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Corona Virus: The Political and Economic Implications

The Post-Pandemic Slump

Update by Michael Roberts, Marxist Economist

The coronavirus pandemic marks the end of longest US economic expansion on record, and it will feature sharpest economic contraction since WWII.

https://wp.me/pKzXa-1yr

The global economy was facing the worst collapse since the second world war as coronavirus began to strike in March, well before the height of the crisis, according to the latest Brookings-FT tracking index.

2020 will be the first year of falling global GDP since WWII. And it was only the final years of WWII/aftermath when output fell.

JPMorgan economists reckon that the pandemic could cost world at least $5.5 trillion in lost output over the next two years, greater than the annual output of Japan. And that would be lost forever.  That’s almost 8% of GDP through the end of next year. The cost to developed economies alone will be similar to that in the recessions of 2008-2009 and 1974-1975.  Even with unprecedented levels of monetary and fiscal stimulus, GDP is unlikely to return to its pre-crisis trend until at least 2022.

The Bank for International Settlements has warned that disjointed national efforts could lead to a second wave of cases, a worst-case scenario that would leave US GDP close to 12% below its pre-virus level by the end of 2020.  That’s way worse than in the Great Recession of 2008-9.

The US economy will lose 20m jobs according to estimates from @OxfordEconomics, sending unemployment rate soaring by greatest degree since Great Depression and severely affecting 40% of jobs.

Full Document

https://thenextrecession.wordpress.com/2020/04/13/the-post-pandemic-slump/

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Corona Virus and Economic Slump   Update by Michael Roberts, Marxist Ecnomist – Links to other relevant articles further down

https://thenextrecession.wordpress.com/2020/03/24/lockdown/

« The ’emerging market’ slump

THE EMERGING MARKET SLUMP

Lockdown! https://wp.me/pKzXa-1yr

According to AFP estimates, some 1.7 billion people across the world are now living under some form of lockdown as a result of the coronavirus. That’s almost a quarter of the world population.  The world economy has seen nothing like this.

Nearly all economic forecasts for global GDP in 2020 are for a contraction of 1-3%, as bad if not worse than in the Great Recession of 2008-9.  And forecasts for the major economies for this quarter ending this week and the next quarter are coming in at an annualised drop of anything between 20-50%! The economic activity indicators (called PMIs), which are surveys of company views on what they are doing, are recording all-time lows of contraction for March.

US composite PMI to March 2020

This is all due to the lockdown of businesses globally and isolation of workers in their homes. Could the lockdowns have been avoided so that this drastic ‘supply shock’ would not have been necessary in order to cope with the pandemic?  I think it probably could.  If governments had acted immediately with the right measures when COVID-19 first appeared, the lockdowns could have been averted.

What were these right measures?  What we now know is that everybody over the age of 70 years and/or with medical conditions should have gone into self-isolation.  There should have been mass testing of everybody regularly and anybody infected quarantined for up to two weeks.  If this had been done from the beginning, then there would have been fewer deaths, hospitalisations and a quicker dying out of the virus.  So lockdowns could probably have been avoided.

But testing and isolation was not done at the beginning in China.  At first there was denial and a cover-up of the virus risk.  By the time the Chinese authorities acted properly with testing and isolation, Wuhan was inundated and a lockdown had to be applied.

At least the Chinese had the excuse that this was a new virus unknown to humans and its level of infection, spread and mortality was not known before. But there is no excuse for governments in the major capitalist economies. They had time to prepare and act.  Italy left it too late to apply testing and isolation so that the lockdown there was closing the doors after the virus had bolted.  Their health system is now overloaded and can hardly cope.

There were some countries that did adopt mass testing and effective isolation.  South Korea did both; and Japan where 90% of the population wore masks and gloves and washed, appears to have curbed the impact of the pandemic through effective self-isolation without having a lockdown.

Similarly, in one small Italian village amid the pandemic, Vo Euganeo, which actually had Italy’s first virus death, they tested all 3000 residents and quarantined the 3% affected, even though most had no symptoms.  Through isolation and quarantine, the lockdown there lasted only two weeks.

At the other extreme, the UK and the US have taken ages to ramp up testing (which is still inadequate) and get the vulnerable to self-isolate.  In the US, the federal government is still not going for a state-wide lockdown.

Why did the G7 governments and others fail to act?  As Mike Davis explains, the first and foremost reason was that the health systems of the major economies were in no position to act.  Over the last 30 years, public health systems in Europe have been decimated and privatised. In the US, the dominant private sector has slashed services in order to boost profits.  According to the American Hospital Association, the number of in-patient hospital beds declined by an extraordinary 39% between 1981 and 1999. The purpose was to raise profits by increasing ‘census’ (the number of occupied beds). But management’s goal of 90% occupancy meant that hospitals no longer had the capacity to absorb patient influx during epidemics and medical emergencies.

As a result, there are only 45,000 ICU beds available to deal with the projected flood of serious and critical corona cases. (By comparison, South Koreans have more than three times more beds available per thousand people than Americans.) According to an investigation by USA Today “only eight states would have enough hospital beds to treat the 1 million Americans 60 and over who could become ill with COVID-19.

Local and state health departments have 25% less staff today than they did before Black Monday 12 years ago. Over the last decade, moreover, the CDC’s budget has fallen 10% in real terms. Under Trump, the fiscal shortfalls have only been exacerbated. The New York Times recently reported that “21 percent of local health departments reported reductions in budgets for the 2017 fiscal year.”  Trump also closed the White House pandemic office, a directorate established by Obama after the 2014 Ebola outbreak to ensure a rapid and well-coordinated national response to new epidemics.

The for-profit nursing home industry, which warehouses 1.5 million elderly Americans, is highly competitive and is based on low wages, understaffing and illegal cost-cutting. Tens of thousands die every year from long-term care facilities’ neglect of basic infection control procedures and from governments’ failure to hold management accountable for what can only be described as deliberate manslaughter. Many of these homes find it cheaper to pay fines for sanitary violations than to hire additional staff and provide them with proper training.

The Life Care Center, a nursing home in the Seattle suburb of Kirkland, is “one of the worst staffed in the state” and the entire Washington nursing home system “as the most underfunded in the country—an absurd oasis of austere suffering in a sea of tech money.” (Union organiser).  Public health officials overlooked the crucial factor that explains the rapid transmission of the disease from Life Care Center to nine other nearby nursing homes: “Nursing home workers in the priciest rental market in America universally work multiple jobs, usually at multiple nursing homes.” Authorities failed to find out the names and locations of these second jobs and thus lost all control over the spread of COVID-19.

Then there is big pharma.  Big pharma does little research and development of new antibiotics and antivirals. Of the 18 largest US pharmaceutical companies, 15 have totally abandoned the field. Heart medicines, addictive tranquilizers and treatments for male impotence are profit leaders, not the defences against hospital infections, emergent diseases and traditional tropical killers. A universal vaccine for influenza—that is to say, a vaccine that targets the immutable parts of the virus’s surface proteins—has been a possibility for decades, but never deemed profitable enough to be a priority.

I have argued in previous posts that COVID-19 was not a bolt of the blue.  Such pandemics have been forecast well in advance by epideomologists, but nothing was done because it costs money.  Now it’s going to cost a lot more.

The global slump is here.  But how long and how deep will it be?  Most forecasts talk about a short, sharp drop followed by a quick recovery.  Will that happen?  It depends on how quickly the pandemic can be controlled and fade away – at least for this year.  On 8 April, the lockdown in Wuhan will be lifted as there are no new cases.  So, from the emergence of virus there in January, it will be about three months, with a lockdown of over two months.  It also seems that the peak of the pandemic may have been reached in Italy which has been in full lockdown for only two weeks.  So perhaps in another month or two, Italy will be freed.  But other countries like the UK are just entering a lockdown phase, with others still facing exponential growth in cases which may require lockdowns.

So it seems that an end to the global supply shock is unlikely before June, probably much later.  Of course, the production collapse could be reversed earlier if governments decide not to have lockdowns or to end them early.  The Trump administration is already hinting at lifting any lockdown in the next 15 days ‘to get the economy going’ (at the expense of more deaths etc); but many state governors may not go along with that.

Even if economies do bounce back in the second half of 2020 as the lockdowns are ended, there will still be a global slump.  And it is a vain hope that recovery will be quick and sharp in the second half of this year.  There are two reasons to doubt that. First, the global economy was already slipping into recession before the pandemic hit.  Japan was in recession; The Eurozone was close to it and even US growth had slowed to under 2% a year.

And many large so-called emerging economies like Mexico, Argentina and South Africa were already contracting. Indeed, capital was flooding out of the global south to the north, a process than has now accelerated with the pandemic to record levels.  With the collapse in energy and industrial metal prices, many commodity-based emerging economies (Brazil, Russia, Saudi Arabia, Indonesia, Ecuador etc) face a huge drop in export revenues.  And this time, unlike 2008, China will not quickly return to its old levels of investment, production and trade (especially as the trade war tariffs with the US remain in place).  For the whole year, China’s real GDP growth could be as low as 2%, compared to over 6% last year.

With the collapse in energy and industrial metal prices, many commodity-based emerging economies (Brazil, Russia, Saudi Arabia, Indonesia, Ecuador etc) face a huge drop in export revenues.  And this time, unlike 2008, China will not quickly return to its old levels of investment, production and trade (especially as the trade war tariffs with the US remain in place).  For the whole year, China’s real GDP growth could be as low as 2%, compared to over 6% last year.

Second, stock markets are jumping back because of the recent Fed credit injections and the expected huge US Congress fiscal measures.  But this slump will not be avoided by central bank largesse or the fiscal packages being planned. Once a slump gets under way, incomes collapse and unemployment rises fast. That has a cascade or multiplier effect through the economy, particularly for non-financial companies in the capitalist sector.  This will lead to a sequence of bankruptcies and closures.

And corporate balance sheets are dangerously frail. Across the major economies, concerns have been rising over mounting corporate debt. In the United States, against the backdrop of decades-long access to cheap money, non-financial corporations have seen their debt burdens more than double from $3.2 trillion in 2007 to $6.6 trillion in 2019.

A recent paper by Joseph Baines and Sandy Brian Hager starkly reveals all.   For decades, the capitalist sector has switched from investing in productive assets and moved to investing in financial assets – or ‘fictitious capital’ as Marx called it. Stock buybacks and dividend payments to shareholders have been the order of the day rather than re-investing profits into new technology to boost labour productivity. This particularly applied to larger US companies.

As a mirror, large companies have reduced capital expenditure as a share of revenues since the 1980s.  Interestingly, smaller companies engaged less in ‘financial engineering’ and continued to raise their investment.  But remember the bulk of investment comes from the large companies.

The vast swathe of small US firms is in trouble.  For them, profit margins have been falling.  As a result, the overall profitability of US capital has fallen, particularly since the late 1990s.  Baines and Hager argue that “the dynamics of shareholder capitalism have pushed the firms in the lower echelons of the US corporate hierarchy into a state of financial distress.”  As a result, corporate debt has risen, not only in absolute dollar terms, but also relative to revenue, particularly for the smaller companies.

Everything has been held together because the interest on corporate debt has fallen significantly, keeping debt servicing costs down.  Even so, the smaller companies are paying out interest at a much higher level than the large companies. Since the 1990s, their debt servicing costs have been more or less steady, but are nearly twice as high as for the top ten percent.

But the days of cheap credit could be over, despite the Fed’s desperate attempt to keep borrowing costs down.  Corporate debt yields have rocketed during this pandemic crisis.  A wave of debt defaults is now on the agenda.  That could “send shockwaves through already-jittery financial markets, providing a catalyst for a wider meltdown.”

Even if the lockdowns last only a few months through to the summer, that contraction could see hundreds of small firms go under and even some big fish too.  The idea that the major economies can have a V-shaped recovery seems much less likely than a L-shaped one.

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Disease, Debt and Economic Depression

By Michael Roberts     Marxist Economist

https://wp.me/pKzXa-1yr

As I write the coronavirus epidemic (not yet declared pandemic) continues to spread.  Now there are more new cases outside China than within, with a particular acceleration in South Korea, Japan and Iran.  Up to now more than 80,000 people infected in China alone, where the outbreak originated. The number of people who have been confirmed to have died as a result of the virus has now surpassed 3,200.

As I said in my first post on the outbreak, “this infection is characterized by human-to-human transmission and an apparent two-week incubation period before the sickness hits, so the infection will likely continue to spread across the globe.”  Even though more people die each year from complications after suffering influenza, and for that matter from suicides or traffic accidents, what is scary about the infection is that the death rate is much higher than for flu, perhaps 30 times higher.  So if it spreads across the world, it will eventually kill more people.

And as I said in that first post, “The coronavirus outbreak may fade like others before it, but it is very likely that there will be more and possible even deadlier pathogens ahead.” That’s because the most likely cause of the outbreak was the transmission of the virus from animals, where it has probably been hosted for thousands of years, to humans through use of intensive industrial farming and the extension of exotic wildlife meat markets.

COVID-19 is more virulent and deadly than the annual influenza viruses that kill many more vulnerable people each year.  But if not contained, it will eventually match that death rate and appear in a new form each year.  However, if you just take precautions (hand washing, not travelling or working etc) you should be okay, especially if you are healthy, young and well-fed.  But if you are old, have lots of health issues and live in bad conditions, but you still must travel and go to work, then you are at a much greater risk of serious illness or death.  COVID-19 is not an equal-opportunity killer.

But the illnesses and deaths that come from COVID-19 is not the worry of the strategists of capital.  They are only concerned with damage to stock markets, profits and the capitalist economy.  Indeed, I have heard it argued in the executive suites of finance capital that if lots of old, unproductive people die off, that could boost productivity because the young and productive will survive in greater numbers!

That’s a classic early 19th century Malthusian solution to any crisis in capitalism.  Unfortunately, for the followers of the reactionary parson Malthus, his theory that crises in capitalism are caused by overpopulation has been demolished, given the experience of the last 200 years.  Nature may be involved in the virus epidemic, but the number of deaths depends on human action – the social structure of an economy; the level of medical infrastructure and resources and the policies of governments.

It is no accident that China, having been initially caught on the hop with this outbreak, was able to mobilise massive resources and impose draconian shut-down conditions on the population that has eventually brought the virus spread under control.  Things do not look so controlled in countries like Korea or Japan, or probably the US, where resources are less planned and governments want people to stay at work for capital, not avoid getting ill.  And poor, rotten regimes like Iran appear to have lost control completely.

No, the real worry for the strategists of capital is whether this epidemic could be the trigger for a major recession or slump, the first since the Great Recession of 2008-9.  That’s because the epidemic hit just at a time when the major capitalist economies were already looking very weak.  The world capitalist economy has already slowed to a near ‘stall speed’ of about 2.5% a year.  The US is growing at just 2% a year, Europe and Japan at just 1%; and the major so-called emerging economies of Brazil, Mexico, Turkey, Argentina, South Africa and Russia are basically static.  The huge economies of India and China have also slowed significantly in the last year.  And now the shutdown from COVID-19 has pushed the Chinese economy into a ravine.

The OECD – which represents the planet’s 36 most advanced economies – is now warning of the possibility that the impact of COVID-19 would halve global economic growth this year from its previous forecast.  The OECD lowered its central growth forecast from 2.9 per cent to 2.4 per cent, but said a “longer lasting and more intensive coronavirus outbreak” could slash growth to 1.5 per cent in 2020.  Even under its central forecast, the OECD warned that global growth could shrink in the first quarter. Chinese growth is expected to fall below 5% this year, down from 6.1% last year – which was already the weakest growth rate in the world’s second largest economy in almost 30 years. The effect of widespread factory and business closures in China alone would cut 0.5 percentage points from global growth as it reduced its main forecast to 2.4 per cent in the quarter to end-March.

Elsewhere, Italy endured its 17th consecutive monthly decline in manufacturing activity in February. And the Italian government announced plans to inject €3.6bn into the economy. IHS Markit’s purchasing managers’ index for Italian manufacturing edged down by 0.2 points to 48.7 in February. A reading below 50 indicates that the majority of companies surveyed are reporting a shrinking of activity. And the survey was completed on February 21, before the coronavirus outbreak intensified in Italy. There was a similar contraction of factory activity in France, where the manufacturing PMI fell by 1.3 points to 49.8. However, manufacturing activity increased for the eurozone as a whole in February, as the PMI for the bloc rose by 1.3 points to 49.2, but still under 50.

The US, so far, has avoided a serious downturn in consumer spending, partly because the epidemic has not spread widely in America.  Maybe the US economy can avoid a slump from COVID-19.  But the signs are still worrying. The latest activity index for services in February showed that the sector showed a contraction for the first time in six years and the overall indicator (graph below) also went into negative territory.

Outside the OECD area, there was more bad news on growth. South Africa’s Absa Manufacturing PMI fell to 44.3 in February of 2020 from 45.2 in the previous month. The reading pointed to the seventh consecutive month of contraction in factory activity and at the quickest pace since August 2009. And China’s capitalist sector reported its lowest level of activity since records began. The Caixin China General Manufacturing PMI plunged to 40.3 in February 2020, the lowest level since the survey began in April 2004.

The IMF too has reduced its already low economic growth forecast for 2020.  “Experience suggests that about one-third of the economic losses from the disease will be direct costs: from loss of life, workplace closures, and quarantines. The remaining two-thirds will be indirect, reflecting a retrenchment in consumer confidence and business behavior and a tightening in financial markets.”  So “under any scenario, global growth in 2020 will drop below last year’s level. How far it will fall, and for how long, is difficult to predict, and would depend on the epidemic, but also on the timeliness and effectiveness of our actions.”

One mainstream economic forecaster, Capital Economics, cut its growth forecast by 0.4 percentage points to 2.5 per cent for 2020, in what the IMF considers recession territory. And Jennifer McKeown, head of economic research at Capital Economics, cautioned that if the outbreak became a global pandemic, the effect “could be as bad as 2009, when world GDP fell by 0.5 per cent.” And a global recession in the first half of this year is “suddenly looking like a distinct possibility”, said Erik Nielsen, chief economist at UniCredit.

In a study of a global flu pandemic, Oxford University professors estimated that a four-week closure of schools — almost exactly what Japan has introduced — would knock 0.6 per cent off output in one year as parents would have to stay off work to look after children. In a 2006 paper, Warwick McKibbin and Alexandra Sidorenko of the Australian National University estimated that a moderate to severe global flu pandemic with a mortality rate up to 1.2 per cent would knock up to 6 per cent off advanced economy GDP in the year of any outbreak.

The Institute of International Finance (IIF), the research agency funded by international banks and financial institutions, announced that: “We’re downgrading China growth this year from 5.9% to 3.7% & the US from 2.0% to 1.3%. Rest of the world is shaky. Germany struggling to retool autos, Japan weighed down by 2019 tax hike. EM has been weak for a while. Global growth could approach 1.0% in 2020, weakest since 2009.”

What are the policy reactions of the official authorities to avoid a serious slump?  The US Federal Reserve stepped in to cut its policy interest rate at an emergency meeting. Canada followed suit and others will follow.  The IMF and World Bank is making available about $50 billion through its rapid-disbursing emergency financing facilities for low income and emerging market countries that could potentially seek support. Of this, $10 billion is available at zero interest for the poorest members through the Rapid Credit Facility.

This may have some effect, but cuts in interest rates and cheap credit are more likely to end up being used to boost the stock market with yet more ‘fictitious capital’ – and indeed stock markets have made a limited recovery after falling more than 10% from peaks.  The problem is that this recession is not caused by ‘a lack of demand’, as Keynesian theory would have it, but by a ‘supply-side shock’ – namely the loss of production, investment and trade. Keynesian/monetarist solutions won’t work, because interest rates are already near zero and consumers have not stopped spending – on the contrary. Jon Cunliffe, deputy governor of the Bank of England, said that since coronavirus was “a pure supply shock there is not much we can do about it”.

And as British Marxist economist Chris Dillow argues, the coronavirus epidemic is really just an extra factor keeping the major capitalist economies dysfunctional and stagnating. He lays the main cause of the stagnation on the long-term decline in the profitability of capital. “basic theory (and common sense) tells us that there should be a link between yields on financial assets and those on real ones, so low yields on bonds should be a sign of low yields on physical capital. And they are.”  He identifies ‘three big facts’: the slowdown in productivity growth; the vulnerability to crisis; and low-grade jobs. And as he says, “Of course, all these trends have long been discussed by Marxists: a falling rate of profit; monopoly leading to stagnation; proneness to crisis; and worse living conditions for many people. And there is plenty of evidence for them.”  Indeed, as any regular reader of this blog will know.

And then there is debt.  In this decade of record low interest rates (even negative), companies have been on a borrowing binge.  This is something that I have banged on about in this blog ad nauseam.  Huge debt, particularly in the corporate sector, is a recipe for a serious crash if the profitability of capital were to drop sharply.

Now John Plender in the Financial Times has taken up my argument.  He pointed out, according to the IIF, the ratio of global debt to gross domestic product hit an all-time high of over 322 per cent in the third quarter of 2019, with total debt reaching close to $253tn. “The implication, if the virus continues to spread, is that any fragilities in the financial system have the potential to trigger a new debt crisis.”

The huge rise in US non-financial corporate debt is particularly striking.  This has enabled the very large global tech companies to buy up their own shares and issue huge dividends to shareholders while piling up cash abroad to avoid tax.  But it has also enabled the small and medium sized companies in the US, Europe and Japan, which have not been making any profits worth speaking of for years to survive in what has been called a ‘zombie state’; namely making just enough to pay their workers, buy inputs and service their (rising) debt, but without having anything left over for new investment and expansion.

Plender remarks that a recent OECD report says that, at the end of December 2019, the global outstanding stock of non-financial corporate bonds reached an all-time high of $13.5tn, double the level in real terms against December 2008. “The rise is most striking in the US, where the Fed estimates that corporate debt has risen from $3.3tn before the financial crisis to $6.5tn last year. Given that Google parent Alphabet, Apple, Facebook and Microsoft alone held net cash at the end of last year of $328bn, this suggests that much of the debt is concentrated in old economy sectors where many companies are less cash generative than Big Tech. Debt servicing is thus more burdensome.”

The IMF’s latest global financial stability report amplifies this point with a simulation showing that a recession half as severe as 2009 would result in companies with $19tn of outstanding debt having insufficient profits to service that debt.

So if sales should collapse, supply chains be disrupted and profitability fall further, these heavily indebted companies could keel over.  That would hit credit markets and the banks and trigger a financial collapse.  As I have shown on several occasions, the profitability of capital in the major economies has been on a downward trend (see graph above from Penn World tables 9.1).

And the mass of global profits was also beginning to contract before COVID-19 exploded onto the scene (my graph below from corporate profits data of six main economies, Q4 2019 partly estimated).  So even if the virus does not trigger a slump, the conditions for any significant recovery are just not there.

Eventually this virus is going to wane (although it might stay in human bodies forever mutating into an annual upsurge in winter cases).  The issue is whether the ‘supply shock’ is so great that, even though economies start to recover as people get back to work, travel and trade resumes, the damage has been so deep and the time taken so long to recover, that this won’t be a quick one-quarter, V-shaped economic cycle, but a proper U-shaped slump of six to 12 months.


Articles from Business Post on Corona Virus and World Economic Slump

https://www.businesspost.ie/analysts/covid-19-risk-of-a-second-great-depression-grows-by-the-day-ce5994e2

https://www.businesspost.ie/coronavirus/covid-19-has-caused-faster-downturn-than-2008-crash-8a9c1eb8

 

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