–Enda Curran | Bloomberg
Every economic shock leaves a legacy. The deadly coronavirus will be no different.
The great depression spurred a “waste not want not” attitude that defined consumer patterns for decades. Hyperinflation in the Weimar Republic still haunts German policy.
The Asia financial crisis left the region hoarding the world’s biggest collection of foreign exchange. More recently, the 2008 global financial crisis drove a wedge through mature democracies that still reverberates, with workers suffering measly pay gains in the decade since.
This time it’s a public health emergency that’s shaking up the world economy. In just a matter of weeks, people in affected areas have become accustomed to wearing masks, stocking up on essentials, canceling social and business gatherings, scrapping travel plans and working from home. Even countries with relatively few cases are taking many of those precautions.
Traces of such habits will endure long after the virus lockdowns ease, acting as a brake on demand. On the supply side, international manufacturers are being forced to rethink where to buy and produce their goods — accelerating a shift after the U.S.-China trade war exposed the risks of relying on one source for components.
In the white-collar world, workplaces have amped up options for teleworking and staggered shifts — ushering in a new era where work from home is an increasing part of people’s regular schedule.
“Once effective work-from-home policies are established, they are likely to stick,” said Karen Harris, managing director of consultancy Bain’s Macro Trends Group in New York.
Universities stung by travel bans will diversify their foreign student base and schools will need to be better prepared to keep educating online when breakouts force their closure.
The tourism sector is seeing the most drastic hit, with flights, cruises, hotels and the web of businesses who feed off the sector struggling. While tourists will no doubt be eager to explore the world and relax on a beach again, it may take some time before the industry that hires about one in 10 people recovers.
The virus has also turned the economic policy outlook on a dime and created new priorities. Central banks are in emergency mode again, while governments are digging ever deeper to find money to prop up struggling sectors. Hygiene is soaring up government and corporate agendas — indeed, Singapore already plans to introduce mandatory cleaning standards.
“This outbreak is unprecedented in terms of its nature of uncertainty and associated social and economic impact,” said Kazuo Momma, who used to be in charge of monetary policy at the Bank of Japan. Tighter borders controls, wider insurance coverage and lasting changes to working and commuting patterns will be just some of the micro-economic changes that will endure long after the virus, Momma says.
In China, where the virus first erupted in Wuhan late last year, the top legislature has already imposed a total ban on trade and consumption of wild animals amid scientists’ warnings that the deadly coronavirus migrated from animals to humans. Additional strict hygiene rules are expected that will accelerate a push by wary consumers to online shopping, similar to how the 2003 SARS outbreak changed shopping habits as people avoided the mall.
Analysis by Bain & Company found that China will see pronounced immediate changes in health care as more and more rudimentary checkups and transactions are conducted through online channels to avoid the risk of contamination in crowded waiting rooms and wards.
Governments may spend much more on health care to avoid the massive cost associated with epidemics, according to a new paper on the macroeconomic impact of the virus published by the Brookings Institution and co-authored by Warwick McKibbin and Roshen Fernando of the Australia National University.
“The global community should have invested a great deal more on prevention in poor countries,” McKibbin said. He was also co-author of a previous paper that estimated the 2003 SARS outbreak wiped $40 billion off the world economy.
Because no one knows how the virus will play out or what the final human and economic toll will be, economists caution against concrete predictions. It could be that much of the disruption will revert to normal activity once the outbreak is contained, according to Nobel laureate Edmund Phelps of Columbia University.
“I think most businesses and certainly the behemoths in the U.S. and elsewhere will not fail to go back to normal business practices,” he said.
Economists like Paul Sheard, a senior fellow at Harvard University’s Kennedy School, also caution that because no two economic shocks are the same, it’s far from certain what legacy this one will leave.
Fabrizio Pagani, a former adviser to the Prime Minister of Italy, draws on previous shocks for guidance.
“The oil supply shock in the 70s led to the first efforts of energy conservation and efficiency,” he said. “The demand shock determined by the great financial crisis was the rationale for a new, quite radical, regulatory framework across the banking and financial sectors.”
This time around, he expects changes to everything from online schooling and distance learning to industrial strategy as existing business models are reworked.
A triple convergence of Brexit, the U.S. China trade war and now Covid-19 could reshape the world’s manufacturing supply chains, according to Michael Murphree, of the University of South Carolina’s Darla Moore School of Business.
Kathryn Judge, a financial markets and regulation expert at Columbia University, says the U.S. banking crash of 2008 has left deep scars by fueling divisive politics and declining levels of home ownership. The current crisis, as nations around the world take emergency steps to shield citizens from coronavirus infection, will have an impact too.
“Long-brewing debates about how to revamp the U.S. health-care system might benefit from a renewed sense of urgency, enabling structural change,” Judge said.
How that plays out on the political stage will be key. Would-be Democratic nominee Joe Biden is pushing a plan that would build upon Barack Obama’s Affordable Care Act. President Donald Trump, meantime, is downplaying the risk to the U.S. economy posed by the coronavirus and sought to cast blame for the pandemic at other countries for what he labeled a “foreign virus.”
James Boughton, who served for decades at the International Monetary Fund, including as the fund’s historian, cites the collapse in South Korea and Indonesia as catalysts for change, provided governments act.
“Only in a crisis are governments able to rally people to accept necessary but painful reforms,” said Boughton. “Every crisis is also an opportunity.”
The Trump administration struck a deal with Senate Democrats and Republicans on an historic rescue package that tees up more than $2 trillion in spending and tax breaks to bolster the hobbled U.S. economy and fund a nationwide effort to stem the coronavirus.
“At last we have a deal,” Senate Majority Leader Mitch McConnell said early Wednesday on the chamber’s floor. “I’m thrilled that we’re finally going to deliver to the country.
The plan includes a $500 billion chunk that can be used to back loans and other aid to businesses, checks of $1,200 to most Americans, more than $350 billion for small businesses to maintain their payrolls, more expansive unemployment insurance, deferrals of taxes, and numerous other provisions, according to a person familiar with the details.
Although both sides had been in accord on the broad outlines since the weekend, the negotiations had been hung up on details and issues such as oversight of the Treasury Department’s distribution of $500 billion in loans and other aid that could go to corporations.
Yet while differences were resolved, the measure is still being drafted despite plans to vote on it later Wednesday.
The administration agreed to the oversight provision and some other Democratic demands following marathon negotiations between Senate Democratic leader Chuck Schumer and Treasury Secretary Steven Mnuchin.
Schumer called it an “outstanding agreement.”
In a letter to his fellow Democrats, he highlighted a series of transparency measures that would prevent keeping loans secret, create a new inspector general to oversee the program and prevent the president or his children from benefiting from it.
Schumer also said that hundreds of billions would be spent on Democratic priorities, including an extension of massively expanded unemployment benefits for four months, $150 billion for a “Marshall Plan” for health care and a $150 billion relief fund for state, local and tribal governments, as well as additional billions relative to the original GOP plan for small businesses, education, transit systems and so on.
The House must also pass the bill before it gets to President Donald Trump’s desk.
House Speaker Nancy Pelosi had been consulted throughout the negotiations.
Pelosi said on Tuesday that the House could quickly approve a Senate-passed coronavirus stimulus with a voice vote that doesn’t require members to travel to Washington — as long as the bill does not have any “poison pills” Democrats object to.
That would also require the unanimous consent of all House Republicans. The second-ranking House Republican, Representative Steve Scalise of Louisiana, told his vote-counting team during a conference call Tuesday night that the best option is to accept a Senate-passed economic stimulus bill, according to Scalise spokeswoman Lauren Fine.
With the prospect that Congress was closing in on a deal Tuesday, the Dow Jones Industrial Average rose more than 11% in its biggest advance since 1933, and the S&P 500 rebounded with the biggest one-day gain since October 2008 after starting the week with a rout. In Asia markets, U.S. futures initially pared losses following news of a deal being reached, but then resumed declines.
Eric Ueland, the White House legislative affairs director, said after the agreement was reached that the “the president and his team look forward to swift action for urgently needed assistance to the American people and powerful aid to the nation’s economy as we work through this crisis.”
The size of the stimulus package is unprecedented, dwarfing the approximately $800 billion Obama stimulus that passed five months after the 2008 financial crash.
Together with Fed intervention, the proposed legislation to a $6 trillion stimulus, according to White House economic adviser Larry Kudlow, or about 30% of annual GDP.
The package will likely more than double a U.S budget deficit that was already set to hit $1 trillion this year before the outbreak. It also may not be the last infusion of government spending in response to the spread of the virus.
Lawmakers universally expressed a sense of urgency as the nation’s economy deteriorates and the health outlook grows more dire. The World Health Organization said the U.S. has the potential to become the new epicenter of the global pandemic as the number of known infections soars.