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Strategic Global Intelligence Brief for May 20, 2020

By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—US Economy

Understanding Job Data
There is an assumption that calculating unemployment is a pretty simple task. Either a person has been fired or they haven't. It is assumed that everybody who is laid off will file a claim for unemployment and every claim is an accurate assessment of the employment environment. In fact, there are many variables. Until recently those who were self-employed could not file claims. Now they can. That swelled the population of unemployed and changed how one compares today's numbers to those in the past. There have been challenges as far as processing applications. That has affected the weekly numbers. People laid off in March might not have been counted until April and even May. The bottom line is this has been a moving target. It has been hard to get an accurate and current read.

CBO Offers Pessimistic Assessment
The latest offering from the Congressional Budget Office (CBO) is not all that encouraging. Fundamentally, it disagrees with the analysis that has been coming from the Treasury Secretary and the White House. It also differs from the predictions that have been coming from the likes of the International Monetary Fund (IMF) and other global think tanks. The key difference between those forecasts that are pessimistic and those that profess more optimism is the expectation regarding consumer behavior and the pace of business reopening. The CBO expects states to be very slow in their opening strategy with some putting off the final phase to next year. They also expect consumers to remain cautious and unwilling to resume their previous habits.

So Much for a Disaster Baby Boom
Over the years, there has been a pattern established when there has been some kind of national disaster. The population seems to start favoring babies and there is a sudden increase in pregnancy. It may have to do with spending time with one another, or it may be a desire to focus on the future. It was assumed that all this time locked down with one's family would provide an opportunity for a major baby boom, but that has not been the case. The U.S. birthrate is as low as it has been in three decades. It seems that many are questioning whether they want to bring a child into the world right now. The same pattern is being observed in other nations.

Short Items of Interest—Global Economy

Surge in Global Poverty
There will be plenty of long-term implications as a result of the global lockdown. The developed economies may be struggling to get back to decent growth numbers for the next year or so, while the less developed nations are headed for unmitigated disaster, which has implications far beyond their borders. It is estimated that some 60 million will be pushed into extreme poverty in the next year. That will trigger everything from warfare to mass migration. The viral pandemic is now hitting these nations far harder than it has hit the developed world.

Migration Crisis
The surge in migration into Europe from Africa and South Asia was a major concern prior to the pandemic, but that issue is about to become immensely more complex. The same situation will develop in the U.S. and even in Asia. People who have been crushed by the economic collapse will have no option but to seek opportunity elsewhere. However, they will be even more unwelcome than was previously the case as it will be assumed that they are spreading the virus. The antagonism will escalate and confrontations will become routine.

Travel Bubbles
Several nations have been trying to open travel between close neighbors as they ease back into a more normal routine. The Baltic States have created one and there is another that links Australia with New Zealand. There has been talk of a Nordic bubble, but there is deep distrust of the Swedish model. There is fear that free movement would expose too many people. Likewise, there has been reluctance in Canada to a deal with the U.S. and the U.S. has been unwilling to work with Mexico.

Global Reaction to Virus
The pressure that has been mounting in the U.S. to reopen business is nothing compared to the pressure applied to many other nations. The emerging market states such as India, Brazil, Indonesia, South Africa, Mexico and others have been slammed as hard as any nation when it comes to their economies. Add in nations such as Russia and China where they also face massive economic issues that they are fundamentally unprepared to deal with. For all the damage that has been inflicted on the U.S. and European economies, these are developed nations that have been able to find ways to partially compensate for the impact of the shutdown. Granted, the U.S., the nations of the EU, Japan and other wealthier states have had to go into significant debt and are running very high deficits as they cope with the disruption, but the point is they have the ability to do this. Most other nations do not have the options that wealthier states have.

Analysis: In almost every case, these less developed nations are still facing rising infection rates and increased numbers of fatalities related to the outbreak. Brazil has seen 16,000 deaths and has one of the highest rates of infection in Latin America. The position taken by President Jair Bolsonaro has earned him a place in the "Ostrich Alliance" as he has asserted that the disease is not real and deaths are from panic. This has resulted in the resignation of all of his health officials. He joins such luminaries as Daniel Ortega of Nicaragua, Aleksander Lukashenko of Belarus and Gurbanguly Berdymukhamedov of Turkmenistan. All of these leaders have chosen to ignore the threat and all of these nations now have very high rates of infection.

As serious as the viral threat has become, the economic threat has become even more intense. These are states whose economies are not in great shape under normal conditions. A shutdown threatens to push them over the edge into a depression that will last for years. These are nations that depend heavily on exports. The governments lack the ability to replace the income lost by people whose jobs have vanished. The unemployed person in the U.S. has options. Most will be able to survive this period of financial stress. The person whose livelihood is interrupted in India, Brazil or Russia is going to be in crisis immediately and will be facing deprivation within days.

This has led these governments to end the containment efforts even as the virus spreads and there are rising numbers of fatalities. This has long-term implications for their economies as well. As the developed nations start to get a handle on the virus, there will be a strong desire to keep that second wave from devastating a weak economy that is just starting to rebound. That will provide a very strong incentive to block contact with these developing nations. There will be restrictions on travel to and from these nations and stricter limits on migration between nations. This will combine with the impact of the virus to stunt economic recovery even more.

More Examination of the Swedish Model
The Swedes did not necessarily want to be the "lab rat" for the rest of Europe, but this has been the role they are now playing. The state epidemiologist Anders Tegnell made a radical choice at the start of the pandemic. It was his position that it was too late for the majority of the options available to fight the disease. There was not enough testing capability and there was no system to track who was infected. A quarantine only works when the area to be contained is small. Once the virus had spread, it was too late to do anything about it other than to let it run its course and rely on the eventual development of "herd immunity." He has stated many times that COVID-19 is ideally suited to that strategy. It is known that at least 96% of those who have contracted the disease have caught a mild version and will not need to be hospitalized; around 60% have shown no symptoms at all. If these numbers hold, it means that a widespread infection will affect around 5% of the population in a serious way. His assumption is that the virus will spread no matter what provisions are put in place. It is better to build that herd immunity sooner than later.

Analysis: Sweden now has a death rate that exceeds any of the other Scandinavian nations. There have been 31,000 cases reported. States that have engaged a lockdown have similar numbers—the Netherlands at 41,000, Switzerland at 30,000. Sweden has had 3,800 deaths (the Netherlands is at 4,400). Sweden has a death rate of 380 per million and the Dutch have seen a rate of 336 per million. The U.S. rate is 283 deaths per million. The point seems to be that death rates have not been radically altered by the containment effort. Tegnell continues to assert he will be vindicated when other nations experience a second surge as their populations will be more vulnerable to that second or third wave than Sweden will be. Time will tell.

Trade-Off Challenge Dominates Decision-Making
From the very beginning of the COVID-19 crisis, there was the knowledge that sooner or later there would be a very tough decision to make. The choice would be between more deaths from the virus or the utter ruination of the economy. There never has been a point where both issues could be dealt with at the same time. The strategy developed was essentially to address one crisis at a time. The most immediate threat was the virus itself, and with justification. The latest numbers are grim—4.9 million cases reported worldwide with over 320,000 deaths. There have been over 1.5 million cases in the U.S. and over 92,000 deaths. The original motivation for the shutdown was to avoid swamping the ability of the hospitals to care for those who had contracted the disease. The fact is there is no cure for the disease; all that can be done is to treat the symptoms and allow the body to recover. The options were limited from the start as there was inadequate testing and tracking. Even the attempt at quarantine was too late. The impact on the global economy has been devastating as each day brings a new set of numbers that break records—over 35 million lost jobs in the U.S. alone, GDP markers in negative territory, thousands of lost businesses and economic desperation in every part of the world. Now the emphasis has started to shift towards addressing this economic catastrophe.

Analysis: This shift will mean the virus threat will worsen and it is not clear the economic recovery will occur as hoped. These may be the most difficult days faced thus far. The evidence from around the world is clear. Those nations that have opened up and reduced the scope of their containment efforts have seen the spike in infections they feared. In some cases, the lockdown was imposed again. That will make a future reopening even harder. The policy at the moment straddles the issue. The move to allow business to start recovery will most certainly result in more exposure and more illness, but the moves have been limited and loaded with restrictions that compromise the ability to return to normal. This means the economic rebound that has been hoped for will be partial at best and may not have an impact on the issues that have been of most concern.

At the top of the list of economic worries has been the loss of jobs. To see any sort of real recovery, the 30+ million people who have been laid off in the U.S. must get back to work. The worst-case scenario for the global economy is a loss of $3.4 trillion in income as unemployment rates in many nations exceed 20%. The majority of the lost jobs would be better classified as furloughs. That means these workers would be hired back just as soon as the business reopens. If the best estimates hold, that means between 80% and 85% get their jobs back. This is all dependent on whether these companies can really get back to normal. This is where the restriction discussion comes in.

The worst scenario is one where there is no emphasis on either crisis. The containment effort weakens and this allows the virus to spread, but parts of it remain in place. That hampers the ability of business to recover and rehire. It is a strategy that brings the worst of both worlds.

Difference of Opinion
The two people who really have the most influence on the course of the economy are Jerome Powell as head of the Federal Reserve and Steve Mnuchin as Treasury Secretary. Granted, there are many, many players as far as the progress of the economy is concerned. Congress sets fiscal policy of course and there is a role for all the state and local officials. Ultimately, the economy moves according to the decisions made by over 340 million consumers and the hundreds of thousands of businesses that seek to get a share of that spending. Mnuchin and Powell will be at the center of policy making. Both are worried about the state of the economy, but have quite different opinions as to what to do at this juncture.

Analysis: Powell has been blunt about the need to pull out all stops in terms of economic support. That has clearly been the approach taken by the Federal Reserve. Every tool at its disposal has been applied. There have also been several new tactics developed with the aim of getting as much money to the business community and the consumer as possible. The focus is on temporary support while the issue of the virus commands the majority of society's attention. His position remains one that places the viral outbreak as first priority.

Mnuchin agrees with Powell as far as the severity of the problem and has supported the Fed's efforts to loosen monetary policy. He has also been supportive of the fiscal efforts from Congress thus far, although he has been lukewarm when it comes to the latest plan passed by the House of Representatives. His position is that business must be allowed to reopen now and that this reopening should be as complete as possible. The time has come to emphasize the economic recovery even at the risk of damaging the effort to control the outbreak.

It is not that these two are diametrically opposed as both have acknowledged the position of the other. It goes to the issue that was outlined in the article above. At some point, a trade-off position will be established. There will never be a point when there are no more deaths from COVID-19—even should there be a vaccine developed. People still die of the flu every year and vaccines are readily available. There will never be a time when the economy will be immune to challenges like this. A position will emerge that accepts a certain level of illness and death from this or some other disease and a certain level of economic impact will be accepted as a way to minimize that disease impact.

A Small Business Owner's Plea
He shall remain nameless as he doesn't want to be attacked on social media and knows that people will not allow him to explain his position. He has been watching all the activity surrounding the COVID-19 response and understands that people have the best of intentions, but he has grown weary of rock stars singing on Zoom calls, people handing out food rations, hand wringing over what to do with children now that parents can't shove them into some school or organized activity. He knows that this sounds churlish and insensitive. He really is not against any of these efforts. He just wants people to consider another way they could impact all this.

He runs an operation that supplies restaurants and food-related industries. He employs 50 people. That translates into 50 families. He counted 36 children, 33 elderly parents and a plethora of sisters and brothers, nieces and nephews and cousins that depend to one degree or another on those 50 people. They pay rent and mortgages. They pay taxes and they consume. Their families and their friends need them and the economy needs them. When the lockdown shuttered the restaurants, he was shut down as well. The government programs helped a little, but most of his staff was still furloughed.

His plea is very simple now. Please return to your favorite restaurant even though the experience is not what it used to be. Please patronize the places you used to patronize. The recovery of his business is in the hands of the consumer now. Contributing to a Zoom fund raiser is a good thing and donating time at a food bank is as well. Just as crucial is returning to our patterns—the life of those 50 families depends on it.

IMF Growth Projections
The assessment from the IMF as regards the developing world has weakened. That certainly doesn't come as a shock. The more salient point is that the projections for next year and even the end of this year are better. The assertion on the part of the IMF economists is that nations will move towards restarting their economies even as the virus threat builds. In the long run, the virus itself will do less economic damage than the efforts to stop it.

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Monday, 25 May 2020