Window of opportunity

Senior Economic Analyst

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KARL Marx once wrote that even children knew that “a nation which ceased to work, I will not say for a year, but even for a few weeks, would perish.” More than 150 years later, we are witnessing the spectacle of a virus forcing nations to shut shop for weeks at a time. That is why economists across the world believe that the global economy is in for its biggest recession in nearly two decades.

For the first time, economic stimulus packages will go to ordinary consumers, and not just businesses.

Investment bank Morgan Stanley’s latest report predicts that the global economy will contract by 0.3 per cent in the first three months of 2020, followed by a bigger drop of 0.6 per cent between April and June this year. That is two successive quarters of negative growth, which technically qualifies to be termed a recession. The bank’s ‘bear case’ prediction is even more worrying. That predicts three consecutive quarters of negative growth.

To understand why this could happen, we need to take a closer look at how the world economy operates. Mainstream economists tell us that in this age of globalisation, international trade connects all nations. We are told that countries export what they are good at making, and import things that they don’t produce efficiently. Nothing could be further from the truth.

In reality, poor countries from Asia and Africa supply raw materials, China converts them into manufactured goods, and the developed capitalist countries of the West consume them. The US and European Union make up about 10 per cent of the world’s population, but they account for over 50 per cent of what all families across the world spend on their consumption. Add Japan, Canada and Australia to that, the number goes up to 60 per cent of all global consumption.

Where do they get the money from? Centuries of colonialism and imperialism has ensured that they are sitting on a lot of riches, which they took from colonies like ours. And now, they have another device — finance capital. Savings from the rich countries travel the world, looking for opportunities to invest in equity markets. They make big profits —usually tax-free — in emerging markets and move them back to the developed world.

A part of the wealth that developed countries have also goes to finance the production of goods and services in the developing world. Again, poor countries, hungry for capital often make these investments tax-free, and sometimes even guarantee returns. Such finance seeks out low-cost countries, where labour and inputs are cheap. Goods produced in these poor countries are then sold at high mark-up in the departmental stores in the West. The profits are partly reinvested, and some of it is repatriated as dividend income or through stake sales.

Let’s now turn to what the novel coronavirus has done to this entire system of global interconnections. China, which produces about 28 per cent of everything that is manufactured in the world, shut down all its factories for nearly two months. Asian, Latin American and African countries, which sell inputs to China, suddenly found that their biggest buyer had disappeared. Factories outside China, especially those which depend on microchips, electronic parts, began to run out of crucial inputs. Store shelves in the US and Europe began to run empty.

After letting it run amok for several weeks, China began a massive exercise to contain the virus. Now, it is gradually returning to normal. Of the 81,000 cases in the country, over 71,000 have recovered. China is now switching on its machines, once again, to return to being the world’s factory. Getting raw materials isn’t a problem right now, because most of the supplier nations haven’t been that badly hit by the coronavirus.

However, it won’t happen overnight. Estimates suggest that it will take China at least another couple of months to get things back on track. The trouble is that China’s buyers have now downed their shutters. While it could continue to produce and build inventories for the future, global economic uncertainty will make Chinese businesses think twice before returning to full capacity.

In the US, which consumes more than a quarter of what the world produces, most people have been asked to stay at home. Remember, nearly 60 per cent of US workers are paid at hourly rates, and if they don’t turn up, they don’t make any money. Only 19 per cent get paid family leave, and less than 40 per cent get paid medical leave. This is why, the Covid-19 shutdown, in the US, has caused a 33 per cent jump in unemployment benefit claims.

Most Americans work in jobs that cannot be done from home. Retail and wholesale trade, health and social assistance, leisure and hospitality, transportation and warehousing and education, account for 42 per cent of all jobs in the US. None of these lend themselves to ‘work from home’. So, most of these people will depend on dole, their own meagre savings and borrowing, to survive, while the coronavirus forces them to stay away from work. This will cause a massive drop in demand, which will affect economies across the world.

The only way to stop this is for governments to actively put money in the hands of workers who might end up without regular income, and businesses which have to shut down temporarily. US President Donald Trump is reportedly already planning to spend $250 billion in cash assistance to millions of Americans. Small businesses in the US and EU are going to be given easy loans. The US Fed has already cut rates to make loans cheaper.

Most governments across the world might end up kickstarting their economies, which were already slowing down before Covid hit them. For the first time, economic stimulus packages will go to ordinary consumers, not just businesses. This could mean that even if the global GDP growth slows down, the world might come out of this crisis with more income in the hands of average citizens and not just the top 10 per cent.