Ashok Dhillon
Mar 31, 202010 min
The Corona Virus, known officially as COVID-19, has seemingly peaked in China, and is in decline there (if the Chinese Government is to be believed), and is now taking hold of the developed countries of Europe and North America (Canada/America). The virus has yet to significantly affect the developing countries (Emerging Markets), but the expectation is as the infection spreads, that regions like densely populated South Asia, and sub-Saharan Africa, could be the next hot-spots; and if so, then the harsh requirements to control the pandemic, globally, may last a lot longer than is being estimated at this time by the West.
The global social-economic shockwave known as the ‘Corona Virus Pandemic’ started in China and has rippled outward until now most of the world is severely impacted. And, practically all the governments of the world are in full crisis-mode in trying desperately to control it. As has been extensively written everywhere, COVID-19 Virus has changed the world, economically, socially and perhaps politically, the extent to which is still to be determined as the world locks-down to try and mitigate its deadly effects.
The full impact from the Corona Virus is at the moment impossible to determine, but it’s already become abundantly clear the world has not had to deal with a global crisis such as the COVID-19 pandemic, and is now in unknown territory. This epidemic, while a medical health condition, is nevertheless the most dangerous economic crisis to hit the global economies and the financial system. Its full impact globally, is compared to nothing less than the World Wars and the Great Depression. It is easily far worse than the 2008 crisis, which up till now, was considered the worst economic shock since the Great Depression of 1929.
The necessary lock-downs, which are at the moment the only effective means to slow the spread of the virus, are devastating local, national and global economies. In fact, nothing in history has required the shutdown of the world’s entire economies ever before, and at such short notices. In all the countries that unprecedented reality, which caught authorities and their populations unprepared, caused very significant and painful disruption to life. In ‘poor’ countries, where the unpreparedness is just daily reality, and the abilities and the resources of governments are very limited, the COVID-19 caused shut-downs that can be literally life threatening on mass scales. For instance:
In India, the Central Government mandated to immediately shut everything down, for 21 days, which had a catastrophic effect on the country’s vast population of the abjectly poor, and its equally large population of migrant labour (like China’s), who have no reserves of any sort, and who got stranded far from their villages and homes in different states where they had gone to find work.
With no means of getting back, as public transportation systems shut down without notice, millions of Indians had to start walking for hundreds of kilometres, without adequate food, water, money, or shelter, often with the very young and the very old in the families in tow, as the country literally shut down around them. It got so bad that Prime Minister Narendra Modi found himself apologizing to India’s poor for the extreme hardship he brought upon them by his reflexive reactive action.
Other poor countries in South Asia and Africa, where the infections are just starting, will hopefully take lessons from India’s painful experience and give a bit more thought about their particular weaknesses before taking such drastic steps.
Similar actions and effects had taken place across China (perhaps not to the same degree), as it had had to entirely shut down entire cities and states, and millions of migrant workers are ‘stranded’ without certainty of returning to previous jobs, and/or any means of assured livelihood. Such shut-downs are now in effect in Europe (particularly Italy and Spain), and to a certain degree in the UK, but with the governments having a lot more resources at their disposal to mitigate some of the pain and uncertainty of this pandemic on their citizens.
In the United States, particularly, as the Corona Virus infections expand at an unprecedented rate, so that it is now the largest epicentre of the pandemic, with the greatest number of infected people in the world, the shock wave is turning into an public health and economic tsunami that will swamp the US for quite some time. The recovery, when it happens in the US (and eventually the World), will be slow and painful, and not swift enough, as most analysts are predicting at this time.
The largest and the most powerful economies have come to an almost complete standstill, triggering the greatest drops in economic activity, and the world’s biggest stock markets, in record time, which in turn has forced governments and their Central Banks to roll out fiscal and monetary stimulus unheard of ever before, both in scope and size.
These massive stimulus packages, enacted incredibly swiftly as a result of the relatively recent experience from the financial crisis of 2008, and the Great Recession that followed it, are a testament to the severity of the dangers posed by the COVID-19 Pandemic. And yet, they will be inadequate to stop the economic and social damage that is being done by COVID-19. However, the multi-Trillion dollar stimulus actions are not designed to stop the damage, but are in fact drastic steps taken more to try and preserve people, businesses and systems, as best as governments can, till such a time that the crisis has passed, and the slow and painful process of recovery (restarting entire economies, and rebuilding shattered and damaged lives) can start to take place.
China, which was the first country forced to take drastic measures to try and curb the virus’ spread, and mitigate its toll on its population and its economy, is now trying to start the very slow process of returning to some form of normalcy, and its ‘post pandemic peak and recovery’ will be a kind of roadmap for the rest of the world.
China is cautiously reopening locked-down cities and states, and is allowing shuttered factories to restart. But the process is slow and cautious, and painful, as the disruption to all aspects of life was so severe that it changed, at least for the near to medium term, all routines, systems and operations of daily life and business. So, though China wants to get back to ‘normal’, there is at the moment no normal to get back to. Chinese citizens are still shell-shocked, and unconvinced that the danger is over, and are therefore reluctant to take up where they left off.
China’s huge migrant workforce, which was either stranded or locked-down because of travel bans, is unsure of their jobs and reluctant to come back from their villages to the cities. A lot of them were laid off abruptly, and were unpaid, as factories and businesses shut down in a hurry and at times without notice, and either ran out of cash, or tried to conserve whatever little cash they had on hand.
A lot of the manufacturing and service industry still has not opened and cannot open, as their business evaporated and to-date has not rematerialized. The recent and much-too-quick optimistic PMI numbers (Purchasing Managers Index) coming out of China, frankly seem a little too good to be true, even if tested against just plain common sense. And that is a problem – it is very difficult to rely entirely on China’s numbers as they are at most times, what the Chinese government wants them to be, rather than the actual reality.
Disruptions to supply chains and orders are still very much in effect, as internally most of China is still in defensive mode, to try and prevent re-infections and a second round of the epidemic. Which means overall demand is still severely muted, and may stay that way for quite some time; and, obviously exports and external orders are at the moment practically non-existent, and may stay so for a very long time, as China’s external ‘customers’ are in various states of lock-down. In fact, externally, as China is trying to recover, the rest of the World has gotten increasingly sick from COVID-19. A majority of countries are now infected, and in various stages of either total lockdown, or serious curtailment of all activities.
After China, it is the developed countries that are the most significantly impacted with COVID-19 cases, particularly in Europe and North America. And this development is going to have far reaching consequences for China, in the near and the long-term. There is of course the immediate impact of practically all business from the rest of the world having come to a grinding halt. This is not only the disappearance of export orders from China’s famed manufacturing capacity, but it would also include the supply of raw and manufactured goods that China imports to feed its massive manufacturing capacity. The disruptions to those necessary supplies will disallow China from returning to normalcy, and its economy will continue to suffer materially, posting the worst GDP numbers not seen since before its transformation (pre mid-1970s) as the current economic giant. The disruptions to its imported raw material supplies and the drying up of its export orders will hold back China’s recovery significantly and therefore its ability to be one of the primary engines that previously drove the global economy.
Europe’s current severe impact from the Corona Virus is going to test China further as it is one of China’s biggest export markets. Europe’s shut-down is also going to impact the rest of the world economies as it is also a significant market for most of the other big economies, including most of the major Asian economies (Japan, South Korea and India), and of course North America (Canada and the United States). And as most of Europe’s biggest economies remain in lock-down, such as France, Italy, Spain and to a lesser degree Germany, one of the world’s biggest trading and economic zones (the EU) has come to a virtual standstill, and the ramifications of that are at the moment, incalculable.
However at the moment, one of the biggest threats to the global economy comes from the United States. It has not only become the biggest epicentre of the COVID-19 Epidemic, with the world’s most confirmed cases (and with testing just starting), the numbers of infected people in the US are climbing at a frightening rate, and are now the highest in the world. As the numbers of infected people in the US increase, the pressure to lock-down more of the country and all non-essential activities will also increase. A nation-wide lockdown for an extended time will truly be catastrophic to the US, and to the rest of the world, as it is the world’s largest economy. But regardless of it being the epicentre, it is still considered the economic safe haven in these apocalyptic times, because its currency is the ‘Global Reserve Currency’ in which most of the international transactions take place.
As the Nation with the ‘Global Reserve Currency’, and as investors worldwide seek to convert their assets into the ‘US Dollar’, the increasing strength of the American dollar poses increasing danger to Emerging Markets of the world. This is because the roaring good times of the past decade of ‘Stimulus’ induced ‘wealth creation’ policy of the Federal Reserve and the other major Central Banks - global governments, industry and businesses borrowed heavily in US dollars, at historically low interest rates, and loaded up their balance sheets because the good times seemed to be here forever. But now, not only have the good times come to a screeching halt but all normal life has come to a stop, cash flows have disappeared, and the possibilities of default due to overloaded balance sheets, of governments and industry, have shot up exponentially.
In the developed countries, the Fed and the biggest Central Banks have the wherewithal to flood their economies with liquidity (including US dollar liquidity), and stave off the worst of the economic hit, at least for some time. But in the developing countries (or the ‘Emerging Markets’) that particular capacity of the Central Banks, to flood their economies and financial systems with ‘dollar liquidity’ is not always there, as the foreign reserves of their governments could be very limited, and ‘currency swap’ arrangements of their Central Banks with the US Federal Reserve, are at most times non-existent.
Given that in most cases, for the developing economies, the international facilities enabling the injections of US dollar liquidity to help with the payments of ‘US dollar denominated debt’ is not there, the odds of a sovereign government or of corporate defaults have increased by the day, as investors fled risky markets for the safety of the American dollar. And in a double whammy, as US dollars fled, business disappeared, leaving Emerging Market’s governments and business, short US dollars to meet their international debt obligations.
The Fed and the other major Central Banks are aware of the mounting risks, and are scrambling to find ways to prevent a financial crisis in the Emerging Markets spilling into the global financial system. International entities like the IMF (International Monetary Fund), World Bank, and other institutions, will possibly be additionally capitalized to help prevent a possible financial contagion, emanating from Emerging Markets.
Now, as money flees to the safe-haven of the US dollar from the Emerging Markets, and the Dollar continues to strengthen, it puts increasingly unbearable pressure on those governments and businesses that need US dollars to continue their transactions with the rest of the world, but find the dollars in serious short supply. This US Dollar liquidity crunch could trigger serious problems in the global financial system if the COVID-19 Pandemic is not brought under control quickly… AND therein lies the rub (Definitely no easy end in sight)... Even if on a country by country basis, the Corona Virus is brought under control, as in China at this time – a. it is not eliminated and therefore can flare again; and b. as long as there are other countries where it is not fully under control, and eliminated, the countries with the ‘flattened curve’ of declining infection rates, cannot risk reopening fully, as the virus can be reintroduced from places where it is still an active problem.
Even if this is where China is at this time, the EU, the US and the other developed countries are nowhere near there. As to the Emerging Markets (countries with some of the densest populations and the weakest economies and healthcare systems), the whole pandemic cycle is just getting started. So, thinking we are weeks or even months from being back to ‘normal’, is wishful thinking, as it is going to be quite a while before this global crisis is truly over, and life is back to normal, or some version of the ‘new normal’.