14 minutes reading time (2800 words)

Strategic Global Intelligence Brief for April 17, 2020

By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—US Economy

Jobless Claims Top 20 Million
The jobless numbers are hitting levels that are truly unprecedented—the total job loss from the 2008 recession was around nine million; this job decline has already been double that level. As threatening as this has become, it is important not to lose sight of the unique aspects of the issue. As has been determined by several polls of the employers, they are not looking at this period the same way they looked at 2008. They are treating this as a furlough situation as opposed to a true layoff. The estimate is that 80% to 85% of these lost jobs will be added back as soon as the lockdown is lifted. Most of the employers are telling their workers that this is the plan. That situation changes the longer the lockdown stays intact, however.

Workshare Options Expanding
Roughly half the states in the U.S. have some version of a program that has been called workshare. It is akin to the system the Germans have been using for decades—"kurzarbeit." This allows companies to move their workers to some sort of part-time status. Those workers are allowed to apply for unemployment benefits that are prorated according to what they are making from their employers. This means they are keeping their jobs and will be available to resume full-time work when the lockdown is lifted. The company gets some relief and the burden on the unemployment system is reduced. The German system has long been seen as a real advantage for the company and worker as they are able to maintain their relationships with one another and swift recovery is made possible.

Second Wave Is Largest Threat
As the U.S. starts down the road to some kind of end to the lockdown, there are lessons to be learned from others that have already tried this. The most worrisome development would be a second wave of infections that would be severe enough to require another lockdown. The ability to overcome a second shutdown is very much in doubt as the consumer will be unlikely to resume old habits if they think they will be plunged back into crisis. The original push for rapid reopening advocated by Trump has been tempered for the time being as the decisions have been left to the states, but there are wide differences between them. That may create its own version of chaos.

Short Items of Interest—Global Economy

China Raises Numbers of Infections
China clearly underreported the extent of the viral crisis for months. This will be a major blow to the nation's credibility for years. There is now a move to be as accurate as possible. That has led to new reports of infections in places where it had been assumed a peak had been reached. The numbers are still not as high as they were at the start of the outbreak, but it has added to concerns about the rate of secondary infections. It simply does not take long for an infected person to pass the virus to large numbers of people if they are not isolated. In the absence of universal tests, it has to be assumed that everybody has the virus and can spread it.

Russia Finally Admits Crisis Level
For months, the Putin regime has tried to assert that Russia has not been affected by the COVID-19 virus. This has been dismissed as pure propaganda as observers in the country have been contradicting the assertion. Now Putin has reversed his position and admitted that there is a major problem with thousands of fatalities and widespread infection. The shutdown orders are being aggressively enforced and draconian tactics have been employed. The rate of infection is now thought to be among the highest in the world.

The Ostrich Alliance
They might be more accurately referred to as the Confederation of Dunces. These four dictators have elected to ignore the COVID-19 threat and have made no efforts at all to control it. They include Jair Bolsonaro of Brazil, Daniel Ortega of Nicaragua, Aleksandr Lukashenka of Belarus and Gurbanguly Berdymukhamedov from Turkmenistan. It would be a good idea to strike these nations from your vacation plans.

Will the World Change?
There are certainly plenty of immediate questions to be dealt with. For the moment, that is all that anyone is really focused on. How does the world control the COIVIUD 19 pandemic? How is the immediate damage to the world economy to be dealt with and how does the world manage the reopening of that economy? There are also some much bigger questions that will shape the future in some very profound ways. It is not even clear at this point that many world leaders are considering these, but there are some who have chosen to start grappling with these huge issues. At the top of that list is French President Emmanuel Macron.

Analysis: It is his assertion that everything has changed as a result of this pandemic, but it is not clear whether it has changed for the better or for the worse. He believes there will have to be a conscious choice as to how this all ends. On the positive side, there is the manifestation of a global threat that has produced a global response. Suddenly, the whole world is facing the same challenge at the same time and it is clear that everybody has to work together to deal with it. The virus has no interest in boundaries or nationalities and attacks everyone. The global health authorities are coordinated in ways they never have been. The financial authorities are attempting levels of cooperation and coordination that are nearly unprecedented. The populations throughout the world are aware of one another in ways they never have been before. The idea of a truly global threat has been established and so has the idea of a global response. Is it possible this leads to more global solutions to issues that range from climate change to terrorism? This is the optimistic stance—one that asserts that in a crisis the people will do the right thing and rally.

There is a far more pessimistic potential as well. The threat has brought out intense selfishness as well—an "every man for himself" approach that extends to nations. The Europeans have been struggling to create a unified approach as the northern states are reluctant to sacrifice for the southern states economically. The U.S. has been hoarding medical supplies and taking them from other nations regardless of need. The Chinese have continued to withhold information on the spread of the virus. They are not alone. Even more distressing is the fact that authoritarian governments have been more successful at controlling the outbreak than more democratic states. One of the nations that has been able to limit both infections and fatalities is Vietnam. The social isolation has been near total and has been enforced strictly. People in public without a mask will be jailed for up to nine months. People who do not observe the stay-at-home orders will be fined more than two years income and face prison sentences that can be as long as five years. Those who are testing positive are placed in formal quarantine in converted prisons for at least four weeks. In democracies, it has been very hard to get people to adhere to even the simplest procedures.

There will be a powerful desire to return to life as it was before the pandemic—just as there was a powerful desire to return to life before terror attacks seemed to be a daily threat. It was not possible to go back to the days prior to the 9-11 attack and the London bus bombing and the Afghan war and the constant strife in the Middle East that destroyed whole nations. The world was forced to change; it is being forced to do so again. The question that Macron is posing is what will that change look like?

China's Growth Stalls for First Time in 40 Years
The Chinese economic miracle was the story of the last four decades. A nation that was mired in underdevelopment and social strife turned the corner in a most spectacular way. In 1980, it was slightly smaller than Turkey in terms of its GDP. Today, it is the second-largest economy in the world. That 40 years of growth has now halted as a result of the shutdown that accompanied the COVID-19 breakout. To a very significant degree, the global recovery will depend on China's rebound. Thus far, the signs are mixed.

Analysis: In the beginning of the COVID-19 crisis, the data coming from China could not be trusted. It was evident China was doing its best to hide reality. This was largely the fault of the Hubei and Wuhan authorities as they were trying to keep Beijing from knowing what was happening in their jurisdiction. Then China itself started to try to downplay the damage. That effort has been thwarted by the number of global health organizations now active in China. The data that everyone now focuses on is the economic data as the world waits to see if China can rebound. It is true that Wuhan has been reopened, but it has not recovered fully. The level of production is a fraction of what it was prior to the outbreak, but there has been steady progress. The issue now is whether China will be able to resume its position in the global supply chain. The evidence is that the process will be slow. Many companies around the world have been rethinking that Chinese supply chain.

Opening in Phases
From the very start of the "lockdown recession," there has been a debate over how it would eventually end. Every government which has engaged in strategies to cope with the COVID-19 pandemic has done so with the knowledge that these actions could not be sustained indefinitely. They have all known the damage to the economy would be severe. There have been bold assertions that rebound would take place right away and that the recovery would be instant, but it became exceedingly obvious that getting back to some semblance of normal would not be swift nor would it be remotely easy. Trump's initial assertions have been dismissed. Now, his administration has revealed a plan that looks similar to those that have been developed in other nations.

Analysis: Restarting the economy will be a phased operation. This has been the most common pattern throughout the world. The alternative was to identify regions in a country that have experienced less impact and let them remove the restrictions. The fear has been that people from locked-down regions would migrate to the opened regions and spread the infection more widely. The phased approach is likely slower, but seems better suited to keeping infection rates low. The criteria for starting the first phase will be exhibiting a downward trend of infections or positive cases over a two-week period. Essentially it means seeing a bell curve develop—a peak in terms of infection followed by a discernible decline. The decision regarding reaching that point will be left to each individual state. Here is where there may be controversy as some states will likely reach that point sooner than others.

Once that criteria are satisfied, the first phase would roll out. This would involve the reopening of other retail establishments, restaurants, movie theaters, sports venues, churches and a host of other entities with the proviso that social distancing guidelines be observed. Most schools would remain closed and those that are deemed at high risk would remain more strictly isolated. Office work would be allowed to resume, but working at home would still be encouraged.

Phase two allows bars and other entertainment activities to open and non-essential travel would be allowed to resume. The vulnerable populations would continue to be isolated and social distancing protocols would be observed. Phase three is the removal of the lockdown universally, but it also ushers in a more permanent set of protocols that may become part of the "new normal." This will involve more mandatory health checks, more enforced social distancing and more aggressive tracking of people who have tested positive.

The long-term goals revolve around a three-stage process—testing, treatment and vaccines. The intent would be to create a mass testing capability that would ensure the majority of the population would be tested with the first priority being the vulnerable and those who would be seen as first responders. The treatment goals would be to develop an effective cure for those that contract the virus so that fatality rates would be sharply reduced. The vaccine is the ultimate goal, but most assert that this remains anywhere from six months to a year away. Then, there will the time to ensure that everyone gets it.

Employment Impacts Thus Far
The most immediate threat to the economy has come from the massive number of unemployed. There was absolutely no warning given the sudden nature of the lockdown recession. This left business and the employee wholly unprepared for the crisis. The studies conducted thus far reveal the prevailing attitude among both employer and employed.

Analysis: The most encouraging aspect of the process is that the vast majority of businesses see the layoffs as temporary—more like furloughs than permanent layoffs. The estimate is that 85% of those who have been dismissed will be rehired the moment the restrictions are lifted. The not so good observations show that certain sectors are engaging in severe hiring freezes and layoffs that could be permanent if their levels of business do not rebound. There is also a significant demand for temporary workers in sectors such as delivery services, warehouses and the medical community. The recovery in the job market will depend on how quickly the lockdown can be lifted.

Consumer Attitude
The real key to the removal of the lockdown will be the attitude of the consumer; it has already moved through several phases. In the beginning of the lockdown, there was considerable skepticism regarding the seriousness of the issue and people were reluctant to comply. By the start of April that had changed. Now, the majority of the population is fearful. The social distancing policies have taken hold and people are policing each other. In the coming weeks, the restrictions may start to lift, but there is no guarantee that people will change their behavior.

Analysis: The message will have to shift from one of fear and extreme caution to one of acceptance and personal responsibility. The community will be opened up, but that will not mean the danger has passed completely. There will likely be a second surge as people come in contact with one another. That could send people back into isolation. It is hard to tell which drive will be more urgent—protection or the desire to resume normal activity.

Expectations
The hardest part of any task is usually the waiting. We are all pretty good at getting on with the task at hand, but few of us are very adept at waiting—especially when we have no idea how long that wait might be. This is what has been making people nuts about the COVID-19 lockdown. Each time it seems we have a deadline we can anticipate, it is moved and we are back to waiting. The orders to stay at home originally assumed a two- to three-week period. Now most have been extended until mid-May—an eight-to ten-week wait from when this all started. There are still no criteria we can look towards to gauge how long the wait will be.

The end of the lockdown will come in phases and will be determined by states—all of which will have different criteria. The fact is that people are not good at waiting and there is rebellion showing up all over the country. This poses the greatest threat to the plan as suddenly there will be millions of people fed up with the wait and willing to engage in risky behavior. That threatens to make the entire effort less than worthwhile and sets up real conflict between those who are still trying to comply and those who are not. The deadlines have been moved again, but yet another such shift may not be tolerated.

IMF Expects Swift Recovery After COVID-19 Contraction
There is still a level of confidence as far as the ability of the global economy to bounce back—it all depends on timing and whether there can be a general end to the lockdown recession. The International Monetary Fund (IMF) numbers assume that "normal" activity will be possible by the early part of the summer. They have been asserting that recovery will start in Asia, spread to Europe and will hit the U.S. by June.

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Monday, 25 May 2020