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What will the post-pandemic world look like

Mihai Gongoroi (Translated by Cosmin Ghidoveanu)
English Section /

What will the post-pandemic world look like


Specialists in the finance, banking and also legal field held a debate more than four hours long, on the new post-pandemic reality, starting from a study made by Andre Cappon, the founder of the CBM group in New York, and presented in the BURSA video-conference called "The Post Pandemic World".

The current crisis caused by the coronavirus pandemic will bring about some huge changes; infrastructure, communications and computerization can be the source of economic recovery of the Romanian state, once the health crisis passes; our economy is likely to have a W-shaped evolution; in the current context, the greatest danger is populism; the resumption of economic growth after this period depends on the confidence of the population and the measures taken by the government - these are just some of the conclusions that emerge from the online debates held two days ago. Mr. Cappon's study is presented in the article below, and we will return with details from the BURSA video conference.

The biggest challenge for the world right now is to find a way out of the Covid-19 pandemic, with a focus on avoiding new epidemic waves after social distancing measures are loosened, says Andre Cappon, founding president of CBM Group of New York.

According to him, possible short-term solutions are: vulnerable groups (the elderly, those with medical conditions such as asthma, hypertension, obesity, etc.) remaining isolated until effective and reliable tests / treatments / vaccines are developed; young, healthy employees returning to work progressively, using masks, gloves - precautionary / preventive measures are passed such as washing hands often, avoiding large groups of people, etc.

Long-term solutions are the development of effective testing, and especially the development of effective treatments and vaccines, as well as the development of group immunity, he says.

How deep might the anticipated recession/depression be? How quick will the recovery be?

Cappon adds that all scenarios for economic projections and the size of the disaster depend on how long the pandemic will last - a few months or more, if we see secondary outbreaks of the coronavirus such as those seen in the city of Harbin, Heilonjiang in northern China.

The pandemic is expected to last only a few months, thanks to social isolation and progress in testing / treatment / vaccine. But it could be longer or recurring. It should be noted that although Covid-19 disease is highly contagious, the mortality rate is much lower compared to previous pandemics (e.g. Spanish flu from 1918-1919).

As far as the expectations regarding the GDP (gross domestic product) levels, the econometric estimates for the USA and Europe are negative for 2020, with a gradual return expected for 2021-2022, but not a V-shaped or even an U-shaped one. The gradual turnaround could take 2-3 years, in other words returning to the point where we were before the pandemic.

The IMF forecasts a 3% contraction in global GDP by 2020, in the baseline scenario.

"One appropriate example would be the situation of China, which announced that the economy began to recover in April, but which then posted a negative GDP of -6.8% in the first quarter of 2020 - so are the Chinese telling the truth or is the reality much grimmer? Will they be able to control new virus outbreaks? What if China is unable to export as much as before because of the recession and of trade barriers in America and Europe? ", are some of Cappon's questions.

The "Asian tigers", the economies of Hong Kong, Singapore, Taiwan, Korea, and Japan are expected to have a relatively rapid economic recovery, while emerging markets - Latin America, Africa - will most likely experience longer and deeper recessions, being significantly affected.

As for where developed Western economies are concerned, unemployment is expected to reach the levels last seen in the US during the Great Depression (25% unemployment), and the big problem is the lack of social safety nets to support the unemployed. Stimulus measures may be insufficient to cover long periods of unemployment, and future retirees will also be affected since pension funds depend on the evolution of the capital markets.

Bankruptcies and insolvencies will increase sharply, similar to the evolution of the 2008 crisis, perhaps even more numerous this time. Many companies, especially small and medium-sized ones, will disappear.

Secondary effects, as scored by the specialist, are:

- after the coronavirus crisis, households will become very conservative (like the Great Depression generation) - more savings, less consumption, avoidance of debts and consumer loans. This will reduce GDP growth rates, especially in the developed world and particularly in the United States.

- "the structure of society is falling apart": collapse of the medical systems, growing cybercrime, supermarket thefts, widespread crime, protests, etc., especially in urban ghettos in the developed world (United States, France) and in emerging countries such as Brazil and South Africa.

Sectoral impact

The impact across various economic sectors will vary. The most heavily affected will be the energy sectors, especially the American oil industry (shale), where the cost of production is higher, as is debt. Countries that rely on the oil industry to generate budgetary revenues will also face significant problems.

Other affected sectors will be retail (malls will be avoided, for example), large transporters (lower volumes of world trade), commercial real estate market (due to more teleworking), as well as the residential real estate market (crowded cities with a high density of inhabitants will be avoided).

The IT&C sector could be the biggest beneficiary of the crisis, especially in the area of internet solutions, IT infrastructure, mobile telecommunications, IT platforms for education, health, etc. The pharma industry will also benefit from the pandemic, as well as the transportation logistics area (Uber, FedEx and other courier services), online commerce and the agribusiness industry, Andre Cappon points out.

How will governments and industries finance the turnaround? Will they be able to handle that much debt?

In the United States, the government's stimulus package of the federal government of over 2 trillion dollars includes, according to the analyst:

- for individuals: money stimulus (helicopter money) paid by the government, bigger unemployment benefits, temporary exemption from the repayment of education loans;

- for companies: rescue packages to essential and strategic American industries such as airlines, low-interest loans for the payment of salaries and other immediate expenses, extension of payment deadlines.

The full package amounts to over 10% of US GDP, but the question of "is it enough?" remains relevant. That is, given that the economy operating at only 50% capacity over a period of 3-6 months means a GDP contraction between 12.5% and 25%, GDP which disappears, Cappon says. Added to this are the November presidential elections, which will exacerbate differences of opinion in the population and the political spectrum.

In Europe, it is a practice for governments to help companies with paying their unemployment benefits to prevent an explosive increase in unemployment.

At the same time, to alleviate the debt burden, central banks act as facilitators of last resort by purchasing securities (money printing) to provide liquidity to markets, that in turn lend to governments and the business sector. As a result, companies with access to debt markets (with investment grade rating - recommended for investment) are issuing debt to survive the crisis. For companies without an Investment Grade rating, they have higher borrowing costs for any debt issued.

The crisis will lead to a sharp rise in public deficits, given that government debt levels are already very high.

In essence, as a bottom line, Cappon points out, anyone who can borrow money will do so. Government debt to GDP ratio will grow very rapidly (also due to the economic downturn), and so will private debt compared to the GDP.

Public debt levels in some countries are already high: in the United States the debt-to-GDP ratio is 120%, in Japan 230%, in Italy (the most vulnerable country in the Eurozone) 135%. It should be noted that, according to a World Bank study, when public debt to GDP exceeds 70-80%, economic growth suffers and decreases.

How will the debt be paid off?

Interest rates (already at real negative levels in most developed countries) and inflation will remain low in the near future. The causes of the low interest rates and inflation are the global excess production capacity, the central banks' quantitative easing policies, and rather deflationary expectations in the economies amid lower consumption.

In the long run, those who save, and capital will end up paying for the crisis, predicts Cappon, who estimates that in the medium to long term inflation will return to higher levels - in the United States we could see huge levels like those in the 1970s, which will lead to higher interest rates.

Will the dollar retain its role as an international reserve currency?

The dollar will likely retain its role as an international reserve currency, says Cappon, since no other reserve currency is likely at this time: The euro is not credible; most investors do not trust China; Bitcoin and similar virtual currencies are too volatile and unregulated; no country wants to go back to the gold standard.

However, it is expected that initiatives such as Libra (the currency developed by Facebook) will reappear in the spotlight and enjoy more credibility.

Other consequences of the crisis are massive corporate ratings downgrades, which will lead to credit crises. As a result, there will be consolidations in certain industries and "vulture investing".

How will the role and weight of governments in the economies of various countries evolve?

The social security safety nets rapidly introduced by the governments to protect the unemployed and those unable to pay their loan installments and rents are supposed to be temporary, but many such measures are expected to remain "embedded", especially those targeting low-income individuals. Programs that provide a guaranteed minimum income may even appear in some developed countries.

It is expected that even the United States, which has relatively few safety nets, will introduce some into its economic structure. Also, political pressure for a government backed medical system will increase amid this year's election campaigns and elections.

At the same time, given that governments provide support to many large industries affected by the crisis by offering secured loans (e.g. airlines), such as small and medium-sized airlines, some of these support packages in the form of loans could be converted to stock. That will mean that governments will own more and more of the national economies, with the assumption being that the holdings will be resold and the companies reprivatized when the conditions are right - the US used this practice in the 2008 crisis to save the automotive industry.

The main issue will be the long-term balance between free markets (business) and governments, says Cappon, who points out that in times of emergency, such as wars or pandemics, governments play a stronger role and markets are suppressed.

Governments are launching a campaign of "financial repression" through artificially low interest rates, price controls, capital controls, which tend to have effects for longer even after the end of the emergency.

In the opinion of the specialist, to be expected are: a bigger role for governments; higher taxes, especially wealth taxes, "de facto confiscation of the savings" of the rich; more government control over business and personal lives; a greater number of regulations.

The effect on globalization

Globalization is being called into question, especially in the West, by association with the manufacturing sector and job losses moving to lower-cost countries. Globalization in the pharma, financial and technology sectors continues to be viewed positively, says Cappon, who points out that globalization is still being praised and promoted in China / Asia, the regions that have benefited the most from it.

The specialist also notes that China's return to the international stage as an ambitious global power is viewed with distrust in the West, as China has become the largest manufacturing hub in the world, especially for certain key industries; has extensive financial resources to gain strategic positions (for example through acquisitions of large Western companies or port infrastructure); has demonstrated major ambitions of being a regional and global military power; has a political system that does not evolve in line with Western values such as democracy, freedom of the press, human rights - "China is now a totalitarian system driven by a capitalist engine and supported by high technology."

At the same time, Cappon points out, the US-China relationship is already strained amid the trade war and could become even more so, following the coronavirus crisis. The US will renew efforts to repatriate certain industries (manufacturing) and associated jobs and / or diversify trade relations with India, Mexico, Vietnam and the Philippines. Americans are also expected to step up efforts to influence other countries to sever ties with China.

Regarding the US relationship with Europe and developments in the European Union, Cappon notes that the transatlantic relationship suffered during the Trump administration but it can be easily mended given the traditional ties - historical and cultural -, NATO can provide a starting point and an adequate legal framework for renewing the relationship.

About the EU, Cappon says the EU bloc has lost much of its credibility, especially since the post-2008 euro crisis, and mentions Brexit in that regard.

"The coronavirus crisis has revealed the lack of intra-European solidarity in difficult times," he says.

The consolidation of regional economies (USCMA - the new NAFTA, continental integration agreement) is also expected, including the consolidation of Mercosur. As the United States develops closer relations with Latin America, such as Brazil, Europe will look more closely to the Mediterranean, to countries such as Morocco, Tunisia and Egypt.

Nationalism will flourish, and the focus will be on bilateral relations at the expense of multilateral relations, which means pressure on institutions such as the World Trade Organization (WTO) and the United Nations (UN), which are threatened with a reduction of their role in the infrastructure of the world order.

Also, supply chains for essential products (medical and pharmaceutical products) will be redesigned, including through the diversification of the raw materials sources, and, where possible, they will be "repatriated". In particular, repatriation will be to North America and Europe, where, given the high labor costs, there will be a focus on automation and technology, especially in the manufacturing sector.

Those companies may also move to peripheral economies, with still relatively low labor costs, from regions such as Eastern Europe or to countries such as Vietnam, the Philippines or Mexico.

Telemedicine and working from home will also become more common, with IT companies benefiting from this transition. Office space will lose value, and businesses like WeWork will become more frequent. Fintechs will also boom, cash will be reduced and electronic payments will become more popular and common.

As for the financial markets, Cappon says they are recovering, but are still vulnerable to surprise negative news and political events such as the US presidential election in November. The price of oil is expected to stabilize and return once the price war between Saudi Arabia and Russia abates, and especially once economic activity resumes.

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