Thursday, May 07, 2020

Demi Tasse

We will not wake up after the lockdown in a new world. It will be the same, just a bit worse — Michel Houellebecq

If you repeat this piece of wisdom from a prominent Gallic wet blanket in a broad French accent, out loud, it might actually improve. Worked for me. 

My father was a lifelong optimist. Sometimes this worked for him, sometimes it didn't. Maybe as a response to this upbringing and perhaps because I have been hanging out a bit too long with Bulgarians, I have my glass is half empty moods.

Yet when the bird flu and swine flu pandemics were puffed up in 2006 and 2010 respectively, I was quick to de-bunk the associated waves of panic. So, allow me now my stint in Cassandra's temple. 

Optimists are a suspicious-looking bunch right now. The mere fact that a quick and robust, V-shaped recovery is such a vital component of the consensus needed for prolonged lockdowns should force us to interrogate this prediction a bit more. 

Indeed Société Générale economist Albert Edwards observed today that resurgent stock valuations, driven in part by the prognostications of governments and central banks, are supported by nothing more than an 'ideological dream'. 

Here are two examples of the divinations that I have come across in the past couple of days. 

The first one, charting the likely course of the US economy from here was emailed to me by my bank. Not only do we get a complete recovery but some bonus growth to boot. 

The second, which does the same for the UK economy, is from the Bank of England, and comes with the caveat that it's an 'illustrative scenario' rather than an actual forecast. It appears to take full advantage of the fact that nobody seems to be mentioning the Brexit deadline at year's end any longer. 

Such is the plotting of the curve you could be mistaken for thinking the drop in output was almost a non-event. 

Here are some of the reasons I think this is the dog’s bollocks...minus the canine qualifier. 

The wealthier nations, even US states, have been fighting the pandemic individually. Even the closely-aligned blocs like the EU have ceased to function as collectives, at least as far as public health is concerned. 

This and the fact that their citizens have been stuck indoors for over a month has given everyone an exaggerated sense of the role of proximity in the spread of the virus and thus how social distancing has temporarily brought economic activity to a halt. 

Yet mobility is just as important to a virus as proximity. Before Guatemalans were told to #quedateencasa they saw whole chunks of their economy evaporate as nearly all the foreigners disappeared. (Antigua also lost the economically-important mobility of the capitalinos from the big city, some 45km away). 

And whilst Sweden has famously side-stepped a full lockdown, its economy has only shrunk 1% less this year than the rest of the Eurozone. 

Zurab Pololikashvili, Secretary-General of the World Tourism Organization (WTO — bound to confuse POTUS) announced a new, more pessimistic forecast for tourism revenues in 2020, which anticipates a steep decline of 60-80%. 

The mobility of people and their money around the globe has been an important component of the global economy and right now there are reasons beyond mere psychology to suspect that it will take a considerable amount of time for the flow to re-commence. 

Developed nations see that the path to living with SARS-Cov-2 involves constant testing and contact tracking/tracing. If this works at all, it is going to work on a national level. Governments won't want to encourage their citizens to head to the airports any time soon. 

Would-be travellers will inevitably be making difficult, rational decisions as their opportunities for mobility return. Do they want to go to countries with limited testing and over-stretched healthcare systems, while facing the risk that closing borders (or airlines) could leave them stranded? Countries where their coronavirus tracking app might stop sending alerts? And do these countries really want them back yet either?  

Just over half of the 16m jobs shed by the US service sector in April belonged to hotels and restaurants. A restoration of domestic mobility, combined with a partial reduction in social distancing, is not going to bring about a sudden 'snap back'. 

Globally, many of the affected companies will fail, meaning that the out-of-work will be competing for a reduced pool of new jobs rather than simply walking back into their old ones. 

Outside the US, financial assistance for the service sector is either limited, or tied to loans. So for example, when Italy allows seating in restaurants next month, owners will have to maintain numbers below a certain percentage of full capacity whilst using any profit they do manage to make repaying the government. In the UK it seems covers could be halved by dictat. 

Should a vaccine turn up in the next 18 months a new patchwork of haves and have-nots will immediately be imposed on the international situation, already complicated by the fact that some countries have compressed R and community transmission, whilst others appear almost ready to give up the fight. This will undoubtedly affect essential trade as well as well as non-essential tourism. 

A more cautious world, will be a slower world. 

(PS: Flesh-eating, reptilian aliens will be invading later in the year. This is an illustrative scenario, not a forecast.) 

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