By Tim Sharp, Hottinger & Co
As the UK settles down to 4 more weeks of national lockdown, we thought it might be timely to look to the future. This pandemic unlike others, will undoubtedly leave long-term scarring on the world but how deep is yet unknown.
What we do know is that after 10 months or so we can look back and confirm that the world was not equipped well enough to cope with a pandemic. So far it appears recorded deaths have reached 1.1m worldwide primarily among the elderly. It has also been interesting to observe how some countries have managed the disease better than others. What is clear is that Covid-19 has inflicted a huge global recession, but again not one that has been equal across countries.
The fiscal expansion could reach 10-15% of GDP in 2020[i]. We could see fiscal dominance become a permanent feature, with lower interest rates for longer leading to higher inflation, something most companies may now be happy to live with…..long gone perhaps are the days of trying to manage to a 2% inflationary target. Mr Osbourne will no doubt choke on his cornflakes, but with the backdrop of increased interventions over the past 10 years the inflationary target has become somewhat irrelevant in our opinion.
The economic damage inflicted looks to have had a profound effect on the young, the relatively unskilled, working parents, and vulnerable minorities. We know social distancing, enforced or otherwise, has damaged all close proximity activities. Travel has been decimated. A high proportion of businesses will be carrying much more debt and because of it many could well fail. Central bank intervention in peace times has been unprecedented across all major currency countries.
Political tensions both domestically and internationally has been heightened as the blame game has begun and has called into question the merits of globalisation when supply chains have been greatly challenged. With this backdrop what could the longer-term look like?
Recent optimistic news announced by Pfizer points to a slightly sooner than expected roll out of an effective vaccine globally, but we along with many others, caution about becoming too expectant in the short term meaning the disease will remain a threat for longer, and we are still going to have to learn how to live with it.
So, what will be the new structure of economies if we must learn to live with it for longer? Will things just go back to the way they were pre-Covid 19, or, will we stop travelling and commuting to work for good? We believe commuting will start again, but it has been proven that many industries can cope with both, so it is likely businesses will look to make efficiencies and the demand for large office footprints will decline. This pattern of virtual engagement will continue, it is here to stay, some industries adopting it more than others, which in-turn will change some patterns of living and working forever.
Technology has been an obvious winner, but perhaps the reliance on tech and the central role they have played has also accelerated the thought process that the reliance on them, and the influence they have is unnerving, and may need to have tighter regulation. We would expect tighter regulation and increased competition to put pressure on the sector in the short term, but we still remain optimistic for the sector long term.
Another obvious winner on a global scale has been China. Whilst most developed markets will struggle to get back to pre-COVID levels, China has managed to grow its economy by circa 10%[ii]. The US has responded, trade disputes will not be resolved quickly, and how this Sino-US economic relationship plays out will have a profound effect on the rest of the world. Whilst China has been a winner, it is our opinion that some emerging markets will be left with scarring so deep that they return to a period 20 to 30 years ago, where income levels had no chance of converging to developed market levels. Places such as South Africa have reportedly seen unemployment levels rise to 50% during the pandemic, and the chance of higher default is rising as some emerging markets take on debt to invest their way out of trouble.
Demagogue populist leaders, Bolsonaro, Johnson and Trump have not fared well, in our opinion, and this perhaps will lead to a shift away from their performance politics, subject to there being a credible alternative.
Finally, Covid-19 has highlighted strengths and weaknesses around common purpose. The world has challenged itself to do things better, Miss Thunberg will be pleased to see climate is still very high on the world agenda. President Xiu recently announced China will achieve peak emissions in 2030 and has set the goal of being carbon neutral by 2060. For the world’s largest pollutant economy, this is good news. Yet we have also seen a weakening in the legitimacy of international agreements, namely the US’s withdrawal from the Paris Climate Accord and the World Health Organisation.
In summary Covid-19 has slammed on the world’s brakes, and we have suffered a global whiplash. It is sure to have created long and profound consequences for business, the economy, politics and international relations. Change is inevitable, some we can predict and some we are yet to learn.
[i] Source: ASR Economics Weekly – 5 ways Covid-19 has changed the World – 5/11/2020
[ii] Source: ASR Economics Weekly – 5 ways Covid-19 has changed the World – 5/11/2020
Resource: FT World Economy 3/11/2020
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