. Interest rates are already low, so further drops will not bring new rewards. We may witness a rush for currencies competitive devaluation that would render exports more competitive and help them bounce back.
In this context, countries such as Romania should want a weaker currency and drop the popular and especially institutional concern about the currency devaluation... (raducraciun.ro)
CORONAVIRUS LOCKDOWN TANKS THE US ECONOMY
Mark Mobius
A recent recovery in financial markets after weeks of intense turmoil is likely to be short-lived, according to legendary emerging markets investor Mark Mobius, who warned Tuesday of the "incredible" implications of the global coronavirus shutdown.
Mobius, the founder of the eponymous Mobius Capital, said markets have the potential to sink even further as banks begin posting their earnings during ongoing volatility caused by the coronavirus pandemic. "I don't think we're at the absolute bottom yet because the implications of this shutdown are incredible," Mobius said in an interview with CNBC aired Tuesday. Markets have been vola - tile over the past month due to rising tensions over coronavirus, suffering wild swings and record-breaking falls as investors scrambled to make sense of the virus' likely economic impact. At the time of writing, there have been more than 126,000 deaths from the virus, which has infected almost 2 million people worldwide, according to data by John Hopkins University. "Although there are some opportunities to buy, I would say it's probably a good idea to keep some powder dry for another downturn. We might see a double bottom," Mobius told CNBC. Although he did not elaborate, Mobius' comment about keeping some powder dry likely meant retaining liquidity such as holding cash, or holding other liquid positions.
Mobius' comments came as stocks recover from recent lows. The S&P 500 last week posted a 12% weekly gain, its best weekly return since 1974, while the Dow Jones industrial average rose 13% in the week.
Markets were spurred on by the Federal
THAT STOCKS COULD SEE A 'DOUBLE BOTTOM' AS THE
Reserve's announcement of an additional $2.3 trillion programme of aid to help weather the economic storm caused by the virus and subsequent lock down.
THE US TO PROTECT THE ECONOMY "We think that some of the governors will be in really good shape to open up even sooner" than the end of the month, Trump told reporters Tuesday, according to a report from Reuters.
The president has persistently suggested that he wants to open the US back up as soon as possible, likely fearing reprisals from voters in November's election if the economy crashes significantly this year thanks to an extended lockdown. Trump's plans, however, remain uncertain, with many in the financial sector expressing skepticism about reopening the economy in short order.
JPMorgan Chase CEO Jamie Dimon on Tuesday said he doesn't think the US economy will open in May, after the bank posted lower than expected first quarter earnings results.
Although he didn't put a date on it, Mobius seemed to tacitly endorse Trump's plans, telling CNBC: "I think we have to open up again in some way, because otherwise the collateral damage is going to be incredible." "You think about the people who live day to day ... you got to get the economy going again." BY SALONI SARDANA
BANKS MUST BE KEY PLAYERS IN THE CORONAVIRUS FIGHT
In the financial crisis of 2008, banks failed to show a supportive, caring side to the wider society. They can and must make amends as the world fights against the coronavirus pandemic.
The world has seldom faced such a sombre and serious outlook in peacetime. Like all major crises, the onslaught of the coronavirus pandemic was unplanned for and has left governments struggling to catch up with policies and allocation of resources.
The first concern must be for the fatalities that are rising every day and with no clear indication as to when this might stop. There will definitely be many more thousands of deaths, most probably tens of thousands and, possibly, hundreds of thousands or even millions. The Banker sends its condolences to all those affected. Human factors such as these put the economic consequences of the pandemic into relief, at least, in the initial analysis. But on top of the human cost, the economic damage is going to be so considerable that the survivors will be paying for it for years to come. Right now, economists have no idea what this cost will be. The biggest unknown is when the crisis will end – in three months, six months or more than a year? Most big companies and banks can survive a short shock but the more it stretches out the more of them will find themselves in difficulties.
Governments are responding with loan guarantee and wage support programmes but they, too, could find funding themselves difficult in the long run. If their only option is to print money, inflation has to be a concern. What is certain is that economies will contract in double figures, budget deficits will balloon and debt-to-gross domestic product levels will rocket to the hundreds of percent. Countries in poor fiscal condition going into the crisis, and which ex pe rience the worst effects of the pandemic, will suffer the most, Italy being the prime example. Countries in better shape, such as Germany, need to put their fiscal resources to work, as quickly as possible, if the eurozone is going to survive
A SUPPORTIVE ROLE
For banks there is a real opportunity to support customers, employees and societies in a way that was lacking during the financial crisis. This is their moment to recover from the reputational damage done last time when they were seen to be the cause of the problem but with the bill being picked up by everyone else.
Banks will feel the pain of the pandemic in terms of rising non-performing loans and lost revenues, but they are also getting government and central bank support from the loan guarantees, the liquidity measures and forbearance on capital requirements and stress tests. They must respond positively. They must start by ending all bonuses and cancelling dividends so that the resources of the bank can be focused on helping both retail and business customers with mortgage and loan holidays. Banking associations should also step up to the plate by co-ordinating measures where they don’t fall foul of competition rules and by putting out an industry message about what is being done.
A DIFFERENT FUTURE
As with all crises, the coronavirus outbreak begs the question as to what reforms and changes should be put in place once this is over. After the financial crisis, a lot of reform was done to banking regulation, but in the wider economic and social sphere almost nothing was done. This time needs to be different or the rise in populism in Western countries will mutate into something much uglier. Raising taxes and reducing avoidance by international companies, especially tech companies, would be a good place to start so that they pay their fair share of the costs. But there are bigger issues to be addressed such as climate change and the related issue of how production and supply chains are organised.
A locked-down economy is a climate-friendly one but it is not very enjoyable or wealth creating. The issue to address is how economies can be reorganised with a more circular production system that takes account of use of resources and recycling from the outset. The old system whereby production was centred on the lowest wage economy (China, Bangladesh, Vietnam) and everything shipped out of there has shown its weaknesses in the current pandemic.
These are radical ideas and should not be seen as an affront to globalisation, which in spite of its critics has lifted millions out of poverty.
