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Why COVID-19 Will Hurt the Global Economy

 By   Shlomo Maital  

        COVID-19 Map

   The ‘new coronavirus’ dubbed boringly COVID-19 has brought to mind an insight of Charles Darwin:

   It is not the species best adapted to their environments, that thrive and prosper, but rather, those who learn fastest to adapt to changes in their environment.

     The reason? Environments are constantly changing. Living species have to adapt, and some do it far better than others.

       Viruses are an example.   Keep in mind- viruses are not actually living things, as cells are. A virus is a small infectious agent that reproduces only inside the living cells of an organism. It inserts its ribonucleic acid (RNA) into the DNA of the cell, reproduces, kills the cell, bursts out and continues with its marauding raid on the human body, like Genghis Khan’s pony-mounted fighters.

        Viruses can infect all types of life forms. And they have learned, through evolution and mutation, to defeat the human body’s antibodies – soldier cells that attack and kill foreign invaders, or antigens. Viruses learn and adapt fast.

         And we humans?  

         The damage to the global economy from the COVID-19 virus will be greater than we expect.   World capital markets, down 10% and more, are now waking up to this fact. But why?

         Most economic downturns occur on the demand side of the supply-demand nexus. Some shock occurs, people cut back, spend less, invest less, governments slash spending, exports fall – and the fall in demand slows the economy. This is standard, and it describes every single economic downturn.

         When President Reagan implemented huge tax cuts in 1981 and then again in 1984, he ascribed them to ‘suppy side economics’ – desire to boost the supply of saving and capital, by putting more income in the hands of the wealthy. It worked – but not in the way Reagan thought. The rich spent the money, there was a huge demand boom, and America had a decade-long demand-side stimulus boom.

           COVID-19 is unique, because it is the first major supply-side disaster, since the global economy’s architecture was redesigned and rebuilt at Bretton Woods, NH, in July 1944, 76 years ago. China produces a great many of the world’s manufactured goods and parts. Most of its factories have slowed or closed. This is a huge disruption to the intricate system of global supply chains.

     What can be done?   Very little, because we have neglected supply side policies, and have underestimated how fragile and delicate the global supply chain system is.

       Central banks can slash interest rates, but interest rates are already rock bottom. Governments can spend money, but they already are running big deficits.

       And anyway, these are demand-side policies. Yes, they can help soften the demand problems arising from the supply shocks – tourism is collapsing, airlines are in trouble, etc. But these are secondary symptoms.

         How to restore the global supply chain? That’s the key issue. It requires a meeting of the world’s leading countries; meanwhile global companies like Apple are scrambling to find quick temporary fixes, and there are few good ones.

           Darwin was right. Our environment changed, when a tiny virus originating in Wuhan, China, set out to spread itself. How fast we learn to adapt will determine how costly that little virus will be to the world.

Global Economy: Clouds Gather

By Shlomo Maital

Caption: In the EU, the current state of the economy, and expectations for the near-term future, have both turned down sharply since the beginning of 2018.


   I regularly respond to a questionnaire from Ifo – Institute for Economic Research, based in Munich. Ifo regularly surveys economists and business leaders around the world, to put a hand on the pulse of the global economy.

   Ifo’s latest report is worrisome. Here are some excerpts from their latest report:

   “Sentiment in the euro area continued to weaken this quarter. The ifo Economic Climate for the euro area fell significantly from 19.6 points to 6.6 points, plunging to its lowest level since mid-2016. Experts downwardly revised their assessments of both the current economic situation and their expectations significantly. The euro area’s economy is moving into rough waters.”

   There are major problems in Italy and Spain. Italy’s new right-wing government is quarreling with the European Commission. Spain is showing signs of instability.   In Germany, Chancellor Angela Merkel announced she will not run again for the leadership of her party, and may possibly resign as Chancellor by year’s end. Hungary is muzzling the press and its judiciary.

   The Ifo report continues: “Experts scaled back their export expectations for the euro area, reflecting beliefs that barriers to trade have grown higher. At the same time, a larger number of experts now believe that short and long-term interest rates will rise over the next six months; and that the US dollar will continue to strengthen.”

     China’s economic growth is slowing, and the renminbi (yuan) is touching 7 to the dollar. In tomorrow’s election, the US may find itself with a split Congress – Democratic House, Republican Senate.  The US stock markets had their worst month in years.

   The world is now paying for neglecting countries, and wage-earners, who were left out of global growth and wealth creation. Migration has destabilized Europe, the Mideast and to some extent, the US.   If wealth does not come to a country, and if it is not distributed well, many people in that country will flee toward the wealth.   And when they do, the resulting instability will put a deep dent in wealthy economies.

The World Economy: Upbeat

By Shlomo Maital

 “Ifo” is a German research institute that sends out regular questionnaires to experts, with two parts: the first, about global conditions, and the second, about local (country) conditions. I respond to the questionnaire regularly.

   Here is Ifo’s latest assessment:

       Munich, 11 May 2017 – The ifo World Economic Climate improved markedly in the second quarter, with the indicator rising from 2.6 points to 13.0 points. Experts’ assessments of the current economic situation were considerably more positive, making their sharpest increase since January 2013.

       Not only did the global economy improve, but so did expectations about the future:

   Economic expectations also improved. A further recovery was seen in the world economy in the second quarter. The ifo World Economic Climate improved in nearly all regions of the world. The main drivers remained the advanced economies, and especially the European Union. Both assessments of the current economic situation and expectations continued to follow an upwards trend in most countries.

   As usually happens, the upbeat outlook is not uniform. Latin America and Africa and the Mideast lag:

In Latin America assessments of the economic situation remained largely poor, but expectations brightened markedly. There was also a significant improvement in the developments and outlook for emerging and developing economies. Africa and the MiddleEast were the only regions in which the economic climate deteriorated. The outlook for Turkey also remained overcast.

     The common denominator? Politics. Politics in Turkey, the Mideast and Latin America are rather chaotic (checked out Venezuela lately?)   Politics in Europe seem more positive, with the voters rejecting the far right. In America, politics are chaotic but this is not new…

   So, despite Trump, and an anti-globalization anti-trade sentiment sweeping the world, the world economy seems resilient. A new China-US trade deal is in the offing.     One dark cloud on the horizon – Brexit. The EU seems in a vengeful mood, and some there want to teach Britain a lesson. This would be a huge mistake. Hopefully wiser heads will prevail.

Blog entries written by Prof. Shlomo Maital

Shlomo Maital