The world faces an unprecedented economic crisis as shops and businesses, factories and entire communities have been put under lockdown due to the coronavirus pandemic. Governments are doing their best to cushion the blow and keep their economies intact, but many people say things won’t be going back to normal… even when this pandemic is over. According to them we are in a “new normal.” To see how economies and industries across the world are already shifting to this new reality, we connect with Dr. Larry Samuelson, Professor of Economics at Yale University, Tony NASH, CEO and Founder of Complete Intelligence, and Dr. Graham Ong-Webb who joins us from Singapore’s Nanyang University.
Interview Notes
AN: My first question to Dr. Samuelson, which industries do you think will struggle to recover after this pandemic and even despite the huge sums of money being poured into them right now to try and keep them afloat?
LS: The huge sums of money are designed to get the industries through this initial period when much of the world is locked down and firms’ whole industries have no obvious or no steady source of revenue. Once we are past that, hopefully we see some opening of economies soon, we still have a recession on our hands. And at that point I would say that consumer confidence is the key thing to monitor it’s difficult to recover that under an ordinary recession. Now we’re gonna have to recover that in the midst of still dealing with the coronavirus.
We won’t have the virus behind us until we have a vaccine, which looks like it’s perhaps a year off and so we’re gonna have to try to reopen our economies where people are still worrying about the virus. So now we can ask about industries the ones that will fare best are those that people can reasonably, safely interact with. We expect retail some education to fare better than say mass sporting events and confine travel in that respect.
Can also look at which industries represent activities, purchase is that people ordinarily do that they have deferred and which are discretionary. The deferred ones we might expect to come back fairly quickly. As a frivolous example think of all the haircuts people are going to need when they come out of lockdown. Things like automobile purchases durables home maintenance might be in the same category. More discretionary items like travel are going to take a longer time to come back.
AN: So what you’re saying is that recovery will really depend on consumer sentiment and it looks like the sort of high-touch industries where you know and where it involves travel or social contacts those are going to be a bit slower to recover? Well Dr. Webb the, European Union they’ve agreed on a 500 billion dollar stimulus plan to protect workers businesses and their Nations in light of this pandemic but they haven’t been able to agree on issuing debt to raise long-term financing for the region what do you
make of this still is it really enough for the region?
OW: Well it appears to be clearly insufficient for for the requirements of what stands to be a 19 trillion dollar economy. We think about the European Union. 27 countries as a collective this is second largest economy you know in PPP terms after China. And so you know the amount of – a billion dollars pales in comparison to what other national economies are injecting in terms of stimulus packages to stave off the risk of a severe economic crippling, mass layoffs and so forth.
So I think the ECB was right to to campaign for about 1.5 trillion dollars and clearly we’ve ended up with 500 billion dollars and that’s not going to be near enough to what the region needs. But nevertheless, yes, there is this big issue in the backdrop of who’s gonna finance or finance all of this. And this is clearly a follow-on discussion from the one we had last week about the global debt crisis right. So no basic were looking at trade-offs here, which trade-off are we willing to live with, the one where we deal with or crisis now in terms of mass unemployment, crippling economies, whether we deal with a lengthy debt crisis down the road, you know, sort of alleviating the pain today.
So I think this is an ongoing discussion but clearly the $500 package is a compromise, a severe one. Southern European states have compromised themselves. They’d rather get something rather than nothing. But clearly it’s insufficient in terms of what’s already percolating in terms of small and medium enterprises folding up as we speak, people losing their jobs because of the slump in demand are all around for range of services and inability for those services to to actually meet consumer needs because of the of the lockdown.
AN: So it looks like there may be more coming out of the EU as this pandemic progresses and the economies continue to be hurt. Well Dr. Nash, here in East Asia China has actually restarted its economy factories are back online and lockdowns on cities even Wuhan they’ve been east. But with the rest of the world they closed for business. Many say that China is actually in for a second supply shock. What’s your your take on this?
TN: Sure. Our biggest worry about China, well, we have a number of them but we’re actually worried about the fall in manufacturing. The industrial production collapse in China that we see coming starting in, say, April and then going into third quarter should be unfortunately pretty damaging to China’s economy. We expect to see deflation starting in April, May in China. It’s not like 10 or 20 percent. It’s kind of half a percent, but still once you start to dip your toe into deflation, it can be pretty dangerous, so starting and then stopping.
The thing that we have to remember with all of these economies is that these are government-mandated shutdowns of the economies. These are not market failures. And so the EU issues 500 billion dollars and euros for a fiscal plan. It’s not the small companies, even the large companies’ fault that this is happening. So the governments have and will continue to push money into the economy because they know that this is their fault. It’s their responsibility. The companies aren’t failing. It’s the government that’s failed the companies by not having a plan and not having the resources in place to manage this.
AN: So that’s no need for such huge pessimism, I suppose. So you think that as long as the government’s take the right actions and the full might I mean that the second supply shock or another sort of sort of impact might not be as big. Well Dr. Samuelson some say that China could employ what some call it a trap diplomacy either by seizing other country’s assets or forgiving that to boost its soft power if it does employ this kind of tactic then could we see the world order actually change?
LS: We have to remember that the question of debt-trap diplomacy was here well before the pandemic. Critics of China have been concerned about this for some time. I don’t have a good idea. It’s very hard to say whether the pandemic is going to exacerbate. The concerns people have about debt-trap diplomacy, it might if it puts other countries that China is dealing with in a particularly adverse position. But it might not. It’s having an effect on China. That may make things more difficult for them.
I think more important is to remember that when we talk about debt trap diplomacy, we tend to think of international trade of economic relations between countries as a competitive or an antagonistic activity, where the most important thing to keep in mind is that international trade is at its heart a cooperative activity. We engage in it because countries on both sides gain from international trade.
As China invests in other countries, as it deals in other countries, it acquires some influence in those countries and some people are worried about that. That’s where the term debt trap diplomacy comes from. But it also becomes linked to those countries and has an interest in those countries and that creates a force going the other way. I think on balance it’s important to remember that there are some real gains to our world economy.
Some risk, some supply chain risks, that we have seen. Some political risks that some people worry about. But on that I think there are real gains from having the International economy linked together. We see these gains in terms of our economic well-being. I think we see these gains in terms of our political well-being as well. Countries, as they trade, as they deal with one another, tend to have common interests that in the long run are good for all of us.
AN: Well, so we really need to see more cooperation and continuous trade between nations especially in times of economic crises. Well Dr. Ron Webb, how do you expect this tug of war between the US and China to play out during this pandemic, especially as their bilateral relations worsen because of the COVID-19 pandemic?
OW: Well, you know the future is contingent clearly. But I think in terms of the current trajectory, it looks like this tug of war, this ongoing bilateral trade war between these two economic juggernauts, will continue unabated I mean from the recent news reports of President Trump’s speeches and his articulations on the issue, it’s quite clear that the US administration is doubling down on its protectionist measures against not only China but also even the European Union and also Mexico.
So I think the COVID-19 challenge which is having an impact of across various domains including economics and technology and so forth will continue without much foreseeable change. I think this effects you know the global economy. It has been even pre COVID, but I think it’s not helping the situation whatsoever in the current climate.
AN: Right. So, we expect these technological sort of competition and the sort of trade disputes that we’ve seen in the past, they’re not just going to stop short because of this pandemic that’s going on. They’re going to continue. Nevertheless, well just before we go, Mr. Nash, some say that there could be a rebound in the latter half of the year. When do you think the worst of this pandemic
will be over on the economy?
TN: Yeah, I think it really depends. I think it depends on a country’s ability to issue a fiscal stimulus. I think it depends on the concentration of manufacturing of those economies, and I think it depends on let’s say workforce flexibility. So, with those, I think China is not in a great position. I think China is going to have a very rough year ahead. The official data may not report it, but we envision a very rough year ahead for China.
We think Europe will have a rough third and fourth quarter. Of course, late in the fourth quarter, we see Europe starting to come out of this. But both of those are constrained because they don’t have a U.S. dollar basis to issue fiscal stimulus. Their companies have U.S. dollar debt and their countries are having to borrow US dollars into their Treasuries in order to keep trade and other things going. So they have real problems.
The US has already issued 2.2 trillion fiscal stimuli plus a lot more from the Fed. And so, the US has had the ability to stimulate the economy. It hasn’t really had traction yet. But of the three kinds of general regions, what we’re seeing is the US, although they’re all very difficult situations on a relative basis, we see the US doing much, much better because of the US’s ability to issue fiscal stimulus and to play monetary policy with the US dollar. So the US dollar is a huge asset for the US.
The large millennial bracket is a huge asset for the US. It’s a workforce that’s actually contributing to the overall dependency ratio and then the ability for US companies to pull their manufacturing back to North America, this is not absolute it doesn’t mean a hundred percent, but some manufacturing will certainly be diverted to Mexico for a number of reasons, and we see that taking catching pace in, say, q3 and q4. And that allows the US to do more value-added activities through the course of recovery.
AN: Right. Well, each region is going to have its own challenges and an unprecedented pandemic really does bring unprecedented complexities when it comes to recovery. Well I’m afraid that’s all we have time for today it’s been a very great discussion.