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Strategic Global Intelligence Brief for May 8, 2020

By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—US Economy

Brutal Employment Data
To the surprise of absolutely nobody, the latest jobs report was a debacle. The rate of unemployment surged to a record of 14.7%; the data showed a loss of over 20 million jobs. These are numbers that far exceed the recession of 2008 and even the Great Depression. If this were any kind of normal recession, the panic would be engulfing the entire planet, but there has been nothing about this recession that is even remotely normal. As has been repeated over and over, this was an imposed recession triggered by an attempt to deal with the COVID-19 threat. The presumption is that 80% to 85% of those who have been laid off will be brought back to work just as soon as their former employers are able to reopen for business. The timing for that rebound is still unclear, however; and with every passing day, the rehiring is put off.

Small Businesses Shunning Government Stimulus
It is estimated that some 40% of the stimulus that was aimed at small business has not been accessed. This is due to the fact that many businesses are unsure what their future obligations might be. They are also frustrated with the provisions of the aid. It demands that they preserve jobs, that 75% of the loan go to preserving their payroll. The problem is that many of the affected businesses are shut down and are operating on skeleton staffs. There is absolutely nothing for the workers to do so the business is being asked to function as an unemployment agency—paying people to stay home. The government provided unemployment is also more than the business can provide. The workers are quitting permanently so they can draw the bigger check. The small business now has no way to earmark 75% for wages and will thus be required to pay it back.

Job Losses in Health Care Sector
There may be a massive demand for people with the skills to deal with the COVID-19 issue, but the rest of the health care sector has nearly collapsed from the lockdown. There have been millions of jobs lost in the dental sector and in eye care or any kind of elective health care. The vast majority of specialists have been sidelined as the hospitals focus entirely on the virus. It is assumed these jobs will come back when the sector begins to return to normal, but that will be too late for many of the support people in these sectors.

Short Items of Interest—Global Economy

Threat to EU Is Mounting
The nations asking for help from the EU have been encountering resistance from the nations that will be on the hook for the bulk of that help. The Germans have been especially weary of the constant demand from the nations in the south. It is the perception in much of Germany that they have been bailing out the likes of Spain, Italy, Greece and Portugal for too long. They do not want to add to that burden. The nations needing help to cope with the viral shutdown are asserting they will leave the EU if that help is not forthcoming—what is the point of membership if they are abandoned when they need the help most?

Allies Tire of Trump's Bluster on China
China has become the foil for Trump once again. The entire issue of COVID-19 has been attributed to China by Trump. He has accompanied these accusations with all kinds of economic threats. At the same time, the trade talks seem to proceed as planned. This manipulative approach is driving many U.S. allies to distraction as they seek some kind of unified approach to getting the economy of the world back on track. Now is not the time to isolate China, or even to fight trade battles. The second-largest economy in the world is important to all the other nations. They want a focus on recovery before these old battles are resumed.

Some Weird Good News
Among the supply chains that have been adversely affected by the lockdowns has been that of cocaine. Drug smugglers have been affected by the shutdowns and the moves made to control the spread. It has cost the drug gangs millions thus far.

How Much Can Be Blamed on COVID-19?
During times of great stress and threat, there is a tendency to look at every issue through the same lens. We know full well that the world is always changing. We understand that many factors play into these changes, but when there is some kind of universal crisis such as the COVID-19 outbreak, there is a rush to assign blame for all this change to this single factor. This has been showing up in everything from medical reports to assessments of business. There are widespread assertions that medical facilities have been reporting every death as COVID-19-related for the simple reason they get more reimbursement if it is virus related. Heart attacks and other illness suddenly become part of the viral death toll.

There have been economic versions of this as well. There are several department store chains that have already declared bankruptcy or are close. That has been attributed to the lockdown recession. While the shutdown may have been the final straw, these companies had been circling the drain for quite a while—killed off by the likes of Amazon rather than the virus-inspired recession.

One nation that was already undergoing rapid change has been China. These changes will have been accelerated by the COVID-19 crisis.

Analysis: China was already one of the most digitally connected countries in the world. Prior to the outbreak, the nation accounted for more than 45% of e-commerce transactions in the world. Mobile payments are employed at a rate that is three times that of the U.S. That trend has sharply accelerated with the viral outbreak and sets China up to be the most digitally connected country in the world. That, in turn, ensures the success of those Chinese businesses that enable the digital transformation of the world. If the virus outbreak permanently changes the way that people shop and work and play, the Chinese will be right at the forefront.

Prior to the viral outbreak, there was increased tension between the Chinese and the world when it came to their role as "manufacturer to the world." Much attention has been focused on the trade disputes between China and the U.S., but other nations had been trying to alter their dependence on China as well. The COVID-19 crisis has meant even more reluctance to engage with China as the reliability of the supply chain is now suspect. Though China has made attempts to protect its export sector, the truth is that there was a shift underway already. The policy pursued by President Xi Jinping was rooted in developing China's own consumers. This has been successful in that the population now consumes the majority of what it produces and China is far less dependent on the rest of the world. That reduces the leverage the world once had over China.

As China becomes more dependent on its own population to consume, there has been a reshuffle as far as business dominance. In China, the largest companies (often state-owned or state-backed) own 90% of the profit made in the nation. In the rest of the world, the dominant companies hold closer to 70%. The new generation of start-up companies are moving faster to capture that emerging Chinese consumer. That is challenging the dominance of those top companies even though they still have state support and backing. The new companies have reacted more quickly to the demands put in place by the viral response.

The Chinese version of the millennial has been driving the country for the last few years. The country has been dividing between Chinese Boomers and Chinese millennials with the Chinese Gen-X stuck in the middle with the smallest number of people. The one-child policy affected the Gen-X cohort more than the other two. The millennial in China had never known anything but rapid growth until now. They have been shocked by the impact of the outbreak. All of a sudden, they are worried about employment and their financial security. That has been altering habits dramatically. Savings rates are rising fast. The focus of their consumption has been changing with more emphasis on their home and concerns about future issues such as educating their children and having what they need for retirement. They are also rethinking where they want to live as digitalization allows them to move out of crowded urban areas and still stay connected.

The response to previous crisis situations was always dominated by the state. The population automatically turned to the government for all the answers. This time, the private sector has played a major role in the development of everything from testing to treatment. More importantly, there has been an explosion of social networks unconnected to the government as the virus overwhelmed the ability of the authorities to react. Private social welfare groups sprang up to help people cope—providing everything from basic supplies to emotional support. The government is no longer seen as the only option in a crisis. Polls suggest that people trust the private networks more than the official ones.

The Trust Factor
Throughout the lockdown recession, there has been an important assumption regarding the recovery. It has been asserted the consumer is eager to resume their old habits. Once the business community is allowed to restart, there will be a wave of people rushing to get back to their previous lives. Thus far, that has not been proven to be exactly accurate.

Analysis: The majority of people polled indicate they remain wary and nervous about ending the lockdown. There are those who are demonstrating for a reopening, but there are far more that assert they are far from ready to risk exposure. They do not believe the politicians who assert it is safe enough. Most have indicated they will wait to see what happens over the course of the summer before they decide what to do in terms of resuming old patterns.

Sweden Defends Its Approach
As the COVID-19 threat emerged in Europe, the response was near universal and based on the tactics that had been employed in most of the Asian nations. Given that the virus was new and moved so rapidly, the opportunity to deal with it via testing and tracking was lost. The only option was to isolate and attempt a mass quarantine of sorts. The experiences in Europe seemed to vary with how effective that isolation policy was. Italy and Spain were unable to enforce the plan, while Germany and the Netherlands were more successful. Austria was one of the most aggressive with a near total lockdown over a two-week period. In the midst of these shutdown strategies, there was one clear outlier. That was Sweden. The state epidemiologist recommended that very little be shut down and Sweden resisted the trend embraced by the others in Europe. Shops remained open, business remained functional, even schools were left open. There was very little disruption of the core economy.

Analysis: Sweden has seen around 24,000 cases thus far. That is comparable to Austria at 15,000 or Portugal at 26,000. States that adopted a strict shutdown policy have not fared any better than Sweden. The Netherlands has over 40,000 cases, Germany has seen 170,000 cases, Spain is at 256,000 and Italy is at 215,000. The death toll in Sweden is at just over 3,000. Their deaths per million stands at 301 as compared to the Netherlands with a death ratio of 309 per million. The point the Swedish authorities have made is that they have not experienced a death toll or infection rate that is significantly different than has been the case in other European nations, but they have seen far less economic damage. The rate of unemployment has risen only slightly and now sits as among the lowest in Europe at 8%. The vast majority of the jobs lost have been those connected to the export sector as there has been a drastic decline in demand from the rest of Europe.

Sweden has been assailed by other nations for their approach. It has been pointed out that other Scandinavian states have registered far lower infection and fatality rates. The response from the health authorities has been based on two assumptions. Anders Tegnell, the state epidemiologist, has stuck firmly to both. His first assumption has been that it was far too late to try this kind of isolation as the virus had already spread and was highly contagious. The shutdown would not slow it appreciably and would only add economic devastation to the viral problem. The second assumption is key to the Swedish plan. The only real solution is some sort of "herd immunity." The virus will spread and will infect a large number of people. Given what is known about the virus, the vast majority of people will get a mild version of the disease and will not require hospitalization. Those people that get COVID-19 and recover will have a certain amount of immunity going forward (although it seems that some people get it again). The situation will be similar to outbreaks of the flu. This is what Tegnell is counting on. He asserts that the rest of the world is setting itself up for a secondary wave when all those isolated people start to reenter society. The virus will still be with us and it will infect the people that had been isolated. The governments of the world will have to consider another lockdown. This would utterly destroy the global economy and accomplish no more than the first lockdown. The better solution is to allow the virus to run its course while work focuses on treatment and an ultimate vaccine.

More Smoke and Mirrors Over Trade
The U.S. and China have become locked in an elaborate political dance. Both Trump and Xi have been using the tension between the two nations to advance their respective political positions. But neither seems willing to let these disputes and arguments affect their economies at a time when everything is in turmoil. Trump has been trying to lay all the blame for COVID-19 on China and has blustered on a daily basis about the punishment he intends to levy. Xi has been blasting the U.S. for withholding vital information and for exploiting the disease for its own political gain. It would seem that with this level of animosity and belligerence there would be no hope of advancing any of the provisions contained within the "phase one" trade deal, but that would not be an accurate assessment.

Analysis: In the midst of all the angry and accusatory salvos that have been coming from Trump and Xi, there comes a series of statements from the negotiators that have been working on the deal and the future phases that were suggested when the first phase was agreed to. The statements are upbeat and encouraging and indicate that progress has been made. Tariffs on the U.S. have been lifted and the U.S. has suspended many of the tariffs that had been imposed on China. It seems that attacking one another is good for domestic consumption by the population, but there is little appetite for making economic situations even worse.

A Narrowing World View
There has been a lot of discussion about the acceleration of existing trends as the virus wreaks havoc on the world. One of the developments that had been attracting attention even before the arrival of the COVID-19 crisis was the narrowing of people's world view. The arrival of social media changed the way people interact and how they consumed news and information. It became possible to cut oneself off from the rest of the world and exist in a self-made cocoon. Fortunately, there remained ample opportunities to meet and engage with other people as we went about our daily routine. We had co-workers and we had neighbors. We talked with the clerks at the store and the servers at the restaurant. We chatted with people while we stood in line to board the airplane and when we sat next to them at the game. We at least saw people living their lives. That is not the case these days. We are all living very isolated lives and interact with a very select set of people.

This is not conducive to cooperation, interaction or empathy. It is hard enough to understand positions and people that are different from us without adding in the challenge of getting out of our self-created cocoons. There will be many challenges that will come as the world emerges from the COVID-19 crisis, but this may be the toughest one.

The Global Risks Landscape in 2020
Not that COVID-19 is not enough to keep you awake at night, but there are plenty of other risks that will have an impact on the global economy in 2020 and beyond. Some of these have been made far more likely and far more dangerous by the viral pandemic. There will be more chance of famine, which often leads to war. Supply chains have been broken. That leads to shortages and business failures. High rates of unemployment lead to suicides, increased crime, domestic violence, drug abuse and a host of other social ills.

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Monday, 25 May 2020