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Strategic Global Intelligence Brief for May 4, 2020

By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—US Economy

Small Banks Rescued Small Business
The relief packages from the federal government have amounted to $3.5 trillion. The money has been directed to a whole host of needs: money for big business and for small business, money for hospitals and money for expanded unemployment. The sector that has been the most vulnerable has been small business. They operate the same way that most people do—living from month to month and even week to week. A few days of interruption in their cash flow can destroy them. The small banks are the ones that support these small businesses. As the relief money has emerged, it has been the small bank that has come through for their customers. They seem to be processing the applications faster and more accurately. That is about the only thing keeping these smaller operations intact at this stage.

More Stimulus Unlikely in Short Run
There continues to be a great need for help on the part of the business community and their employees, but that additional support is not likely to be arriving from the government any time soon. There are three issues that have not been resolved. The first and most pragmatic is the current supply of aid has been bottled up by sheer demand. Every agency is slammed and can't process what it has already. The second issue is there remains a huge concern about the burgeoning national debt and deficit. It was already high and now it has grown by another $3.5 trillion. The third factor is a debate over where additional aid would be directed. Does it go to big business to protect jobs, small business to ensure survival, individual people to get them through another month?

Tourism at Greatest Risk
It has already been obvious that tourist areas have been very hard hit by the shutdown. They were among the first businesses ordered to lock down and there has been no state that has declared an intent to fully reopen them. The biggest threat is the customer will not return once they are opened. The polls taken indicate people will return first to shopping, next to restaurants and last to tourist destinations and sites. The tourist locations themselves will be under strict protocols that will make the destination far less attractive.

Short Items of Interest—Global Economy

Business Leaders Turn on Bolsonaro
The rapid and unexpected rise of President Jair Bolsonaro owed a great deal to the frustration within the business community with the many years of semi-socialist rule in Brazil under Inazio "Lula" da Silva and Dilma Rousseff. Most did not know much about the obscure former military officer, but he seemed to talk a good game. Business thought they would be able to influence and control him. That did not become the case. The business leaders have been very frustrated with his capricious policy making and corruption. The near complete ignoring of the COVID-19 crisis has been the final straw. Brazil has become one of the so-called "ostrich nations" and the scourge has been devastating.

Job Losses Mount Even as Business Restarts
One of the key assumptions has been that once the restrictions were lifted, there would be a return to normal and people would get their jobs back. The problem emerging in Asia and Europe (as well as in the U.S.) is there has not been enough business returning to justify the rehiring. The social restrictions have made it impossible to resume previous activity. Thus, there is a need for far fewer employees. Hotels are recalling no more than a third of their former staff, shops are down by 75% and restaurants down by 80%. There is no rush of consumer activity yet, although this is still early in the rebound process.

North Korea's Leader Seen Again
Well, sort of. After weeks out of sight, there has been a sighting of Kim Jong-un, but he said almost nothing and was observed only at a distance. This is reminiscent of the last days of the old USSR when very sick and dying leaders were propped up and put on display to prove they were still alive.

'Arrogance' Doomed Global Reaction to COVID-19
There have been many national reactions to the viral crisis. Some countries have had a much more successful campaign than others. In the months and years to come, there will be close examination of those that seem to have succeeded when so many others failed. The current set of success stories can't be fully judged at this point as there remains ample time for things to go wrong. Singapore was once held up as a shining example of what a county should be doing, but they now have one of the highest infection rates in Asia as they have been profoundly affected by the secondary wave of COVID-19 cases that came when people returned home with the disease. Both New Zealand and Australia have been spared the worst of the disease and have even started to resume normal economic activity and travel between the two. Another country that has done well is Austria. This is significant as this is a small nation that has been surrounded by countries that have had major issues with the virus. Their success has had less to do with isolation than policy.

Analysis: Austria reported only 39 cases of COVID-19 over the weekend. Since the outbreak, there have been 15,531 people infected and there have been 596 deaths. That is fewer than the U.K. reported this last Sunday alone. The U.S. has a death rate of 207 per million in comparison to 67 in Austria. This is despite the fact that Austria borders several countries with much higher rates of infection and fatalities. What seems to have made the difference is the approach taken by the country from the very start of the threat. Antonella Mei-Pochtler was brought in as the person who would lead the effort. She was a senior executive at BCG—a major consulting firm. She took the same approach she did with previous clients. The mission was clear—stop the spread of the virus. Anything else was secondary. She paid little or no attention to the politics of the decision. Her approach was to consult with experts in the medical field and act on what they told her. The advice was near universal—that has really been the case all over the world. It is just that some leaders in some countries have actually paid attention.

The advice was that it was too late for the preferred method. There were no clear testing procedures and not enough tests. The ability to track and trace was not there and there was no sure cure and no ready vaccine. All the usual response procedures were unavailable. That left only one option—containment. The message from the medical community was that people needed to be quarantined. This was beyond social distancing and involved a near total shutdown. The vast majority of governments have been unwilling to do a complete quarantine as this was deemed too politically risky. Instead, the quarantine had gaping holes in it. It was not OK to visit a bookstore or a department store, but it was OK to go to a hardware store or a grocer or a quick shop. Austria engaged in one of the strictest shutdowns in the world, but it came with a timeline and a declaration of what next steps would be. The containment was more effective and lasted for a shorter time. Shops have been open for weeks now and restaurants open this week.

Three lessons have come from this experience. The first is that a non-politician should be in control so that unpopular decisions can be made and adhered to. The second is that half measures do not work. The approach taken by many nations has been referred to as "swiss cheese quarantine." This leads to an ineffective and lengthy interruption. The third lesson is that public trust is key to a rebound. The Austrians have generally had faith in the government of Chancellor Sebastian Kurz. It has been his support for Mei-Pochtler that has been key to maintaining that support.

Hardest Hit Nations in the World—Formerly the Fastest Growing
The viral infection that started its awful scourge in Asia, spread to Europe and then to the U.S. has now spread to the rest of the world. It is slamming the middle-income nations harder than it has other states. They are getting hit from all directions and lack the resilience that other economies have had. These are countries like India, Brazil, Argentina, South Africa, Nigeria and the like. They are not the poorest, but they are hardly rich.

Analysis: The impact of the virus has been felt in three ways. The first and most obvious is that there are tens of thousands of people getting sick and dying. The U.S. and Europe have been plagued by shortages of everything from face masks to respirators and medical personnel trained to react. The middle-income nations have an even more acute shortage. The second impact has been the near total shutdown of their export economies. These are countries that rely on foreign trade for upwards of 50% of their GDP. The collapse in worldwide demand has crippled these countries. Finally, there is impact of the domestic shutdown as they have all been trying their own versions of lockdown and containment.

What Factors Will Thwart a Consumer Rebound?
The lockdown recession began with essentially a ban on consumption. The response to the threat of the virus was an extreme one as the opportunity for other options had been missed. Ideally, the nations of the world would have engaged in a system of rigorous testing and tracking, but few countries reacted swiftly enough for this to be effective. The long delay in reporting the outbreak in China allowed the infection to spread widely through all of Asia and, subsequently, a slow response elsewhere. Leaders in Europe and the U.S. were dismissive regarding the impact of the virus weeks after it had been shown to be deadly. When it was finally identified as a real threat, the only option left was to try to slow its progress through some form of national quarantine. After nearly two months, the U.S. is preparing a chaotic lifting of that quarantine, or at least parts of it. Beyond the fact there will be different policies pursued by the 50 states, there will also be a vital part of the whole process—the attitude of the consumer. The U.S. is 80% dependent on the consumer for GDP growth and for jobs. The fact that consumers have been denied the opportunity to consume has been the factor that has created the recession.

Analysis: In order for the consumer to make a comeback, there are several required components. First, the opportunity to engage in spending has to resume. That means a reopening of the businesses that have been forced to close or curtail their operations. That is going to be a highly charged and confused process as there will be no national plan at all. Even as states elect to reopen, they will be doing so in phases—most of which will be utterly confusing to the population with all manner of rules regarding how many people can be how close to one another while wearing masks and avoiding contact with any surfaces. Cities will have different rules than the state and businesses will have different rules than the city or the state or the country. Nobody has a clue how these rules will be enforced. That will guarantee tension between those who want to maintain maximum vigilance and those who have chosen to ignore the whole thing. People will not know what is open and what isn't and under what circumstances.

This leads to the issue of desire. Just because a business is open doesn't guarantee consumers will elect to patronize it. There are basically two kinds of consumption. The first is required consumption. People need to buy certain things to maintain their households. For the most part, these businesses have been allowed to remain open throughout the pandemic (grocery stores, drug stores, hardware stores, etc.). This kind of spending makes up approximately 40% of consumer spend. The rest of that consumer dollar goes to what could be classified as "entertainment." This is spending on things that are not necessities and involves shopping as a pleasurable activity. If the shopper is expected to engage in a host of protocols such as waiting for an appointed time to shop, wearing masks, avoiding people and the like, will that shopping still be pleasurable? The retail community is well aware that some 30 million of their consumers have lost their jobs and will not be spending on much of anything. If the people who are employed decide that shopping is no longer fun and decide to shun the experience altogether, the future of brick-and-mortar retail is exceedingly bleak. There is also the population that will not trust the decision to reopen and will refuse to resume old habits for fear they will contract the virus.

As the world tries to conjure up a vision for the future, there are major questions regarding what habits will be maintained and which will not. There are a number of sectors that are extremely concerned and will be studying people's behaviors closely. Retail is near the top of the list as it had already been struggling against the online alternative. Restaurants are also at risk although they are not fighting a viable alternative. Travel will be affected as people will be very reluctant to resume the old patterns. Much will depend on the decisions that business makes. If people are still required to meet with customers and colleagues, attend conferences and trade shows and otherwise circulate, the airlines will survive. If that activity is curtailed, the entire sector will decline sharply.

What Can Make the Virus Crisis Worse? Politics of Course
Over the last few years, it has become increasingly apparent that national unity has become a thing of the past. There is no nation on the planet that has been able to maintain any semblance of national purpose. The divisions between citizens have contributed to substantial political and economic decline. Analysts believe there has been a long period without a true outside enemy to focus people's attention on and that has allowed internal divisions to harden. Today, it can be argued there is a national threat. However, it has not unified; it has become yet another reason to divide.

Analysis: One side of the divide holds that reacting to the virus must take priority, no matter the cost. Those who lament the damage to the economy are dismissed as "greedy capitalists" who care nothing for the suffering of others. The other side asserts the efforts to control the virus are government overreach and that the whole pandemic is a media-created hoax. The vast majority of the population falls in between these extremes and worries about both the virus and the impact on the economy. As one cartoon had it, "I have a balanced approach to this crisis—half the day I panic over COVID-19 and the other half of the day I panic over the coming depression."

These divides are not unique to any nation—they are in evidence in Asia, Europe, the U.S. and now in Latin America, Africa, South Asia and elsewhere. The political leaders have been forced to react to these extreme positions. That has compromised strategy. There is no comprehensive quarantine in place and there is no resumption of normal patterns. The fear is that there will be a "worst-case" outcome as a result—a high rate of infection and death and a collapsed economy.

The Great Mask Divide
As a population, we never seem to run out of ways to separate ourselves. We have serious and devastating divides over race, ethnicity, gender and many others. We have more benign differences over our choice in sports teams, but even these can get pretty emotional.

Now, we have those who wear masks and those who don't. Let there be no mistake about their purpose. They are to keep an infected person from spreading the virus by containing their sneezes and coughs. The mask obviously does not stop the infected person from touching things that others will subsequently touch. This is a contact virus that can live for a time on a variety of surfaces. It does not protect the wearer from exposure. It may prohibit the virus from entering through the mouth and nose (if worn properly), but the virus would still be able to enter through any other exposed part of the body (such as the eyes).

The advice given at the start of the outbreak remains the most useful. Keep one's hands clean, avoid touching one's face if there is a possibility of infection and keep surfaces clean you touch. If some people feel better with a mask on—that is their prerogative. If there are those who are not infected and do not wish to wear the mask, that is also their prerogative. The whole idea behind social distancing is keeping people far enough away from each other that they do not have an opportunity to pass the virus by touching or sneezing or coughing (mask or no mask).

COVID-19 Impact on Voters
The economy is suffering—that is the understatement of the year and perhaps the decade. The impact on politics has yet to be seen as everything will depend on what the situation is next November. If the economy has bounced back to an approximation of what it was prior to this outbreak, the advantage will lie with the incumbents, but if there are still major issues, the challengers will be in a better position. This will be at every level—city, state and federal.

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Monday, 25 May 2020