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How the Coronavirus has Changed our Economy Forever Pt.2
Over the next few days, I will be writing articles to discuss how COVID-19 (the disease induced by the coronavirus [SARS-COV-2]) might affect our global economy.
How Coronavirus is Affecting Us
The coronavirus pandemic is not something entirely new in the history of homosapiens, but for our generation, there hasn’t been anything quite like it that we’ve experienced. Therefore, there isn’t much point comparing it to other events in history, as we are the ones who have to live through it today.
Lockdown may prove difficult to handle for specific sectors, especially those working within the retail and entertainment industries. Small business owners have been increasingly isolated and at risk. And the longer the lockdown, the deeper the scars and the longer the healing process too.
Liabilities are accumulating week after week, and history suggests that radical solutions are needed such as an outburst of inflation or an organised public default.
Keynes talked about “animal spirits”, where people react in times of shock (whether positive or negative) on their animal instincts alone. Risk-aversion means triggering the flight response, which results in flying to safety e.g. increasing saving, liquidating any unneeded assets.
Central Banks
The pandemic has left deep scars on the world economy. Central Banks are resorting to unconventional policies. This will be undoubtedly helpful for the economy as during cases of sudden economic shock, the economy needs greater levels of flexibility.
Examples of Central Bank Stimulus
For example, the US Federal Reserve has supported the financial markets with greater levels of asset purchases. This has provide much needed liquidity to other central banks.
The European Central Banks (ECB) has stated there will be “no limit” to the support of the euro and purchasing of government/corporate bonds.
The Bank of England has mentioned that they will finance UK government spending directly.
The Reserve Bank of India is considering “extraordinary measures” to aid with the coronavirus crisis.
How does the action of the central banks compare with fiscal stimulus from government?
Although the current, combined fiscal effort is the largest since World War II, compared with monetary policy response, the fiscal reaction of governments has been more politically complicated, cumbersome to implement and difficult to target where it’s needed the most.
For example, in the UK there are millions of people who have been left out of the government furlough scheme. One case being for directors of small and medium-sized businesses, who are unable to act like the self-employed and claim funds based on total earnings over the past couple of years. The government has said that directors can claim via the standard employee furlough scheme, which offers up to 80% of wages paid. However, directors are often advised by their accountants to pay themselves a very low wage via PAYE (often minimum wage or lower) and then claim dividends from their profits. Because of this formality, directors, who are often some of the hardest working individuals in the economy, are being left out and treated as lower-level earners and taxpayers.
The reasoning for this is because governments find it difficult to calculate how much profit is earned directly from the director’s sole business, as dividends can also be earned by investing in the stock market.
By contrast, central bankers can act with great speed, boldness and creativity in such desperate times.
Jobs
The pandemic accelerates the movement towards digitalisation and automated work. These are trends that have eroded middle-class jobs, contributed to the stagnation of middle-class wages and accelerated income inequality.
The share of services will likely continue to rise, as it has done over the recent decades. But the share of in-person services will likely decline e.g. retail, hospitality, travel, education, healthcare and government. Some low-wage, low-skill, in-person service jobs will also struggle to return (especially those working for smaller firms). There will be an acceleration in unemployment in the gig-economy and those on 0-hour contracts, even after COVID-19, as this will teach those incumbents a lesson.
On the other hand, there are some positives. Essential jobs will be protected such as policing, firefighting, logistics, healthcare, public transport and food. There will be an increased demand for labour in these sectors, which might lead to greater wage potential.
Growing digitalisation will mean lowered costs and complexities around training. Increased digitalisation will also lead to greater investment and expansion of the telecoms industries, as our dependence on the Internet has never been so apparent.
Globalisation
This has been mentioned in some other articles already, so I’ll keep this brief.
It’s likely that we will begin to move away from US-led globalisation towards a more China-centric globalisation. This is partly to do with America’s movement towards greater levels of protectionism and global distancing. While this was the will of the people to a degree, Donald Trump’s policies and public outbursts have been the catalyst that has majorly fueld this.
China, on the other hand, has not lost faith in globalisation. Globalisation benefits China greatly. China has learned its lessons throughout the 19th and 20th centuries, where they were essentially isolated from the rest of the world between 1842-1949. Their resurgence was a result of greater economic engagement, not less. Furthermore, Chinese people are now more confident and proud than ever, believing they are able to compete in any market segment they choose. Perhaps this is what led to the eventual ban of Huawei in the US in 2019 and not the threat to national security that the Trump administration has claimed.
It’s plain to see that the US has 2 choices moving forward: either engage in a geopolitical zero-sum contest, both politically and economically with China, or alternatively, cooperate with China.
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