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Unexpected Consequences of Covid-19

Macro Macchiato 02 March 2020

To add to last week’s portents of doom, China (as you will no doubt have seen already) released dismal Purchasing Managers Indices last week. The official PMI, which covers mostly state owned enterprises, fell to 37.5 from 50 in January. The Caixin/Markit index, which covers more privately owned businesses, fell to 40.3 points from 51.1 in January. This is well below any expected fall from Lunar New Year and is the lowest reading since the survey began in 2004.

Many economists now think that China will fall into recession in the first half of 2020. Across Asia, activity is down: Taiwan, Japan and Korea have all reported weak activity in February while manufacturing output fell in Thailand, Malaysia and Vietnam. Indonesia was the only ASEAN nation to reveal higher manufacturing output in February - for the first time since last June – but then confirmed today its first cases of Covid-19.

The runes are there to read if you look for them. OPEC is now openly discussing further production cuts with or without Russia and oil prices would appear to predict negative consumption growth in the current quarter. Tanker owners will be on the look-out for increasing contango in the oil price as above a certain level and beyond a certain time horizon that contango indicates a profit in time chartering tankers for storage – but that assumes that onshore storage is unavailable, which is a moot point as yet. Tanker owners had barely cleared the champagne glasses from their boardrooms after a great Q4 last year when Covid-19 flattened their bubbles. Agricultural futures on the Chicago Board of Trade have been tumbling as speculators price in a fall in demand and Latin American farmers will be anticipating a dismal River Plate season this month. Chinese importers look likely to stay quiet as consumers slowly work their way through inventories.

In the US, there is a difference between Main Street and Wall Street. Intermodal operators in the US report business as usual so far this year, suggesting imports and domestic demand are both ticking over as expected. Jobs growth remains steady and most voters haven’t felt any kind of Covid-19 effect on their personal lives. In a nation that sanctifies individual freedom while being armed to the teeth to protect it, one wonders if the kind of restrictions on movement demonstrated in China would be possible without provoking civil unrest. Anyway, the preppers are prepped and everyone else is carrying on as normal apart from in lower Manhattan. On Wall Street, yields on treasury bills are at multi-decade lows as investors rushed to safe havens last week. And of course, that meant global stock markets mostly entered correction territory. Still, more fool us for thinking that a recession was inevitable. Speculators and investors are now betting on rising commodity prices and consumer spending as they price in central bank stimuli around the world. The EU moved first, and the Federal Reserve is now expected to cut rates later this month.

But the supply-side management handbook of monetarism has little to say about virology. Around the world, schools have been shut for weeks, forcing parents to forego work for childcare. White collar workers are being told to work from home, which can create productivity dips while staff get used to changes in process and daily habits. Major sporting and commercial events are being cancelled, slashing personal and corporate travel. Cutting interest rates by half a per cent is not going to make Covid-19 less contagious or reduce its fatality potential. The public health priorities of containment and delay of infection run counter to the consumerist imperative and to the free movement of people and goods that underpin the global economy.

What happens when the virus blows over but people have got used to working from home? What happens if people don't get back into their cars or onto public transport at the same levels as before? What happens at the macro level if people get used to video conferencing and take one fewer flight a year each to meet in person? What if parts of the global supply chains for manufacturing are permanently replaced by more resilient local suppliers? Does monetarism have an answer? Do lower interest rates change peoples's apprehensions about public health?

In China, coal and gasoil burning has fallen so much that satellite monitoring of air quality has shown a significant fall in NOx emissions. Blue skies are back over China for the first time in years. Data show that coal use has fallen to a four-year low. As domestic flights are cut back by 70%, the lack of contrails forming around black carbon particles in the air has cleared the skies – at least relatively. Beijing air still exceeds by a factor of 10 the limits recommended by the World Health Organisation for NOx and particulates.

There is an opportunity for the Chinese government here. There has been a wavering commitment to burn less coal, to burn cleaner gas and to invest more in renewables. But renewables subsidies were cut last year. Even with super-low gas prices, LNG imports remain expensive due to the cost of infrastructure. China’s central government will no doubt provide a variety of stimuli to get the economy moving again once Covid-19 dies down (we still assume that it will die down). The timing is perfect for a raft of green investment and public health initiatives to innovate on energy use and to prepare for the next novel virus. Perhaps the politburo will turn to the old reliable of construction and manufacturing but why not take the chance to make a Great Leap Forward in national public health – the political benefits could be enormous.


What will be the future verdict on how Covid-19 affected the global economy? It is too early to say. We could look back at this and consider it a mere blip in economic growth. We might view it as a sideshow that briefly diverted us from the increasing competition between China and America. We might realise that, while we were focusing on the economic effects of a novel virus, we were not focusing on the dangerous escalation of international conflict in the Middle East. During our more utopian fantasies, we might think of it as a moment captured by China to switch its focus from growth at all costs to growth with public health and environmental benefits, which came with the advantages of shoring up the Party’s position in society because it softened some of Xi’s more totalitarian instincts. We might say, Covid-19 was the moment that marked peak consumerism, that it slowed down the unsustainable consumption of fossil fuels and was the virus that saved the planet. And people say economists are always pessimistic…

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