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The Economic Outlook -What the Experts Say

It’s very hard to get to grips with where this crisis will lead us.


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Colin Hannan

3 years ago | 8 min read

It’s very hard to get to grips with where this crisis will lead us. There are no easy answers, but it seems that everyone is understandably searching for factual and statistical information now more than ever.

Image Credit : Evgeni Tcherkasski

So we’ve collated the articles that have stood out to us over this past week, and in the interests of balance we’ve broken them into:

  • Positive: while not quite upbeat, these at least highlight some potential silver linings
  • Negative: highlighting the grim reality we may need to face together
  • Informational: more balanced pieces with a focus on statistical analysis

We’ve focused primarily on articles that impact international business and the global economy. Nobody knows where the road will lead, but we hope the information below helps build your data-bank of knowledge.

Photo Credit : Edwin Hooper

POSITIVE

FINANCIAL TIMES, 31 March — China manufacturing index rebounds in March

Key Takeaways:

  • China’s official manufacturing index rebounded to record an unexpected expansion in March, government data showed on Tuesday, after falling sharply in February due to Covid-19.
  • The official manufacturing purchasing managers’ index rose to 52.0 during the month, according to the National Bureau of Statistics, from February’s record low figure of 35.7. The 50-point level separates contraction from expansion. The March reading came in well above economists’ forecasts of 45 compiled by Reuters.

Our Take:

Unexpected good economic news coming out of China today. It will be interesting to see how quickly China can rebound with everyone hoping that V-shape recovery becomes a reality.

IMPERIAL COLLEGE REPORT by Prof W T Pike, 23 March — An international comparison of the second derivative of COVID-19 deaths after implementation of social distancing measures

Key Takeaways :

  • A recent paper out of Imperial College suggests that as a result of Social Distancing the projected deaths in the US could be about 28,000.
  • This compares with Harvard and the NY Times just a week ago saying the numbers could be over 2.2 million people and Dr Fauci guessing that maybe between 100,000–200,000.
  • In general, this analysis suggests that early adoption of social distancing is more effective than delayed implementation.

Our Take:

Some potential good news — it appears too early for accurate predictions in any area, but certainly social distancing has very quickly proven to make a significant impact. This has been talked about from the beginning but it’s only now we are starting to see modeling based on actual data gathered. Here’s hoping this turns out to be accurate.

SSRN PAPER, 26 March — Pandemics Depress the Economy, Public Health Interventions Do Not: Evidence from the 1918 Flu

Key Takeaways:

  • Research shows a strong correlation between the level of damage inflicted by the pandemic and the depth of economic decline in its aftermath. It also showed that cities that intervened earlier and more aggressively experience a relative increase in real economic activity after the pandemic.
  • Higher mortality was associated with lower economic growth and cities with stronger commitment to social distancing grew faster in the medium term. The results show parallels to the COVID-19 outbreak — countries that implemented early Social Distancing such as Taiwan and Singapore have not only limited infection growth, they also appear to have mitigated the worst economic disruption caused by the pandemic.

Our Take:

Cause for some level of optimism, or at the very least some reassurance that the best steps we can take for the economy is to do what we’re doing — social distancing.
Significant research into the economic impacts of social distancing and shutdowns during the 1918 flu epidemic showed that those US cities that did so for longer periods of time had significantly better economic recoveries than those less aggressive in their response.

FINANCIAL TIMES, 25 March — Bill Ackman makes $2.6bn in credit market rout

Key Takeaways:

  • The founder of Pershing Square told investors on Wednesday that he was ploughing his US$2.6bn in recent market winnings back into the equity market, saying he believed the US government was “all-in” to mitigate the damage the virus has inflicted on the economy.
  • Encouraged by the Trump administration’s approach to the economic fallout, Mr Ackman said he removed all the hedges he had put in place and was now betting heavily on a US recovery.

Our Take:

It seems clear that Mr Trump will do everything in his power to try to prevent or minimise the effects of a recession in order to benefit his own re-election prospects. Though the market is not the economy, any cause for investor confidence is worth noting. Whether confidence will remain balanced if the shut down becomes more prolonged is a different question.

Photo Credit: Amelie & Niklas Ohlrogge

NEGATIVE

GUGGENHEIM INVESTMENTS, 27 March — The consequences of policymakers returning to the same tools employed in the financial crisis.

Key Takeaways:

  • Businesses and households have been carrying larger debt loads and smaller cash reserves, confident that policymakers will restrain the severity of the consequences created by any shock to the economy.
  • The average ratio of government debt to GDP for G-7 economies reached 117 percent in 2019, up from 81 percent in 2007. The total debt of U.S. nonfinancial businesses has grown by about $6 trillion since 2007, while cash on hand has only grown by $1.7 trillion.
  • If there is too little money made available, the prices of assets used as collateral backing loans will spiral downward. If there is too much, inflation could spiral out of control.

Our Take:

An interesting & informed opinion piece on the greater macro forces at play, and the sheer scale of the task ahead of monetary policymakers around the globe. The debt-laden economic backdrop means the economic future is more likely to feature strong deflationary or inflationary forces.

WALL STREET JOURNAL, 27 March — Coronavirus Measures Could Cut Economic Activity by a Quarter, Report Says

Key Takeaways:

  • Measures taken to curb the spread of the new coronavirus could lower economic activity in the U.S. and other developed countries by 20–25% according to the OECD
  • If the measures are sustained for three months, the OECD forecast total annual output would be 6% lower in the developed economies. Under this scenario for the U.S., where the economy was forecast to grow 2% this year before the virus struck, the OECD estimates output would fall 4% in 2020.

Our Take:

No good news anytime soon. Only two weeks ago there were questions about whether the US would actually move into recession, yet more recent stats point to an extremely heavy negative jolt.

McKINSEY, 30 March — Beyond coronavirus: The path to the next normal

Key Takeaways:

  • A comprehensive assessment of the five stages that lead us from the crisis of today to the next normal that will emerge after the battle against coronavirus has been won.
  • A McKinsey Global Institute analysis indicates that the shock to our livelihoods from the economic impact of virus-suppression efforts could be the biggest in nearly a century. Other impacts could include a complete re-assessment of global supply chains and globalisation in general.

Our Take:

This is one of many pieces (Ray Dalio being another noteworthy example) to point to a bigger shift in the global political and economic order. It makes the case that, whatever the new normal looks like, it will be unlike anything seen prior to the pandemic.

Image Credit : Erik Mclean

INFORMATIONAL

THE ECONOMIST, 26 March — Rich countries try radical economic policies to counter Covid-19

Key Takeaways:

  • Nothing in history has helped boost state power in Europe and America more than crises. The State begins to play a very different role in the economy — not just during the crisis, but long after, as forces encouraging a “temporary” expansion of state power tends to result in it becoming permanent.
  • More countries may seek to become self-sufficient in the production of “strategic” commodities contributing to a further rollback of globalisation. But the redefined role of the state could prove to be the most significant shift. The rules of the game have been moving in one direction for centuries. Another radical change is looming.

Our Take:

While it is easy to ratchet state spending up, it is much more difficult to push it down. And once the door is opened to this incredibly large level of state intervention, the precedent will be set — and the expectations raised — for the level of intervention during future recessions. This sets the scene for a potentially significant shift in the role of Government going forward.

FINANCIAL TIMES, 25 March — Get ready for the $4.5tn takeover

Key Takeaways:

  • The US signed off on a $2tn aid package on 25th March and the global bailout — central bank liquidity support included — will have a sticker price of more than $4.5tn.
  • Such expedient interventions will create legacies that will take years to unwind. In time, loans must be recouped or written off, and equity stakes sold.
  • Coronavirus is dispelling any doubts that ultimately the state, not business, is in charge. It can create money or pencil in future tax increases. Businesses cannot.

Our Take:

There has been so much written in recent years about the rise of China and the timing for when it might become the global economic superpower. It’s certainly going to be interesting to see whether Coronavirus is the tipping point in that transfer of power.

THE ATLANTIC, 26 March — The 4 Possible Timelines for life returning to normal

Key Takeaways:

Epidemiologists interviewed stressed that they have no idea when life will be unfrozen, but they walked through a series of possible timelines to safely start leaving the house to make money or do fun things again. Below are those timelines, including some turning points to look out for in the coming weeks and months.

  • Timeline one — 1–2 months — In a month or two, public-health authorities and researchers will likely have a better sense of whether those who recover from an infection are immune to future infections, and if so, for how long.
  • Timeline two — 3–4 months — maybe it becomes possible to isolate contagious or more vulnerable people, while a large portion of the population returns to something resembling normal life. And in three to four months, researchers might have identified a treatment for COVID-19 — not a cure, but something that could quickly and reliably ease symptoms and prevent deaths.
  • Timeline three — 4–12 months — we’ll find out if COVID-19 is seasonal sometime in the next two to three months, and here is where Timeline Three splits in two: In one scenario, the virus recedes in the summer. In the other, it doesn’t. In both, at least some of the social distancing measures now in place continue into the second half of the year when hopefully the world would be in a better position to absorb another wave of infections.
  • Timeline four — 12+ months — Spring 2021 is about the earliest anyone expects a vaccine to be available. If researchers are making something that’s going to be pumped into the arms of potentially billions of people, they need to be extremely prudent and that takes time and lots of extensive testing.

Our Take:

Ultimately things will become a lot clearer over the next 1–2 months, which will bring much more certainty over timelines. All scenarios lead to some tentative level of relaxing of the current controls on movement in the coming 90 days. In the meantime, we have no choice but to exercise patience.

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Colin Hannan

Hotel developer, sustainability advocate, economist. Doing my best to use my words.


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