The dance of black swans: world tour
More than 10 thousand victims in Italy, Bundeswehr helicopters take patients from overcrowded hospitals in France, Russian army fights for the lives of Bergamo residents, Boris Johnson leaves the official residence on N 10 Downing Street and has to work from home, in the US 3.2 million people register at the labor exchange in one week. If during the Christmas holidays, you had been told that all this would happen before Easter? Most likely, you would have thought it was a gripping script of a fantastic movie, or a person simply had not got over New Year's Eve yet.
What now?
Epidemiologists were not heeded
The global economy was hit by two simultaneous crises: the pandemic and the collapse of oil prices. Both politicians and experts agree that the consequences of the crisis of 2020 will be more dramatic than those of 2008-2009.
The last global crisis went down in history with the clear brand "Made in the USA", due to severe and possibly regulatory blunders in the sub-prime credits market. The current events are of a different nature. We have already wrote in the autumn of 2019, during the period of global economic slowdown, that the trigger of the new recession will be not the financial and economic dynamics, but some external for business activity events – the so-called "black swans". (The term was introduced by Nassim Taleb and means an unexpected catastrophic phenomenon. However, Taleb himself believes that COVID-19 is a "white swan" because there were predictions of a global pandemic.) They were expected to be associated with political events: Brexit, the US-China trade war, sanctions, the assassination of Qasem Soleimani etc.
No one heeded the alarmism of epidemiologists who had warned of the threat of global pandemics. Moreover, the US National Security Council's office for epidemiological threat was simply shut down in 2018. The challenge of climate change had valued much hier, artificially inflated public attention, but it didn't become a trigger for the global recession.
One black swan is from Wuhan…
According to official Chinese data, the "patient zero" with coronavirus was identified in Wuhan Province on December 1, 2019. Local authorities tried to slow down the spread of information (let's recall Chernobyl). Only by the new 2020 year, on December 31, 2019, the Chinese informed WHO of the epidemic threat. And on January 23, 2020, the quarantine was introduced - 60 million people found themselves in severe compulsory isolation. Regional leaders were suspended, and Beijing took extraordinary measures to suppress the epidemic, disregarding the economic consequences. High frequency, outpacing economic indicators of transport activity, air quality and electricity consumption showed a significant drop in economic activity in China.
The difficult, almost existential arbitrage of social distancing between health of people and "health" of economy, is evident. Isolation is positive for health, but greatly "brakes" economic activity. China chose the strategy of hermetic quarantine; South Korea chose the maximum testing "by random sampling" (5.5 thousand tests/million people) without total quarantine restrictions. The UK's choice was a mess: first – a liberal regime of 'population immunity' (750 tests/million people in total) – then – diametrically opposite rigid measures of social isolation. Sweden, probably due to the high responsibility of the population, maintains the line for 'population immunity'. Anyway, WHO declared a pandemic on March the 11th.
Without a vaccine, according to McKinsey, COVID-19 is more dangerous in terms of mortality and spreading speed than the flu of 1918 (Spanish flu). The current public health crisis is undoubtedly the worst in the XXI century.
...the other one is from Vienna
Almost simultaneously with the "black swan" from Wuhan the second "black swan" – for oil exporters – "flew out" from Vienna on March 6. There they failed to reach a compromise to extend the OPEC+ agreement. Which in a month collapsed the price of Brent crude by 30%. According to the pre-crisis level of world exports of 70 million barrels/day, the losses of exporting countries roughly may account to $0.85-1.4 billion a day (depending on the starting date). Excess supply of cheap oil has emerged. Oil storages, pipelines and tankers filled up. This has increased the cost of oil freight by 7-10 times. The global demand for oil has already decreased by 20% due to the epidemic. But at the same time, the low-margin offer is decreasing. Primarily due to shale oil production in the US. It is expected that 70% of 6,000 companies in this segment of the market will go bankrupt in the coming months. The stock market has been disappointed by horizontal drilling technology. However, Daniel Yergin, a well-known oil industry historian, believes that after the "bounce" of oil prices up to $50-60 per barrel and changes in ownership, shale oilers will switch on the drilling rigs again.
And, of course, demand will gradually resume, primarily in the recovering Chinese economy. Taking into account the "privileged strategic partnership", one can expect that Russian suppliers will receive preferences. Today, it is premature to predict the new price equilibrium. We can't rule out even a short period of negative returns in the oil industry.
Is a global recession coming?
The IMF, OECD and leading financial institutions compete in forecasts of negative growth of world GDP. The consensus is that in 2020 a global recession will begin. Its depth and duration are being discussed. Despite the decline of Chinese GDP in the first quarter of 2020 (only the demand for cars has fallen by 92%, production of smartphones has decreased by 50%), the beginning of the recovery will take place in the coming months, as quarantine measures are lifted. Of course, annual growth rates may be below 5% of GDP. But it seems that, as in the previous economic cycle, China will remain the key locomotive of the world economy. Low hydrocarbon prices for China, as well as for other consumers, are an important countercyclical advantage.
The scourge of the American economy has become the explosion of unemployment. If during the third week of March 281 thousand people applied for unemployment benefits, the next week there were already 3.2 million people. Unemployment forecasts for May are 13%. Consumption contraction will produce a stronger negative shock in the US than a supply chain break or a reduction in working hours due to epidemiological restrictions. Therefore, an unprecedented package of financial investments ($2.2 trillion) has been adopted (Cares Act), supported by Congress. It implies an unconventional monetary policy in the form of QE, negative interest rates and so-called "helicopter money" - payment of $1200 per adult and $500 per child to households with income below $75,000 a year.
What's next?
Structural shifts ahead?
One shouldn't expect super dramatic post-crisis changes. They neither happened after the "Spanish flu" epidemic in 1918-1920. But even in the face of deep uncertainty, we can forecast that the pandemic will certainly accelerate the structural shifts that have already been outlined in the society, economy, global governance and politics.
It is clear that the epidemiological threat will take the same place in the public consciousness as the terrorist threat after the September 11, 2001 attacks in New York. The emergence of biometric control at airports in addition to existing aviation security protocols can't be ruled out.
Investment in the sustainability of national health care systems will increase. For example, the number of intensive care beds per 100,000 population (30 in Germany, and only 6 in the UK) will become an important indicator of business environment quality. It is even possible to include this or another similar indicator in international standards of economic sustainability.
Governments and states as a whole will sharply increase their regulatory and administrative functions. The crisis of epidemiological and economic governance in the EU will require a serious reset of this organization. The idea to abolish consensus decision-making in the EU may receive additional arguments. Delegation of part of the sovereignty of France, Germany and Italy, to, for example, the Baltic States, does not contribute to the speed and optimality of strategic decisions.
This will also be true for many other global and regional governance institutions. It is very reckless to predict the complete collapse of globalization. As global challenges will require global responses. But the responses should be adequate and timely. It is not accidental that the online meeting of the G20 leaders confirmed their commitment to the world institutions such as the IMF, WTO and further empowerment of the WHO. The leaders of the G20 agreed to coordinate monetary policy, social protection measures and to conduct joint vaccine development and a uniform policy on test distribution. The UN Secretary General called for the lifting of economic and financial sanctions. China's President Xi Jinping made the same statement, while Vladimir Putin called for the opening of "green corridors" for medical goods and technologies, and financial transactions for their procurement. This anti-crisis measure gained support. In any case, the sanctions and protectionist policy has suffered a moral and psychological defeat. Also in terms of a possible slowing down the post-crisis economic recovery.
Work-at-home - more efficient and cheaper
Speaking about the acceleration of structural changes, it is clear that IT, the telecommunications sector, online services, digital content production and sales, and the gig economy (working through digital platforms under contract) have received additional acceleration. The shares of Zoom, which sells software for remote meetings, have increased by 75% in the last month. Worldwide, 770 million students are already affected by quarantine. Distance learning methods have seen explosive growth. Accordingly, all the tools that provide them – both software and hardware are in high demand.
Highly qualified workers in such areas as professional and business services (financial, legal services and consulting), education and corporate governance are better adapted to remote access than low-skilled workers – drivers, sellers, builders or cleaners. The Bureau of Labor Statistics believes that in the USA 29% of the labor force can work remotely. It turns out that working from home is one-third more efficient and two times cheaper. In the post-coronavirus economy this share may quickly exceed 1/3. This would mean the end of the principle "A rising tide lifts all boats". It's not going to happen anymore. The crisis will increase income polarization and inequality, and thus further reduce social cohesion. Cheap labor will no longer be a competitive advantage.
Quarantine measures can be expected to strengthen demand in the public utilities sector as well – everyone is staying at home. And, of course, the health care sector will get a new acceleration. But this, we suppose, ends the list of "winners".
Need for change in management
But the list of losing sectors is almost endless. What is common in this list is that these are industries and markets that are somehow related to material consumption: ranging from extraction and processing of raw materials to the automobile industry.
As for state governance, the trend towards the re-nationalization of states is continuing. Real problems require real and quick response, rather than talking about "common values". In demand are non-linear approaches, but not permanent crisis management. Management needs to be proactive. Executive short-sightedness and managerial autopilot in a constantly changing environment is a recipe for failure. One must think about strategic stability by constantly moving towards the future. Inertia, fear of change, a lack of courage and a lack of systemic vision lead to a late assessment of risks and loss of opportunities to manage them.
That is why the Shengen zone has already become a victim of COVID-19, the Stability and Growth Pact (Maastricht) has been temporarily suspended, and Northern Europe does not want to participate in guaranteeing the sovereign debts of Southern Europe. The special relationship between the US and the UK is also being tested. Only the government of Japan can compensate $20 billion of frozen for a year investments in the Tokyo Olympics.
But, as the master of aphorisms, a popular German TV presenter R. Lembke said, "Common ailments bring together stronger than shared beliefs". Of course, the Cold War virus seems to be more resilient than the coronavirus - American and Chinese propagandists fight each other from tooth to nail. But Trump, on March 28, consulted by phone with Xi Jinping about China's experience in fighting the coronavirus. As they say, "propaganda vs. life".
In full compliance with a signed in January agreement on the first phase of mutual reduction of trade restrictions and as part of the liberalization of the Chinese financial market, Goldman Sachs and Morgan Stanley have received regulatory approval for the purchase of controlling interest in the two largest Chinese financial companies from April 1, while BlackRock and JPMorgan increased their investments in China. Chinese financial authorities are well aware that apart from the US Treasury bonds and the dollar, there are no other low-risk assets today, even if with negative returns. And American financiers realize that China will pull the world economy out of crisis. Realpolitik - and nothing personal - especially ideology.
Preliminary outcome
Summing up the preliminary outcome, one can say that the corona-crisis of 2020 provides the preconditions for a new paradigm of social dynamics - "responsible development". In short, its core is the orientation towards intangible, non-material production and consumption. Towards unlimited resources - intellectual, creative and nature-like technologies. In interstate relations - the abandonment of strategies of exporting development models. It is necessary to realize that the pluralism of national socio-political models is historical and reduces entropy, that heterogeneity is more sustainable than homogeneity, that classic neoliberalism has run its course. It is fragile and does not provide convincing answers to the challenges and threats of the XXI century. And corona-crisis present a lot of evidencies to this point.