My imaginary grandmother aka GrandMa once told me “ son! you don’t measure the damage caused by a hurricane, when you are in the eye of the hurricane “. And I believe that to be true. In my own assessment, we should have a lot more clarity on where we are and the road ahead by the end of April 2020. By mid May, we should be able to capture a good picture of the overall damage caused to the society, in terms of death and disruption, as well as the overall economic damage to the global economy.
I strongly believe that, comparing the ongoing COVID-19 pandemic with the financial crisis of 07/08 is like comparing apples to pineapples. This is why I keep urging my friends and colleagues to stop comparing the economic damage from COVID-19 to the financial crisis of 07/08. It’s not the right or an appropriate comparison. I would define the comparison as a false equivalence.
What we are going through is, more of a warlike situation, in terms of the overall loss of lives across the world along with the disruption to the society, and obviously the economic damage from shutting down of so many businesses resulting in massive loss of jobs. Also, the lockdown of cities and in some cases the entire country around the world, will translate into lowest economic activity that most of us have seen in a very long time.
Some countries like Italy and Spain for example, as a society will most likely take a while to heal and recover from the pandemic, and it will reflect in how these economy comes back to life. Also overall debt levels of most governments across the world, will look quite similar to a warlike situation. So those focusing on markets and economy will also need to factor in the bigger picture. And what we do need to remember is, unless a therapeutic cure or a full functioning vaccine is discovered, the COVID-19 virus may continue to terrorise the society, causing large scale disruption.
So therefore pricing a V shaped recovery might disappoint a lot of money. As I see it, only when we have gone through the eye of the hurricane aka COVID-19 that, we should begin to have a very good estimate of the overall economic damage, and also be able to establish the damage to the society. Rushing to estimate the economic damage while we are in the eye of the storm isn’t really a prudent approach.
The policy decisions made by the central banks along with the stimulus packaged announced by various governments across the world will surely serve as the bloody supply the global economy will need to support its healing process. But nevertheless, a sizeable number of companies may not survive this pandemic, even with ultra low interest rate and big stimulus. A lot of the zombie companies were simply kept alive by the banks, and those companies may not come back to live again. I do expect consolidation in the economy starting with the hospitality sector as well as airline industry etc. There will be an uptick in M&A activity, as companies decide their future going forward.
Also, if the social behaviour really changes then, it will also have an impact on the economy. Countries like Italy and Spain will suffer immensely, and large parts of the EU will as well. I also see disruption in the economic model of countries like China for example, because in the immediate aftermath, some companies in the developed world will be forced by their governments to move their supply chain out of China. And there may also be pressure from the markets itself.
So people who are looking at China as safe heaven may have to come out disappointed on the other side of the show. Going forward, US may very well become more assertive and controlling when this is over, and the politicians in the US will demand their companies to bring a lot of their supply chain back to the US, and the pressure may higher especially on the healthcare and pharmaceutical related sector. Also no doubt, there will be consolidation and readjustment across the economy.
The pandemic will impact globalisation, and the world economy will readjust. But I also see innovation, and possibly a change in the architecture of the global economy. And if there is backlash against China then, investors will need to readjust strategy also. The economy will come back, and the central banks will once again play a dominant role. Markets may have a V shaped bounce back, but not the economy. And it’s not really a bad thing at all.
In my own assessment, just as the architecture of the modern economic system came out of the World War II. I believe, the pandemic will bring out new innovation in overall economic policy making and modelling. Insurance companies will need to learn how to underwrite pandemic risks, governments will have to prioritise public health as a top most priority. I see a growth in pandemic bonds and insurance market. And surely in tech including Healthcare TECH.
We may also see a demand for off-grid living. Also, if it was up to me then, I will encourage a whole-of-the govt approach to fund and prioritise public health. And in the scenario, part of defence spending of countries should be allocated towards public health and general welfare of the society. A healthy and good function gut inside a human body provides the best natural defence aka the immune response. And I am sure most of us know by now, the importance of a robust immunity. So spending on public health should become part of the overall defence spending of counties. Also policy makers especially the central bankers will have to pay more attention on public health, and it should become part of their overall mandate to maintain monetary and financial stability. Because quite clearly, a pandemic will disrupt the monetary and financial stability of any economy. And the markets will most likely start pricing in pandemic risks, so therefore markets will most likely push governments and companies to show, how they are dealing with a future pandemic risks. So in the process, public health will become a priority. I would like to conceive an economy that worked very hard for people everyday, and not an economy that enslaves and breaks people. And we can do that, but yes we do need a strong resolve. I am hoping people won’t forget this pandemic. Because I see this great tragedy unfolding in front of our yes, also as an opportunity to fix whatever is flawed and broken. So let’s see, how we are going to take this forward.