Inside Track 4 June 2020

  • Wide-ranging fiscal and monetary policy measures have succeeded in averting a global financial meltdown. To do so, by the end of this year, OECD countries will probably have taken on an extra USD17tr of public debt, increasing their debt to GDP ratio from 109 to 137%. So far, bailouts have been remarkably effective at providing life-support and saving the patient, but the struggle for the global economy is far from over. The path to economic recovery is going to be a long, uncertain one, constantly dogged by the risk that the current consumer liquidity crisis morphs into a corporate solvency crisis. Hertz’ bankruptcy could be the canary in the solvency crisis mine.
  • For the next few years, unemployment will be by far the greatest economic issue. In contrast to growth, it has an immediate and direct effect on peoples’ lives and wellbeing. Lockdown-layoffs make current figures catastrophic (e. almost 24% real unemployment rate in the US, 23% in France). As confinement measures ease, these numbers may improve, but the overall situation will go on deteriorating as labour-intensive industries (hospitality, travel, retail) start dismissing employees who were until now on temporary layoff. Many of them will become structurally unemployed – i.e. permanent job losers.
  • It is the younger generation entering the labour market today that will feel the effect of the current crisis for decades to come. Study after study shows that it should expect lower employment rates, lower incomes and greater social problems (like more divorce and more premature deaths). This translates into palpable consequences for business and investors. One illustration: over the past weeks, Chinese millennials have increased precautionary savings while analysts were anticipating the opposite: “revenge spending”.
  • There are zillions of reasons why some countries have (so far) successfully dealt with the pandemic, while others have not. These causal elements are so intricate and interdependent that they cannot be disentangled from each other, but for the sake of shedding some light on this, let us offer three intriguing correlations underlying relative success. They may seem farfetched and simplistic, but they say something and offer interesting lessons for businesses and investors.
  • i) Women: so far, countries led by women have 6 times fewer Covid-19 deaths than those led by men. They also seem to be recovering faster. Three main reasons could explain this “women leadership premium”. (1) They did not underestimate the risks and acted fast. (2) They focused on preventative (3) In policy terms, they’ve always favoured wellbeing – a source of greater resilience (like Denmark, Finland and New Zealand).
  • ii) Populism: the fallout from Covid-19 tend to be harsher and deeper in countries led by populists, like Brazil, USA, UK and Russia. A core feature of populism lies in the rejection of expertise. For Covid-19, this translated into ill-preparedness and the late adoption of social distancing measures.
  • iii) Size: governance seems to be easier in small countries, not as obvious as it seems, and suggests that diseconomies of scale were penalizing larger Singapore, Israel, Taiwan, Iceland, South Korea have done much better than the US, Brazil, India and Russia, and in a less “invasive” way than China.
  • There are many unsung Covid-19 winners ignored by the Western-centricity of the international media. Ghana, Senegal, Mongolia, Uruguay are a few examples and all great successesIn Europe, the winner is Denmark. It was one of the first countries to close and one of the first to reopen, proving that acting fast and decisively was the most appropriate strategy in dealing with the pandemic. Denmark did everything that Sweden (the focus of international attention) did not: closing its border, schools, restaurants, etc. Today, it has much fewer cases of infections and death (a fourth) than its neighbour, and its GDP for the year is expected to do better than that of Sweden’s (-5.3% vs. -7%).
  • Three very different events (two negative and one positive) epitomize how Covid-19 accelerates existing trends while amplifying their effects in a non-linear fashion, bound to take investors by
  • i) In the US, the riots and social explosion superimpose a societal crisis on an epidemiological The murder of George Floyd triggered the fury, but Covid-19 ignited the outrage. The disproportionate amount of pain inflicted by the pandemic on African Americans has crystalized a sense of unfairness and fuelled convictions that the US social contract is broken.
  • ii) In Hong Kong, the decoupling between the US and China, exacerbated by Covid-19, has taken a turn for the worse. After China enacted a national security law for the territory, the US secretary of state declared that the US would no longer certify Hong Kong autonomy. However, revoking Hong Kong’s special status cannot occur overnight and carries high stakes. This said, ceaseless frictions between the two giants are inevitable. Investors, beware of the crossfire.
  • iii) In Europe, Covid-19 may well succeed in pushing the EU towards further integration. If the €750bn recovery fund (500 in grants and 250 in loans) put forward by the European Commission sees the light of the day, then what seemed unimaginable just a few weeks ago will become policy, with a beginning of debt mutualisation in sight. Europe’s burgeoning “Hamiltonian” moment will have come, once again proving the doubters wrong (the currency markets have taken note). And the plan is green! On many fronts Europe is an enticing model.
  • The Inside Track 4 June 2020