After the Emergency: Economic Trends

The world is in crisis. A deadly pandemic is spreading rapidly across the planet. It started in China, which is finally beginning to reopen after a two month lockdown. It is peaking in Europe and North America, with most of the continent in differing degrees of social distancing and quarantine. Next week be the turn of Africa and Latin America, which are starting to see widespread cases and early mitigation measures. The bad news keeps on coming.

Covid-19 is the first serious pandemic in the era of globalisation. There has been nothing like it since Spanish Flu at the end of World War 1. More recent epidemics were contained before they could cause any real damage outside one region. Swine Flu in 2009 spread globally but was too mild to leave any long term effects. This one is different and could potentially have a transformative effect on both the economy and society.

The speed of its spread is unprecedented in human history. Past pandemics took years to get out of control, hitting in waves. This one could potentially be over by this summer at best or next summer at worst. Cheap and easy international travel is to blame. The virus was initially spread by Chinese tourists in late January, a month after the disease first became known to authorities in Wuhan. That wave was successfully controlled outside a few unlucky countries. Alas, it took hold undetected in Northern Italy and was then spread globally by Italian tourists and Europeans going on skiing holidays in the region.

The Chinese were successfully able to contain the disease using extreme measures that are being copied to varying degrees in the west. It is still too early to say what effects the lockdowns will have on the virus, but they are definitely having an impact on the economy and on society. In doing so, they have accelerated social and economic trends that have been building for some time. Economic Liberalism and Globalisation have been suspended, and they're not coming back.

New Solutions

In much of Europe, the real economy has been put on hold for a few months, while governments direct their energies to saving lives. Consequently, economic growth has cratered and stock markets have crashed. The digital economy is still alive but can not exist in total isolation from the physical world. As such, European governments are subsidising the wages of hospitality, retail and manual workers whose employers have been forced to shut due to the social distancing measures now in place. That is unprecedented in peacetime, but governments really don't have a choice. Any alternative course of action would destroy entire sectors of the economy and lead to a decades long depression.

Instead, even the strongest economies will be piling on unsustainable levels of public debt in order to avoid even worse outcomes. Much of that debt will have to be funded by central banks using Quantitive Easing. Debt levels of 150% will be normal - that's the same ballpark as Greece during the 2009 Financial Crisis. Attitudes to sovereign debt will have to change and it wouldn't be surprising if a coordinated write down of debt owed to central banks was arranged just to get balance sheets under control. A partial default may be possible if the entire OECD agrees to it. Countries won't want to act on their own when it comes to this because they'll be hammered by the bond markets, but concerted action will leave investors with no choice but to accept.

Old Ideas

Attitudes to public spending will change too, accelerating a trend towards a bigger, more interventionist state that has been building on both sides of the Atlantic. In December, the Conservatives were elected on a platform of increasing public spending with a particular focus on infrastructure. That will now extend to other areas of the economy. In the US, the Republicans will be using the crisis to temporarily trial a different left-wing idea: Universal Basic Income.

Anglo-Saxon countries are now falling back in love with an activist industrial policy after decades of rejecting the concept. Calls on the left for an expanded state have moved the Overton Window, just as right wing parties have moved in a populist direction to attract blue collar workers the world over. The financial crisis soured many to the concept of government intervention, as it was mainly directed towards big businesses and the financial sector. Government support towards personal incomes and small businesses will change perceptions.

New Industry

The initial beneficiary will be manufacturers in Europe and North America. The crisis has exposed significant weaknesses in Western supply chains caused by increasing complexity and extensive offshoring to low cost regions in Asia and Eastern Europe. The UK and US will try to make sure that essential goods are produced domestically, which will benefit voters in left behind industrial areas who supported Trump and Brexit. Other European countries will do the same. The EU failure to arrange medical supplies or coordinate a continent wide response has done more to damage the union than previous crises, although it won't prove terminal.

Many of the new manufacturing jobs will be repatriated from China, where costs have risen in recent years to levels that make onshoring a realistic possibility. This will accelerate the Chinese push into services and high value manufacturing, harming the west in the very long term. In the short term, the west will benefit too. We're already seeing the world fragment into three main economic blocks: China, US and the EU. Smaller nations will have to fall into line with one of these titans as regulatory barriers and trade wars escalate. Some large economies such as Japan, South Korea and the UK are trying to remain neutral between the superpowers, but it is too early to say whether they will succeed. A global recession will make that task harder.

New Challenges

One factor that will hinder them is the increased cost and difficulty of air travel after this is all over. Many borders have closed, and more will do so in the next few weeks. Many of those closures will persist until the pandemic has passed globally, which could be in months or years. Those that do keep their borders open will introduce quarantine measures and strict health checks that will last beyond the crisis. South Korea, Taiwan and Singapore have already moved in this direction and others will follow. Air travel will be expensive and be the risks higher because airlines won't allow potentially unwell passengers on their flights.

The crisis will pass, and there will be social consequences that emerge from it. The west had thought they had conquered deadly diseases. They were wrong, and people will be more cautious as a result. None of the political or economic trends that will emerge from this crisis are new though. They're merely a movement in the direction that the mainstream right was heading anyway, to head off the populists outflanking them. It will mark the point that such ideas became part of acceptable mainstream political discourse. That is a revolution in its own right.