The lockdowns across the world have induced an imminent global recession – the worst in 300 years according to one study. So the real question is: how long will that recession last? Victor Hill inquires.
In the deserts of the heart
Let the healing fountain start
In the prison of his days
Teach the free man how to praise.
– WH Auden (1907-73), In Memory of WB Yeats
Sobering numbers
This week the IMF forewarned that the global economy is heading for the biggest shock since the 1930s. An estimated $9 trillion in output will be lost this year and next. Global GDP will fall by 3 percent in 2020 – the largest drop for almost a century. Millions will be tipped into poverty – especially in the developing world. The UK economy will shrink by 6.5 percent, Germany by 7 percent and Italy by 9.1 percent. Japan, the US and Canada will experience losses of GDP of 5.2 percent, 5.9 percent and 6.2 percent respectively. 22 million Americans have filed for unemployment status in the last month – a totally unprecedented number.
Back in the UK the Office for Budget Responsibility (OBR) announced this week that the British economy could shrink by 35 percent in Q2 2020 if the lockdown endures. The fiscal deficit is likely to rise to 14 percent of GDP – the highest level since WWII. That would presage the worst year for the economy since 1709 when an extreme winter was followed by floods, pestilence and crop failures – resulting in widespread famine. Such an apocalypse is not in prospect but over one million Britons have applied for Universal Credit this month alone.
The butterfly effect
There is an idea popularised by Chaos Theory that minor perturbations in small-scale systems can be amplified in entirely unforeseen ways. So there is the conjecture that the flapping of a butterfly’s wings somewhere in the Amazon basin can result in a hurricane in the Caribbean some weeks later. That would be difficult to prove – or to falsify; thus, on Karl Popper’s principle of falsifiability, it is not a scientific proposition at all. However, one of the most powerful implications of Chaos Theory is that an identical concatenation of events and forces can have quite different outcomes – a proposition which accords with common sense.
The coronavirus pandemic of 2020 represents a classic paradigm of chaos theory. Right now we just don’t know what the economic fallout of the coronavirus pandemic will be – not even in the very short-term i.e. the next nine months, let alone over the medium-term. Though there are three types of commentator at large in my reading: optimists, realists and pessimists.
Optimists envisage that, once the lockdowns are relaxed, normal life will resume and the economy will snap back. Hence, they talk about a V-shaped dip followed by swift recovery, with the financial markets closely following – if not anticipating – the real economy. They think that the lockdowns will safely be scaled back once the peak is passed.
But, let us be clear that we have to look at the peak in new cases rather than the peak in daily or weekly fatalities; and that, as I explained two weeks ago, relies on testing (which is currently wholly inadequate in the UK and indeed in the USA too). So determining when the peak of new cases has been reached is an exercise in flying blind – unless we test everyone repeatedly, how will we know that we are there?
Furthermore, the optimists’ scenario makes a number of heroic assumptions in terms of both the epidemiology and the economics– and about the nature of the data.
Let’s take the epidemiology first. The optimists assume that we are following a perfect bell curve – what Boris, before he fell ill, referred to as the sombrero. In fact there is no reason to suppose that the slope in the decline of new cases will mirror the slope of the rise. On the contrary, we are very probably dealing with a distribution which is highly skewed to the right; and indeed which could undulate as new cases rise and fall in post-lockdown conditions.
The medical evidence increasingly suggests that, until a new tried-and-tested vaccine is available, some limited form of lockdown will continue to be necessary. Indeed, Harvard’s Chan School of Public Health released a report this week which concluded that, unless a vaccine or cure is developed, there will almost certainly need to be ongoing social distancing and periodic lockdowns until 2022[i]. And Bill Gates has been telling us this week that there will not be any reliable vaccine for 18 months at least.
In terms of the economics, the optimists assume that there will be no change in consumer behaviour and that the patterns of demand will go back to pre-pandemic levels. That ignores both a fundamental change to our psychology which I believe is underway – the over-60s, for a start, of whom I am one, will not be rushing back to restaurants and the theatres any time soon. Nor will young university graduates with no jobs in prospect go clubbing.
Then there is the fact that so many people across the developed world – and not just the low-paid – have had their purchasing power holed below the water line. Despite the efforts of the UK government’s Job Retention Scheme, and equivalent programmes in the US, France and many other countries, consumer confidence will have taken a battering; nest-egg savings will have been run down; and the threat of a second lockdown will prove a brake on future spending commitments. Not to mention the fact that people on above-median incomes will brace themselves for the inevitable tax rises to come.
As for the markets, it does not follow that a post-lockdown surge in economic activity would restore the markets to their end-February toppy levels. On the contrary, despite their bullish performance in the week of 06 April, the markets are already showing signs of fatigue. There are reasons – read on – why they could fall a lot further.
So the idea that we shall all emerge blinking into light sometime in May and go back to our pre-pandemic lives is not just optimistic but fanciful.
The realists foresee a U-shaped recession. They admit that Q2 2020 will be a catastrophe in GDP terms – the UK OBR prediction of a fall in UK GDP of 35 percent in Q2 has already been noted. They admit that Q3 and Q4 will probably be dire as well with significant unemployment. But they argue that productive capacity will not have been destroyed as occurs in a cyclical downturn; the economy in the UK and elsewhere has been kept on life support by judicious government intervention; and there will be pent-up demand as the economy re-normalises. Therefore, they see no reason why the global economy will not rebound around the beginning of Q1 2021.
As evidence of this the realists point to a 40 percent rise in cruise bookings for 2021 as compared with 2019 – despite the dreadful experience of passengers on the Diamond Princess and other cruise ships. That suggests that even the older demographic, which is the core market for cruises, is cautiously optimistic that life will return to something like normality after Christmas. One possible reason for the spike in bookings, mind you, is that there have been some incredible cruise offers available for next year with minimal down-payments. Hope sells – especially if it comes cheap.
The realists think that there can be a substantial easing of the lockdown without endangering public safety. For example, there are 4.2 million adults in the UK aged under 30 who do not live with their parents. They could be called back to work while the older demographic works from home and pensioners continue to self-isolate completely.
Then there are the pessimists who foresee an L-shaped GDP curve – that is to say that they think we are about to enter a depression the like of which we have not experienced since the 1930s. One such pessimist is the American speculator Jim Rogers, the co-founder with George Soros of the Quantum Fund. He is on record even before the pandemic for predicting the most severe bear market in living memory, exacerbated by exorbitant debt levels in both the public and private sectors. He thinks that even before the coronavirus crisis kicked in, the stock and bond markets were sustained at artificial levels only by magic money printed by central banks[ii].
In real bear market territory stocks lose value by 60-80 percent. The recent rally has been largely motivated by monetary policy, which is essentially political in character. Politics matters too – there is a certain election coming up in November; and the Brexit end-game is still not yet played out. In the EU the full political fallout is yet to come – but it will not be uplifting.
At least Jim Rogers endorses a theme that I have plugged in these pages for several years – that agriculture is an under-invested sector with fantastic potential. Maybe people on the other side of this will realise that getting the best out of Mother Nature is the new high-tech.
All that glisters is not gold
Mr Sunak was praised for his decisive intervention during the earliest stages of the lockdown with the Job Retention Scheme which ensured that huge numbers of people were not laid off by struggling employers. That scheme, it seems, is working; albeit that there are people who were engaged after 28 February, through no fault of their own, have fallen through the cracks. But even those who have been furloughed will have to make do on much reduced incomes.
Then assistance was offered to self-employed people, of which there are over five million in the UK. When a self-employed friend of mine went to the HMRC website a few days ago to determine if a grant were available to pay the rent for his frozen business, after much scrolling he arrived at a message which read:
My friend can’t apply for Universal Credit because he and/or his partner have more than £16,000 in savings. There must be millions like him who just have to dis-save to survive.
When the Chancellor bailed out the charities I began to worry. The whole point about charities is that they raise donations from supporters for a good cause, and then direct their funds accordingly. Some charities are more worthy than others; and some are better managed than others. If the state bails out my favourite charity – then why should I bother to donate anymore? Behaviour, as I keep repeating, changes in response to economics.
As if all this is not bad enough, there are a slew of price hikes in store for UK citizens on below median incomes. Council taxes across England have already risen by around the statutory maximum of 4 percent; TV licenses and prescription charges (England only) are rising this month; mobile and broadband charges are on the up; stamps, water bills and energy prices are set to rise.
Apparently minor policy mistakes right now could result in ghastly consequences. It’s a good moment to reflect that the Black Death in England (1348) led directly to the Peasants’ Revolt (1381). But cause and effect are almost immediate in the modern world.
Clearly, I’m not an optimist. But am I a realist or a pessimist? Readers will find out in a webinar that goes out live next Tuesday (21 April) at 14:00 hours London time. I’ll be in the distinguished company of two of the sharpest investment minds in the business – namely Jim Mellon and James Ferguson. Do join us if you can on Zoom – places are limited, so don’t delay.
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On my fifth birthday my father gave me a globe. It was a splendid orb, each country brightly coloured, the vast oceans in pale blue and with the great mountain ranges in tactile relief. In subsequent years I spent hours at a time planning imaginary journeys across this amazing planet. I still have that globe.
I started to collect maps even before I began to collect books. Even today, I can easily lose an hour planning a hike in the Cairngorms or in the Olympic Alps, considering where a river might be forded or crags traversed. I have most of the Ordnance Survey’s output in a filing cabinet in my study (though finding the precise one I want can be a pain).
In these days of travel deprivation I take comfort in maps. Our weekend newspapers groan with travel porn – those “holiday ideas” are no way as satisfying as planning a journey. I suppose that I am fortunate in that I have a stock of memories of journeys to fall back on, and the maps to prove it.
Talking of butterflies, I was hiking one spring some years ago in the Atlas Mountains of Morocco. For the first day my dour Berber guide, Hassan, and I exchanged barely a word apart from the necessities of donkeys, kit and route expressed in French and pidgin Arabic. Then, on the second day, I asked him to speak to me in Berber. His mood lightened perceptibly. From then on he would point at an object and enounce its Berber word.
The Atlas is famous for its exotic butterflies. When a gorgeous, delicate exemplar floated past, Hassan pointed to it and said: tabr-bellat. That word from this ancient, secret tongue struck me as one of the most beautiful I had ever heard. Perhaps that was the word for butterfly in the Garden of Eden.
Whenever I see Red Admiral butterflies, which are plentiful in my garden in Norfolk this isolation springtime, I think: tabr-bellat.
[i] The paper is available at: https://science.sciencemag.org/content/early/2020/04/14/science.abb5793
[ii] See for example: https://www.youtube.com/watch?v=5zK8-Gvimx4