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Service Sector Emerging as Achilles Heel for Global Economy

The lockdown recession has been odd from the very start, and that has become more and more apparent with every passing month. The shock was sudden with absolutely no time to prepare. The pandemic was not expected. There was a woefully inadequate response at the start. Most governments worldwide ignored the threat until it was really too late to do much about it.

The only recourse left was a massive quarantine of the entire world. By every measure, this has been a colossal failure with a minimum of 31 million cases worldwide and over 970,000 deaths. The hoped-for peak in April was reached, but the numbers never declined. In many nations, they have started to rise again. Despite the failure of the lockdown strategy, this is being tried again with the assertion that things would have been so much worse had there not been a quarantine in place. Frankly, there is not much evidence to support this assertion as the pandemic spread in places where lockdowns have been imposed strictly.

After several months of the lockdown, several things have become clearer. The greatest impact on the economy has been in the service sector and for the most obvious of reasons. The lockdown was designed to keep people apart because it was asserted that infections could be managed by reducing proximity. The restrictions are well known by now: social distancing, wearing masks, relentless hygiene and the like. These restrictions affect the service economy far more directly than other segments such as manufacturing. If people are to remain separated, businesses that rely on proximity will be shuttered. That has been taking place with closed restaurants, shuttered amusement parks, canceled events and postponed conferences. The industries that cater to these sectors have been severely affected, everything from the hospitality industry to travel and entertainment. These are also industries that have a disproportionate number of low wage and low skilled workers. This is the cohort that has been most severely affected by the job losses.

In recent weeks, it has become apparent that there is some global economic recovery underway, which is being led by the manufacturing sector as well as construction. The global consumer has been essentially cutoff from the service economy. Consumers have shifted their spending to other sectors. That has pushed some growth in nations that do a lot of this manufacturing; but for nations that rely on service spending, there is no sign of a rebound and of late they are heading in the opposite direction. Spain is not pulling out of the recession, and neither is Italy or Greece. Germany has been making strides, and the U.S. has seen sectoral improvement, while other parts of the country continue to falter.

This situation is about to worsen, however. There are now serious conversations regarding a renewed lockdown in some European nations as well as states in the U.S. The pandemic has not eased in any significant way, and the seasonal change is not going to help. The fact that lockdown and isolation has been ineffective thus far has not stopped governments from asserting that it will work this time. The fact is that the virus is ubiquitous and shows no signs of fading. A renewed lockdown strategy will succeed only if it becomes a permanent policy. As soon as the restrictions are lifted, the virus spreads again. That means the lockdown would have to remain in place forever, and that is not remotely possible. The development of a vaccine is the long-term hope, but that is at least a year or two away in terms of distribution. A shutdown can't last that long without crushing the global economy.

-- Chris Kuehl, Ph.D.

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Sunday, 17 January 2021