Green Economy Journal Issue 48

THOUGHT LEADERSHIP
THOUGHT LEADERSHIP
Two lessons stand out. The first lesson is that governmental control
over the economy takes a large step-up during periods of crisis. The
second is that the forces encouraging governments to retain and expand
economic control are stronger than the forces encouraging them to
relinquish it, meaning that a “temporary” expansion of state power tends
to become permanent. 5
Road to Recovery
The extent of the economic damage and the time it will take for the
economy to recover is subject to a high degree of speculation, and new
models have been created to project a recovery trajectory. For example,
the recovery can be V-shaped (after the downward fall the recovery will
follow a straight line back to the original growth trajectory); U-shaped
recovery (like V-shaped but with a longer turnaround period); VU shaped
recovery (an initial pop, or sugar hit (the V), which is then superseded by a
second, much slower growth phase (the U) due to a huge increase in debt
repayment burdens and big creative destruction-induced output gaps
(or excess productive capacity) as the virus forces the global economy
to effectively rewire itself); Z-shaped (recovery follows the V-shaped
trajectory but overshoots the original trajectory due to pent-up demand
before falling back to the original trajectory); W-shaped (recovery begins
buts fall back before climbing back up again); and L-shaped (growth
recovers but ends up lower than that of the pre-C-19 economic growth).
In a survey of 106 economists and real estate experts conducted by
Pulsenomics and Zillow, 41% of panellists expect the US recovery to
follow a “U” shape, with the recession lasting several quarters before
returning to growth. 6 This prediction is in line with how the experts
expect the US economy to recover overall. Forty-one percent said
they think economic recovery will follow a “U” shape, and 33% say it
will be a bumpy, multi-year return to trend growth. Both patterns are
characterised first by a sharp decline and then match how experts see
transaction volume recovering, with the consensus generally being a
more gradual journey back to normal.
Whatever the final shape may turn out to be, Eswar Prasad and Ethan
Wu, writing for the Brookings Institution, warns, “The world economy is
on the precipice of its worst crisis since World War II. As the newly updated
Brookings-FT TIGER (Tracking Indexes for the Global Economic Recovery)
makes clear, economic activity, financial markets, and private-sector
confidence are all cratering. And if international cooperation remains at its
current level, a far more severe collapse is yet to come.” 7
A wide variety of economic and survey data suggest that the economy
will recover slowly even after the government begins to ease limits on
public gatherings and allow certain shuttered restaurants and shops
to reopen. Many economists and business owners say there will be no
rapid economic rebound until people feel confident that their risks of
contracting the coronavirus have fallen, either through widespread
testing or a vaccine. 8
Prasad and Wu argue that while the current extraordinarily sharp
downturn could prove to be relatively brief, with economic activity
snapping back to previous levels once the Covid-19 contagion curve
is flattened, there is good reason to worry that the world economy is
heading into a deep, protracted recession. In their view much will depend
on the pandemic’s trajectory and whether policymakers’ responses are
sufficient to contain the damage while rebuilding consumer and business
confidence. They do not believe that a rapid recovery is likely due to
ravaged demand, extensive disruptions to manufacturing supply chains,
and a financial crisis already underway.
They, like many other commentators, draw a distinction between
the 2008-09 crash, and Covid-19. Unlike the 2008-09 crash, which was
triggered by liquidity shortages in financial markets, they point out that
the Covid-19 crisis involves fundamental solvency issues for firms and
industries well beyond the financial sector. In addition, they note, the
current shock is simultaneous and universal. During and immediately
following the 2008 crisis, some emerging markets, not least China, and
India, continued to register strong growth, pulling the rest of the world
economy along. But this time, no economy is immune, and no country will
be able to lead an export-driven recovery. Today’s collapse has increased
deflationary and financial risks in the advanced economies and struck a
significant blow to commodity exporters.
On top of it all, oil prices are plunging even more than they otherwise
would, due in large part to Saudi Arabia and Russia flooding the market.
In their view all told, the economic and financial carnage wrought by the
coronavirus could leave deep, lasting scars on the global economy. While
they recognise that central banks are stepping up to the challenge, they
point out that central banks cannot offset the fall in consumer demand
or stimulate investment by themselves. With both conventional and
unconventional monetary-policy tools already stretched to the limit, fiscal
policymakers will have to do more.
They suggest that well-targeted fiscal measures can soften the blow to
consumers and businesses-especially small and medium-size enterprises,
which typically have minimal financial buffers-thereby helping to sustain
employment and demand. In these desperate times, such measures
should be fully embraced by all governments that currently benefit from
low borrowing costs, even if they already have high levels of public debt.
They also emphasise that low- and middle-income countries who
have inadequate health systems will need substantial support from the
international community, potentially including concessionary debt relief.
But there is an elephant in the room: unfortunately, the world’s inability
so far to forge a common front attest to the erosion of international
cooperation, which is further damaging business and consumer
confidence. They too, like many other commentators, call for this to
change. The world urgently needs honest and transparent informationsharing
by national leaders, coupled with aggressive steps to contain
the pandemic, extensive stimulus to mitigate the economic fallout, and
a carefully calibrated strategy to restart economic activity as soon as it is
safe to do so.
The embedding of Zoom, or cheap video
conference technology, may dissipate
the value of face-to-face meetings and
result in a permanent decrease in the
demand for expensive business-related
travel and accommodation.
Christopher Joye agrees with the sentiments expressed by Prasad and
Wu. Joye sees the global economy being burdened by a great deal more
public and private debt because of the enormous fiscal policy responses,
which will need to be serviced through tax revenue and corporate/
household earnings. This he argues will drag on future global growth
after the initial pop in activity as businesses restart and the working-age
population gets back into their day-jobs.
On the matter of whether this precipitates a sovereign debt crisis he
believes that ultimately the central banks can cauterise this problem by
continuing to do what they are currently doing: i.e., funding their domestic
treasuries by buying government bonds via quantitative easing (QE). After
all, he notes, central banks were originally created to fund governments
during times of war (that term again), and that is arguably where the world
finds itself now in terms of response.
On the question of inflationary shock, he expects the deflationary
impulse of the GVC via the huge sudden increase in labour supply to
overwhelm the inflationary impulse of the crisis over the short-to-medium
term (i.e., in the next year or two) noting that the near-term inflation
pressures obviously come through supply-chain rigidities as labour is
taken temporarily offline.
He does foresee a key consequence of the GVC as compelling much
greater internalisation of supply-chains, especially those that service
critical infrastructure and security-sensitive goods and services. In terms of
changes, it is suggested that the GVC will result in a permanent economic
damage akin to a form of creative destruction where the virus kills off
weak companies as well as unproductive employees. This he suggests is
because many businesses will come back looking different, shedding low
quality workers, and closing unprofitable activities/subsidiaries.
Some industries will be permanently changed in both positive and
negative ways, for example, entire communities are being forced to get
much more comfortable with online shopping and the associated delivery
process, reducing at the margin the demand for traditional retailing. The
cinema industry will be irreversibly damaged as consumption shifts away
from theatres to on-demand digital platforms like Apple and Netflix, which
will turn allow these distributors to capture more of the value-chain in the
same way Amazon did with bricks and mortar retailing.
The commercial property sector is also likely to feel this change as there
is a possibility of a permanent decrease in the demand for both office and
retail space. Many companies may conclude they can save overhead by
remaining disaggregated (i.e., not renting office space). This will result in a
decline in the value of commercial properties, and the risk associated with
commercial property debt could increase sharply. Commercial property
lenders’ LVRs might suddenly jump because of this. Indeed, he argues that
a lot of distress in commercial property debt portfolios can be expected
over the next 12 months.
The embedding of Zoom, or cheap video conference technology, may
dissipate the value of face-to-face meetings and result in a permanent
decrease in the demand for expensive business-related travel and
accommodation, adversely impacting airlines and hotels, as companies
seek to enhance their operating efficiencies. All this creative destruction
could result in unemployment rates not returning any time soon to
their pre-GVC levels which will, in turn, place downward pressure on
wages. Ultimately, he concludes that this will result in a battle between
the shock of the new – a virus that derails life as we knew it – and the
opportunities presented by the gigantic stimulus afforded by fiscal and
monetary policy. 9
As the world tries to deal with the ongoing challenges of Covid-19, it is worth reminding
ourselves that infrastructure investment and climate action are both urgently need,
and that with the right approach, both goals can be achieved simultaneously. This
article provides some indications of what the right approach may be.
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REFERENCES
1 Opie, J. and Opie, P., ed. (1997) [1951]. The Oxford Dictionary of Nursery Rhymes (2nd ed.). Oxford: Oxford University Press. p. 254. ISBN 978-0-19-860088-6.
2 Joye, C. 2020. “Calling a ‘VU’ shaped recovery: and creative destruction induced by GVC.” Coolabah Capital Investments, 7 April 2020. .
3 Briefing, 2020. “Rich countries try radical economic policies to counter covid-19.” The Economist, Mar 26, 2020. .
4 Briefing, 2020. “Rich countries try radical economic policies to counter covid-19.” The Economist, May 26, 2020. .
5 Briefing, 2020. “Rich countries try radical economic policies to counter COVID-19.” The Economist, March 26, 2020. .
6 Olsen, S. 2020. “Experts: Spring’s missing home sales will be added in coming years. Zillow, June 3, 2020. .
7 Prasad, E. and Wu, E., 2020. “Anatomy of the coronavirus collapse.” The Brookings Institution, Monday, April 13, 2020. .
8 Tankersley, J. 2020. “Economic pain will persist long after lockdowns end.” The New York Times, 13 April 2020. .
9 Joye, C. 2020. “Calling a ‘VU’ shaped recovery and creative destruction induced by GVC.” Coolabah Capital Investments, 7 April 2020. .
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