2007 - 2020

The Global Economy Catches the Virus

THIS week we take a look at what is happening in the global economy.  The impact of the Covid-19 crisis is unique in economic terms. Normally recessions are triggered by some malfunction that is internal to the market system, e.g. over-investment leads to a glut of products that fail to sell.  Think of a lightbulb failing.
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However, the collapse in global output in 2020 is different.  It is the result of a lockdown imposed by government fiat.  Instead of the lightbulb failing, the light switch has been flipped.  Which explains why the initial forecast of central banks, including the Bank of England, was that the economy would turn back on again in an instant, the moment the lockdown was lifted.  Think of the light switch being flipped on again. Hence references to a quick, V-shaped recession.
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But six months later, few experts are prognosticating such a V-shaped recovery. In my analogy, the light shows no great sign of working, even now the switch is back in the “on” position.  Something has “popped” the fuse.  What goes?
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The latest economic data is dire.  In America, the second quarter economic decline translated into an annualized drop of 32.9% in output.  Trump’s incapacity to manage the crisis has led to more than 150,000 Americans dead but also 4.4 million infected, which has added to the economic cost of the pandemic.  Last week yet another 1.4m American workers filed for unemployment relief.  Goldman Sachs, the big investment bank, says that 70% of the US has either reversed plans to reopen the economy or delayed them.
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In Europe, the economy of the 19-country eurozone partners shrank by 12.1% percent in the April-June period – the largest drop on record.  Spain suffered the heaviest fall at 18.5%. France, Italy, and Portugal also endured steep declines.  The broader 27-country European Union saw output sag by 12%.  This performance is actually weaker than the US, partly because the German economy was already flagging before the pandemic arrived, and partly because EU leaders have dithered over introducing a stimulus package.
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But bottom of the economic league comes the UK, which has suffered a bigger slump than any other major European economy.  In the second quarter, UK output shrank by a fifth, with the economy falling into its deepest recession on record.  Official data released on Wednesday showed that GDP fell more than 20% quarter on quarter.  The decline in UK output since the end of 2019 is in fact double that in the US and second only to Spain among European countries.
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Incidentally, this relatively poor UK performance suggests three things. First, Chancellor Sunak’s economic stimulus package – despite the attendant publicity – is actually quite weak. Second, the prospect of Brexit is still weighing heavily on business confidence.  Third, Boris is an even more incompetent a manager than Trump.
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WHAT HAS GONE WRONG?
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What explains the transformation of the temporary lockdown into a global, sustained recession?  There are at least three elements involved.
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First, the global economy was already in a bad shape before the pandemic. As a result, the lockdown can be seen as the straw that broke the camel’s back. The problem goes back to the 2009 banking crisis, itself the outward manifestation of an inner weakness in the world economy. Essentially, there is global excess manufacturing capacity.  The upside is that inflation has disappeared: potential supply is far ahead of consumer demand.  The downside is that the impetus to invest in new capacity and new technology has become blunted – hence productivity growth has flatlined everywhere (which explains the weakness in the German economy). Footloose cash has nowhere to go but into speculation – hence the banking crisis and hence the current insane rise in world stock prices despite the plague.
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Second, the lockdown has effectively killed key sections of the global economy stone dead.  In particular, tourism has been crucified and is unlikely to recover (if it does) until years after a successful vaccine has been produced and disseminated. Tourism may seem a peripheral part of the global economy, but it was actually one of the few growth sectors.  And when you take out tourism, you take out the aircraft construction business, chunks of shipbuilding, and property construction (think hotels, resorts, and airports).  Kill world tourism and its adjuncts and you destroy around 15% of the global economy, and at least one in ten jobs.
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Third, the modern capitalist economy is predicated on massive consumer expenditures to keep the whole economic machinery in motion.  But this consumer economy is now in jeopardy as a result of Covid-19.  Consumers are endlessly cajoled to buy what they don’t need, in ever greater quantities.  In addition, they are persuaded into ever deeper debt in a vain attempt to keep consumption rising faster than output.  But the prolonged lockdown, with its unprecedented and unpredictable mental impact, might well have disrupted the consumer cycle permanently.
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Of course, we might all rush to the shops as light relief, once the crisis is truly over.  In fact, UK retail sales surged in July, to their highest level in over a year, when the lockdown was eased. But a closer look shows most of the increase was driven by online grocery sales, which bodes ill for high street retailers.  Nobody really knows for sure the permanent impact on consumers of the pandemic.  But it is at least worth speculating that the global plague might have fatally undermined the consumer nirvana that neoliberal capitalism has promoted since the 1950s.
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CURRENCY WARS
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Finally, there is a new front in the economic crisis that has been overlooked to date.  Namely, the near 10% fall in the value of the US dollar since March. In the short term, of course, a cheaper green back helps US exports.  So beware any UK-US trade deal now that American food exports are a tenth cheaper.  This anticipation may lie behind the rise in US stock values (plus an ever-optimistic bet on a Covid-19 vaccine emerging quickly).
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However, there is a big downside to the yo-yoing of the dollar exchange rate: it starts to undermine the currency as a store of value.  Which means that hot money flows might look elsewhere for safety.  To the euro, for instance, or even the Chinese renminbi.  Beijing fancies turning the renminbi into an international currency, though its present attempts to suppress democracy in Hong Kong are going in the opposite direction.
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Conclusion: expect 2021 to see a fresh outbreak of currency and trade wars.  Being locked-down with a boxset never looked more appealing.
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Comments (4)

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  1. Axel P Kulit says:

    I find it hard to disagree with any of this. Especially “Third, Boris is an even more incompetent a manager than Trump.”

    But brexiteers did say England wouuld lead the world after Brexit.

  2. Pete Roberts says:

    Great article, thanks. My only quibble is with your last sentence. Beijing is not trying to suppress democracy in Hong Kong, it is trying to stop America from doing to Hong Kong what it did to Iraq and Libya i.e. bringing “democracy” by destroying the country, but by economic means. Most Hong Kongers are totally fed up with the riots and destruction of property and infrastructure by US funded and armed groups, but you will never hear a word of this in Western MSM. The Chinese government is not stupid, unlike ours.

    1. John Learmonth says:

      No the chinese govt is not stupid….they realise to cling on to power they have to brutally suppress any expression of deviation from the communist party line. I presume the circa 1m Uighar muslims currently in ‘re-education camps’ are US fifth columinsts. Unbelievable that you could spout such nonsense.

  3. SleepingDog says:

    Why mention currency wars and trade wars and not war-wars? Surely the impact on all these countries running war economies deserves some analysis? Maybe the weapons that militarists were drooling over only yesterday look a tad less lethal in comparison with some random non-brand-name virus. Maybe it is inconvenient to invade places when you don’t have the shots (no imperialist wants to end up as those Martians, and who’d trust military PPE). Do we really want war economies to recover?

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