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Strategic Global Intelligence Brief for March 6, 2020

By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—US Economy

Job Numbers Look Good
This is the report that came out before the impact of the virus. At this stage, the economy looks pretty solid with 273,000 jobs created—far more than had been anticipated. What happens from here is anybody's guess. The virus has not seemed to provoke any big layoffs yet. Maybe it will not, but many of the harder hit industries will be forced to make adjustments of some kind in the not very distant future. What this seems to say is the economy was doing well before the panic set in. That also indicates conditions will improve once the panic has subsided—assuming it does in the next several weeks or months.

Will We Have to Get Accustomed to This?
One of the reasons the markets and the business community has been so nervous is that this is unlikely to be the last such episode. It is obvious it is not the first as there have been threats almost every year over the last decade—SARS, MERS, Zika and so on. Two major changes have amplified the worry. The first is the disease spreads so fast now that people can travel easily between nations and within nations. A local outbreak doesn't stay local for long. The second issue is that climate change warnings have long included this issue. The changing global environment seems to be feeding these virus outbreaks. That leads many to assume these will be more common and more threatening in the decades ahead.

Oil Prices Fall
The price per barrel of oil has tumbled to the low 40s and that collapse may not be over. The question of how far this price falls is one consideration, but the other is what the oil producers do now. The OPEC states have suggested a big production cut, but countries like Russia rely on that revenue and can ill afford to give up any more than they already do. The production decline is also likely to be a problem later when the demand starts to ramp up. Will the producers be able to get output back up and will they even want to—or will they keep production down in hopes of getting some of their profits back as demand returns to something near normal.

Short Items of Interest—Global Economy

Borders Redux
We ran this piece a while back. Now, it seems more relevant than ever as the virus has started to make nations far more conscious of where their population is and where it comes from. There is nothing sacrosanct about borders. The majority of the world has witnessed massive changes in the makeup of their nation state over the years. Europe has been subject to many of these. They inevitably leave groups of people in the wrong place at the wrong time—or so they would assert. The fact that a national boundary changes does not mean the ethnicity and history of that region changes. At the moment, almost a third of the European population would like to be part of a different nation—one dominated by their own group. This also applies to nations such as the U.S. where people choose to voluntarily segregate themselves in order to live with their "own kind." It makes governing for the majority very hard indeed.

China Refuses to Stimulate
In a sign that suggests the Chinese are about to assert things are getting back to normal, the Chinese government has now stated it no longer plans any sort of major economic stimulus effort in the way of lowered interest rates or additional spending. It appears the decision has been made to turn the spigot back on and resume production soon—taking some of the heat off global supply chains.

Russia and Turkey Agree on Ceasefire in Syria
It seems these two nations have been able to exert pressure on the Syrian government to stop the fighting in Idlib and avert an even more catastrophic situation from emerging. Whether the Syrian army really agrees has yet to be proved.

Asia Faces the Crisis
The vast majority of COVID-19 cases have been reported in China—over 80,000, including nearly 3,000 deaths. The vast majority of these have been in the Wuhan area. China now asserts the disease has peaked and has started to recede (for whatever that is worth).

Many other Asian nations have been affected, but not to the same degree. Japan has reported 360 cases and six deaths, but this has been enough to create a major political crisis. There have already been demands for the resignation of Prime Minister Shinzo Abe on the ground that he did not act quickly enough. It doesn't help that one of his chief political rivals is the former health minister who obviously sees this as an opportunity to supplant the long-serving Abe. The actions taken recently have been extreme with calls to close schools for a month and to virtually shut travel down. There has been a serious sense of panic in the population; business activity has all but ceased.

South Korea has been hit far harder than Japan with nearly 7,000 cases and 40 deaths. The country mobilized the health system quickly and seems to have managed a balance between business as usual and caution. There has been a great deal of emphasis on personal responsibility as people have been asked to self-quarantine if they think they have the virus or have been exposed. The public has been a willing agent in that process as those exhibiting signs of distress are severely chastised if they appear in public or go to work

Analysis: Given that the virus essentially started in Asia and is most serious in Asia, much of what is known about the disease has come from the Asian experiences. It is abundantly clear it is attacking certain vulnerable elements of the population—almost exclusively. If one is under the age of 45, the fatality rate is still less than 0.2%, but for those over 70, it jumps to 13%. The deaths that have been reported are due to the pneumonia issues that accompany the infection. Therefore, the people most at risk are those who have lung issues already (smokers are at the top of that list as they are for flu and other respiratory ailments).

The economic impact has been especially severe in Asia. That has translated to issues for the world economy. The Chinese supply chain has been all but eliminated and there has been a severe reduction in exports from Japan, South Korea and other nations as well. There is good and bad news as far as the Chinese reaction is concerned. The nature of the system allowed the government to essentially shut down the economy while addressing the virus. That same system of state control means the country can order these companies back to work in an instant. There are signs this has been taking place already as China does not want to sink into a real recession over this issue.

Europe Takes Very Hard Line on Immigration
The arrival of the COVID-19 virus in Europe was not due to the influx of migrants from the Middle East and North Africa—at least not that anybody can see at this point. It is nonetheless being used as yet another reason to employ a much harder stance on migration. In the last few weeks, the issue has reached a crisis stage as the Turkish government has asserted it will force refugees that settled in Turkey to move on into Europe. This has infuriated the Greeks and many of the nations in East and Central Europe as these will be the nations affected first. The rest of Europe is not much more favorably inclined.

Analysis: It has been migration that has motivated the development of populism in the majority of European nations. These parties (such as AfD in Germany, National Front in France, Freedom Party in Austria and so on) have exploited the frustration of the population as they see wave after wave of desperate people flowing into Europe. The perception is they are changing the culture, taking jobs and sucking up government money. In reality, the migrants and refugees are having almost no impact on any of these issues, but that has not stopped opportunistic politicians from asserting the threat is imminent. The borders are not slamming shut to a degree that is unprecedented in Europe, but with the arrival of the virus, the excuse to tighten further is present. Italians blame the migrants for their virus issues despite the fact there is no evidence to support the assertion. The outbreak in Italy was rooted in an elderly population that was living in very close quarters and was receiving little health support from the government.

How Bad Will This Be for the Global Economy?
There is no accurate way to answer this question at this point. Too little is known as far as how fast the virus will spread and most importantly what steps will be taken to deal with it. The best guess estimates are based on the assumption that COVID-19 will ultimately behave similarly to outbreaks such as SARS, MERS or the flu. It is also assumed that governments will not employ radical and draconian steps that utterly shut down the economy. Neither of these assumptions can be seen as guarantees, however.

Analysis: The nation that will take the biggest hit will be China. The crisis might cost it as much 1.5% of its GDP. The utter collapse of the Chinese Purchasing Managers' Index (manufacturing and service) is nearly unprecedented. This dramatic drop comes as a result of the radical response by Chinese authorities as they essentially shut the country down with a massive quarantine enforced by the military and police. The U.S., in contrast, is looking at a reduction of 0.2% of GDP—taking the expected growth rate for 2020 to around 1.9% as opposed to 2%. It is not good news, but it would not tip the U.S. into recession. Japan is looking at a reduction of 0.5%, but they are already in recession so this could do them more damage. The EU as a whole may see a decline of 0.2%, but Italy is likely to see a reduction closer to 0.5%. The situation in Europe will be a bigger issue as many of these nations are already teetering on the edge of a serious recession.

'A 9-11 Gut Punch' for the Airlines
The industry hit the hardest by the threat of the COVID-19 virus has been the airline sector. There have been hundreds of canceled flights and thousands of passengers canceling their travel plans. Airlines are eliminating routes where there has been a drastic decrease in passenger activity. Many flights are far emptier than has been the case in previous years—especially given the fact this is the start of spring break season. The sense is this will be a disaster on a par with the 9-11 crisis. It took the airlines years to recover from that and for much the same reason. People instantly became too afraid to fly because of the hijacking of the planes that subsequently were used to attack the World Trade Center, Pentagon and Congress. There are many parallels between these crisis situations and there may be many more before this is all over.

Analysis: The airline industry is overwhelmed by blind panic today, as it was at the time of the 9-11 attacks. Nobody knew what was going on in 2001. Was this an isolated attack or one that was going to be part of a series? What was next? It turned out to be one desperate attack and was not repeated, but the assumptions were all over the place with some analysts predicting that hundreds of flights would be downed in the days that followed. These assessments proved to be ridiculously inaccurate. Today, there is similar panic and people are shunning air travel because they fear the unknown.

The reaction to 9-11 provoked the creation of the security system we all know and love today. Now, there are calls for similar reactions to the virus threat. Many cruise ships are demanding that potential passengers get a temperature check before being allowed to board. If the reading is 100 degrees or above, they are denied. There are suggestions that temperature and health screenings be added to the duties of the TSA. Airlines are already rejecting passengers that show signs of having some kind of cold (and that is going to make flying with allergies interesting). There are also restrictions in place according to where one has arrived from.

It is nearly impossible for a business like the airline sector to make the "right" choice. If all these steps and restrictions are implemented, the already miserable process of getting through security will be much worse and millions of people will be rejected because they caught a common cold or have hay fever. If they elect not to employ these plans and someone manages to infect an entire planeload of people, the airline is going to be on the hook. Ideally, the public should be expected to act reasonably and responsibly, but that will never happen.

Is There a Bright Spot in All This?
In the short term, the answer is most definitely no. The steps that have been taken to deal with this crisis have crushed business in a variety of ways. The directly affected sectors have been obvious enough—travel, entertainment and even business conferences and trade shows. The indirect impact has been due to the mass disruption of the supply chain; the shortage of goods has already started to show up in the retail community. Longer term, there may be some good news.

Analysis: The more optimistic assessments assert this crisis will begin to ebb as the warmer temperatures start to arrive and the spread will be halted by early to mid-summer. This will mean pent-up demand will explode and business will be scrambling to catch up as the supply chains open back up and the traveling public rushes to make up for those lost opportunities. The surge in recovered demand may create different challenges, but these will be welcome as compared to the challenges now. These encouraging assessments are predicated on the virus being contained and the spread blunted. If that doesn't happen, the panic level will rise and there will be even bigger economic problems.

Observations
I have been on the road the last few days—speaking in Denver and San Antonio. I have been at airports in Kansas City, Denver, Dallas and San Antonio. This is far from a comprehensive collection from which to draw conclusions, but I can report that so far things look pretty normal to me. The flights have all been packed with not a single open seat (business as usual at Southwest). The TSA lines have been as long as always and the airports have not looked empty. I have seen a handful of people with masks; however, most seem not to grasp how they are supposed to be worn—they cover their mouth, but not their nose and two wore them on their head like a fetching little blue beanie. I have noticed that men are actually washing their hands. It is the first time I have seen that.

The attendance at the conferences has not been affected as nearly as I can tell, but I have had several calls to make certain I am still planning to be there (and I am). Tensions are running high as there are those who are in full panic. Those who are losing money to that panic are very upset with those they perceive to be overreacting.

Market Still Going Down
These numbers are not good, but it is useful to note the market has been a lot lower. There are still many analysts who assert that some of the decline is a reaction to the fact the market has been so artificially high and due for a correction. This may be an excuse to puncture that balloon.


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Monday, 30 March 2020