The phrase “Crisis cannot be predicted because what is predicted will not be a crisis” turned out to be very true and completely wrong at the beginning of 2020. For financial markets, for business, for society, the covid-19 pandemic naturally became not just a surprise, but a surprise of an unexpected type. We are used to the fact that the economy of the world lives according to its own laws, and biological life – according to its own; the only significant crossing point used to be “global warming“. But for WHO, for national health systems, for governments, the pandemic should not have come as a surprise: competent specialists have repeatedly warned not only about the potential possibility of a viral pandemic, but also about the possibility of a corresponding mutation of just such a virus.
It shouldn’t have, but it did. Neither SARS, nor MERS, nor successful experiments to create a highly contagious coronavirus (on the basis of which scientists warned that an appropriate mutation is highly probable) did not force those who were charged by taxpayers to be responsible for world health, nor to pre-prepare for the creation of a vaccine, or write effective control protocols with the spread of the virus, nor prepare reserve capacity for mass treatment of patients.
Back to quarantine
Almost 3 months after the start of the epidemic, the contours of an intelligible response by states to the threat have just begun to emerge; intelligible, but, it seems, far from the most adequate. The seemingly real actions are still catastrophically inadequate. We need fast organization of mass production and distribution to the affected areas of protective equipment, oxygenators, and ventilators; ensuring, at the level of the highest state priority, the logistics of the process of creating vaccines and drug testing; removal of customs barriers to all essential goods; refusal of national certification of all virus control products that have been certified in OECD countries; rejection of the “territoriality” of medical diplomas and qualifications during a pandemic, and much more. All this, if done, then quite recently, in places and in small volumes.
But the old methods – quarantines (they were also used during the “Black Death” in the XIV century – to no avail) are already actively used. Where they are combined with careful monitoring of infection paths, more or less extensive testing and isolation of all potentially dangerous ones, they work better. Where the emphasis is only on limiting social contacts – worse. There is a suspicion (there is no need to be a virologist, this is pure mathematics) that it is the monitoring and isolation of the potentially infected and most at risk that is the optimal strategy, and quarantine measures add almost nothing.
In many places nothing really has been done. For example, in Moscow the possibilities of passing the test are still extremely limited, the answer is unacceptably long, public transport and many places of collective use continue to work. This should lead to the “Bergamo scenario” – the question is only in time.
However, everywhere government measures have seriously affected the economy. It seems that she was chosen by all as sacred sacrifices, which should propitiate the bloodthirsty demon in the crown. Of course, even the fear of infection has a significant economic effect: a decrease in social activity leads to a decrease in the consumption of offline services, and a depressed mood leads to a decrease in total consumption. But the greatest blow to the economy comes from the restrictions set by the authorities.
Quarantines are the shutdowns of most businesses and a corresponding decrease in the income of their participants, which means a drop in consumption and savings. The first causes a drop in income for all businesses in the chain, and the second causes a drop in the value of long-term and financial assets. The fall in the value of investment assets causes their owners to reevaluate their ability to consume, and in turn leads to a drop in consumption. The replacement by states of consumer shortfalls in income will not be complete and will be borrowed – all the more so as tax collections will fall after incomes. Volumes of public debt will grow throughout the world, which will lay the foundation for future inflation (inflation is always observed during the post-war recovery period). This is bad news for those who keep their savings.
Perhaps there is one more bad news for them. In previous periods of wars and cataclysms, states very often turned to accumulated savings and household incomes as a source of funds for maintaining the poorest sections of society, the most important industries, and their own bureaucratic systems.
Forecast for tomorrow: Viral Depression ’20
Before World War I, the tax burden on income and wealth around the world was almost zero. The Great Depression added social benefits to the emerging income taxes. During the Second World War, the upper limit of income tax in the United States grew to 94% of income, and this tax payer was not 7% of Americans, as before the war, but 64%. If the cataclysm drags on, then in addition to the future inflation tax, we can see an increase in taxes on income and wealth among the most affluent members of society. War is war, there is no time for “business motivation” and the interests of the elite.
If a representative of a democratic party comes to power in the USA, such a scenario is very likely. In Russia, in the context of a long-term drop in oil prices, taking into account the specifics of the current prime minister, this scenario is also quite possible. Maybe we will even see a one-time “military tax” on the state (similar to the Swiss wealth tax).
Although we don’t know how quickly it will be possible to stop the pandemic, we already clearly understand that this will not happen before the majority of the world’s population is immunized (and this takes about 2 years), or an effective vaccine appears (from 9 months to a year), or miraculously, there is a cure that significantly alleviates the course of the disease (there is little hope for this, but even if this happens, it will take 1-3 months to test and some time to mass production). Being realistic, you need to expect 6-12 months of fairly stringent restrictions. If it turns out to be less – well, that would be the best forecast error you can imagine.
A business reduction of almost 100% will occur in the tourism industry, the hospitality industry, the entertainment industry, and the educational industry (offline). No industry has been affected as much as the hospitality sector because they rely on constant customers to maintain an income. However, the industry is fighting back against the pandemic by adapting how they function. For example, more restaurants are going to a central kitchen supplier to help meet the consumers shift in demand towards efficient food delivery due to the pandemic. By using this type of commercial kitchen space, they are able to cut down on cooking time and provide a faster service for online sales.
But not every restaurant can adapt like this so the likely duration of such a reduction is 1-3 quarters. Almost 100% there will be no summer tourist season in European countries and North Africa. Given the specifics of these businesses (significant fixed costs), one can expect a total bankruptcy of smaller players (tour operators, restaurateurs, event agencies, etc.) and a significant loss of creditworthiness of hoteliers, large tourist networks and systems. Most of the employees in these industries will lose their jobs.
A number of countries in which tourism makes up a significant share of GDP will be on the brink of sovereign bankruptcy. What happens in reality depends on international financial institutions and large economic donors (such as the EU).
Due to the fall in passenger traffic, the business of transport companies will significantly decrease; Given that airlines around the world are virtually unprofitable, they all need government support.
Demand for fuel will decrease very significantly – and this will keep oil prices at a low level, even if the OPEC + countries agree on something.
We are waiting for a significant slowdown in any changes – legislative, implementation, structural – due to the cancellation of events, refocus on the fight against the disease, quarantine measures. It’s not so bad if quarantines last 1-2 quarters (someone will say that this is even for the best). But such a slowdown is a consequence of the inhibition of the work of the entire state machine. This means that litigation, issuing permits and licenses, approving projects, updating agreements – everything will slow down or stop.
Depending on the rigidity of quarantine for a period of 1-3 quarters, many enterprises and even more service businesses in the affected areas will stop (excluding online services, and that’s not all). The potential impact on GDP will vary from country to country, but judging by preliminary data for China, Italy and France, the decline in GDP at the moment will reach 20-40% (that is, for each quarter of downtime – 5-10% of annual GDP). This is an unprecedented level of GDP decline: if quarantines drag out, we can see a 10% or more reduction in world GDP in one year. Already there are forecasts promising an increase in unemployment in the United States to 25-30%. These figures are similar to the Great Depression, only compressed in a short period of time.
Unlike the Great Depression, the main states of the world today have powerful monetary redistribution in their hands. Most likely, nowhere in the world will Virus Depression ’20 cause hunger and crowds of unemployed people will not roam the streets looking for work: quarantine. Despite the deferrals and privileges on loans, despite defaults, banks will be supported in the right amount, and the financial system of the world will work almost properly (it will only become even more centralized). Governments and central banks use their issuing opportunities to partially cover the shortfalls of their citizens with direct subsidies to those in need. Large economies have already directly announced such programs, their total amount under discussion exceeds $ 10 trillion (more than 12% of GDP). Russia is in no hurry to join those who is ready to replace employers in the matter of maintaining the solvency of workers (on the contrary, the government prefers to threaten companies that will lay off staff). But it is unlikely that the Russian Federation will be able to stay away.
Thousands of small and medium-sized enterprises (and many large ones) will not have an alternative – they will either partially reduce employees, or they will reduce everyone through closure. In principle, such injections should support those who are losing revenue (somewhere more, somewhere less), and the part of them that will be used to buy assets should support prices at substantially lower, but non-zero levels.
But this does not mean that all economic agents will be able to survive the six-month shock of falling consumption and work restrictions. We will certainly see a significant increase in bankruptcies and defaults, takeovers and changes in ownership, nationalizations and foreclosures. And although physical and intangible assets will remain intact, the business landscape after the epidemic will, of course, be very different from the current one.
The forecast for the day after tomorrow
And then the epidemic will end. Neither real estate, nor factories and plants, nor transport, nor nature will suffer (it will most likely only become cleaner). Enterprises creating really necessary products (whether food, industrial goods or services) will not be affected, unless their business was over-credited before the epidemic and was not able to get liquidity support. In fact, other businesses will not suffer either – those who had a pillow of liquidity sufficient to cover fixed costs, a positive unit-economy and reliable sources of financing.
You can start again, as if nothing had happened. Moreover: it will be possible to recoup for months of quarantines, restrictions and fear. The world is waiting for a consumer and investment boom. An additional incentive to development will be given to healthcare and the pharmaceutical industry; additional grants – immunology researchers. The world will become much more “online”: after trying and getting used to it, an order of magnitude more people will work from home, make purchases, enter into transactions and organize negotiations on the Internet. There will come a time of great takeovers: online services that have only strengthened their positions during quarantines will absorb those offline where there will still be value.
States will spend large amounts of money on improving tracking and testing systems (they always learn this way, choosing among those useful practices those that are aimed at restricting and regulating), on the nationalization and localization of critical industries, on building systems for responding to global crises of the new kind – “epidemic.” Opposition parties, of course, will actively protest; but there will be far fewer people in the world who support “freedom of private life,” and much more who don’t want to die because of the carelessness of others.
Borders, registration, registration, which already began to lose their sacred meaning, will again become an important element of our life. Once created, the state system will not be able to stop working, and we will have to get used to buying plane tickets to check: does the destination of travelers who have visited where we have been in the last two weeks today?
After victory in the world there will be a huge amount of money thrown by states into the economy in the process of “war”. This will mean a rapid increase in the value of many types of assets, increased inflation and (paradoxically) a gradual reduction in the debt bubble – rates will certainly be negative over time. A year or two after the end of the epidemic, a period of long-term growth in stock prices and a period of stagnation of debt markets may begin: negative rates are of no interest to anyone, there is a lot of money, the economy is growing.
However, do not make plans. The current pandemic is not the last black swan in the history of mankind. Even, possibly, in the near future.
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