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The End of the Line for Small State Systems?

Last week we reported some Chinese state statistics that detailed the impact of Covid-19 on the economy in January and February, for which most statistics are combined to cover the Lunar New Year. To review, industrial output fell 13.5% year on year, retail sales fell by 20.5%, fixed asset investment fell 24.5% and services output was down 13%.

China is now reporting a fall in the number of new Coronavirus cases and data appear to show that it is getting back to work. Air pollution numbers are rising in line with public transport use and traffic congestion. Coal consumption is back up to over 70% of its level at the end of last year. If there is to be only one wave of Coronavirus infection, then China has shown how to manage public health issue and has demonstrated that the economy can recover relatively quickly.

But --- containerized freight at Chinese ports is still falling, being only 71% of its year-end level by last Friday. China may be back on its feet, and its Coronavirus episode may only last one quarter, but the rest of the world is only where China was back in the middle of January. In other words, the rest of the world has not yet trod the economic path that China has.

No wonder the US Federal Reserve has today said it will buy unlimited quantities of US Treasuries and secured debt, as well as setting up more lending tools to add liquidity to an economic system now sorely in need of a ventilator. It has set a new programme to buy securities backed by student loans, vehicle finance and credit card debt – a great get-out of jail card for sub-prime credit card lenders who were already seeing delinquency rates of over 7%, the same as in 2008. The Fed has said it will also buy corporate bonds including new issues as well as municipal bonds. It has pre-announced a Main Street Business Lending Programme to funnel money directly to small business.

This all comes on top of the Fed’s commitment last week to buy over USD 500 Bn in Treasures and at least USD 200 Bn in asset-backed securities. It wasn’t enough to stop the blood-letting on Wall Street and the Dow has continued to plummet along with stock markets around the world as investors realise that the damage is only just starting. China’s economic output could end up being down by 20% for the first half of this year. In the West, where consumer spending makes up over two thirds of economic activity, the effects of quarantine and nationwide lock-down will be greater. Up to 30% of OECD economic output could be lost in the second quarter of this year.

The UK government has announced a similarly wide-ranging set of measures to support the economy. Most look like Labour Party heaven. Today, railways were effectively nationalised for the next six months as franchises were suspended. Last week the Chancellor (a graduate like myself of Lincoln College, Oxford) announced measures to make interest-free loans to small businesses, to pay the wages of staff laid off for the duration, and to support mortgage payers by backing three-month payment holidays. Similar moves are being implemented or planned in Europe, Australia, India, Japan, Brazil and elsewhere. Will it be enough?


The bottom line is that, if the rest of the world follows China’s economic path through the Corona-thicket, we could see a global economic downturn of 30% in one quarter. The measures announced by central banks and governments in the US, the UK and elsewhere will be only the beginning, especially if the virus enjoys a second wave later in the year, as the experts tell us often happens with pandemics. It looks like the State is going to have to take a much greater role in national economies around the world.

The years after 2008 showed us that, once nationalised, many industries and corporations can take years to be sold back to the private sector. This time it could take longer. This looks increasingly like the end of the line for the small-state, liberal-economic model followed by the West since the end of WW2. Our consolation? Whatever replaces it will still need to trade in commodities, raw materials and energy. Our role as an industry will be to manage shipping to meet the new level of trade that finally settles out of the chaos.

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