There are economies, and sectors within them, that are leveraged to globalisation. If the coronavirus pandemic threatens globalisation, then it threatens them even more directly and unpleasantly.
All the talk about a return to normal after the pandemic – the debates about “V-shaped” or “U-shaped” or “W-shaped” recoveries – understates the probability that, whatever normal looks like after the pandemic, it won’t be what it was before.
Even without the pandemic, the fracturing of the relationship between the US and China; the Trump administration’s assaults on multilateral institutions and relationships and the rising tides of populism and nationalism meant the world was already changing and shifting away from the increasingly globalised relationships and structures of the past half-century.
The pandemic is further widening the fissures between the two largest economies while undermining the foundations of economies throughout the world.
The responses of central banks and governments to the virus mean it will leave legacies of staggering levels of debt and governments’ intervention within already-leveraged economies, higher levels of unemployment and social stress and an unwinding, to some degree, of global supply chains.
US Treasury Secretary Steve Mnuchin, addressing a congressional hearing on Tuesday, said there was “a risk” of permanent damage to the US economy if commercial activity were closed down for too long.
He didn’t appear to appreciate that, despite the extraordinary measures taken by the Federal Reserve Board – and, in some respects, because of them – permanent damage has already been done.
In the US, as will be the case here, there will be businesses that won’t re-emerge from the lockdown. Others will be permanently impaired.
The Fed, which started supporting corporate bonds, including junk bonds, last week by buying exchange traded fund securities (it plans direct purchases in future) might be able to provide life support for those businesses in the near term but that won’t save companies and households whose leverage is increasing even as their revenues are being decimated.
The most extreme example of how the impact of the pandemic will produce a new normal, and impact globalisation, is the global aviation industry.
Both international and domestic aviation have effectively been shut down. While some domestic markets might start to reopen, and some cross-border “bubbles” might be formed, it is improbable that the industry, or that proportion of it which survives, will look remotely like it did pre-pandemic.
The growth in global aviation reflected globalisation and the rise in affluence, particularly in developing economies, that it facilitated.
Health concerns, changes to the way businesses communicate, the unwinding of global supply chains, increased geopolitical tensions and the lower-growth outlook for the global economy are expected to see a significant shrinkage in the industry and a substantial increase in the cost of air travel.
International airlines are leveraged to global growth but so are many economies.
China’s dramatic growth was fuelled by the way its mercantilist policies leveraged and helped drive globalisation. Most emerging economies, particularly those within Asia that could piggy-back on China’s development, were also leveraged to global growth.
Consumers in developed economies such as ours or, for that matter those in the US, benefited from the lowering of the costs of production of consumer goods and of inflation that the globalisation of supply chains enabled.
Any unwinding of global supply chains and a lowering of global growth not only removes the leveraged benefits of globalisation but it leaves exposed one of its legacies, a legacy exaggerated by the way central banks and governments responded to the global financial crisis.
The world was awash with debt even before the pandemic. Global debt – about $US175 trillion ($267 trillion), or just over 280 per cent of global GDP ahead of the GFC – was more than $US250 trillion, or more than 320 per cent of global GDP, heading into the pandemic. Debt levels were particularly high in China, the US and Europe.
Given the multitrillion-dollar spending of governments so far, the coronavirus is going to add considerably to that global debt and leverage.
In Europe, the €500 billion ($834 billion) proposed “recovery fund” that, remarkably, France and Germany are promoting to help bail out economies such as Italy and Spain and, in effect, mutualise their debt, illustrates the parlous position of some developed economies.
In the US, the Fed’s balance sheet looks like expanding from about $US4 trillion to $US10 trillion and the federal government, having agreed a $US2 trillion fiscal package, is now discussing another multitrillion-dollars of spending even as its budget deficit blows past $US2 trillion and its debt-to-GDP ratio races towards 100 per cent.
Here, it is unlikely we’ll see a budget surplus within a generation.
To the extent that near-zero interest rates and unlimited liquidity do keep companies, households and economies afloat, they threaten to produce a generation of zombie companies, households reliant on government support and zombie economies.
China, and developing economies, built their economic progress on leveraging their exposure to global activity with debt.
China was trying to reduce the excessive levels of debt within its system ahead of the pandemic but it now faces the unpleasant combination of high levels of financial leverage even as its economic growth rate crashes.
China has been shifting the weight of its economy from exports to consumption but the impact of last year’s trade war with the US and the continuing efforts of the US to undermine its technological and industrial development had already slowed its growth.
The outbreak of the coronavirus and the backlash it is generating from other nations, the likelihood of a deep global recession and then persistently low global growth and an unwinding of global supply chains will create even more severe challenges.
That will be the case for most developing economies. They are seeing rapid capital flight that, combined with their own financial leverage and their exposures to US dollar-denominated debt, will be destabilising.
Some of the post-pandemic shifts in the global economy, like the changes to aviation, are occurring abruptly. Others, like the impact on service sectors and households, will only become apparent once economies reopen. Changes to supply chains will take years.
The extent of central bank and government support for their financial sectors and industrial bases means that the longer-term impacts of the pandemic and the changes to world economic orders will also take quite some time to play out.
None of them, however, are positive or produce a “new normal” that looks anything like the old.