Monday, March 23, 2020

Global Economic Outlook 2020: Democratizing Information and Advancing the Frontiers of Economic Thought... Part II

by Terry O'Neill 

Founder, Institute for the Study of Global Economics and Finance (ISEF)
Chairman Emeritus, The O'Neill Company

During these very challenging economic times, the events taking place will be much more dynamic than static. Therefore, in an effort to keep everyone up to date and best informed, I am adding to my last writing and will continue to comment and add context to some key economic changes that are rapidly taking place (please review caveat below: Poland and the creation of an “anti-crisis shield”). For those of you who have not read my March 17 comments, may I encourage you to review them here.

I now believe that we will experience what I would refer to as a “front-loaded recession” and the Global Financial Crisis 2 (GFC2) will be more severe, however, shorter in time. Given the current data, the recession has already started in the first quarter of 2020. So we will have a Q1 (quarter) contraction, a Q2 contraction, most likely a Q3 contraction and, if we get a fiscal stimulus (congress needs to act quickly) of at least 3 percent of GDP (GDP is 21tn, therefore 600-800bn) and we control the pandemic by doing systematic quarantines, it will be more severe than the Global Financial Crisis 1 of 2008 (GFC1). However, because it is front-loaded, if the pandemic can be stopped by potentially June or July, then maybe by the fourth quarter of this year, we could possibly start to see an economic recovery. The recession could be three quarters rather than six or seven quarters. Again the key that is needed is the fiscal stimulus to backstop the collapse of private demand, the collapse of exports, the collapse of consumption, the collapse of residential investment, the collapse in small and medium size businesses of capital expenditures (CapEx), and the collapse of the private sector, overall.

We need liquidity in the economy, a big balance sheet like the Federal Government that can create the liquidity and then spend or transfer income to those who need it. We will need to assist those who will not be working during the shut down, those in America who have been “preconditioned to save in reverse through installment purchases” (on credit, which is a large percentage of our citizenry), and those in the lower wage category who are not capable of building any financial reserves and are now not working due to the shutdown. The Federal Reserve completed a survey and concluded that about 40 percent of adults have said they would not be able to cover a $400 unexpected expense with cash.

 We all know that, in life, we experience reaching peaks that are euphoric and valleys that can appear to be devastating and/or troublesome. Looking back on GFC1 of 2008, the valley was unforeseeable, however, the valley of the 2020 pandemic and the resulting economic crisis can be seen and understood. I might suggest we look out to the next mountain peak of mid 2021 and 2022 knowing that this shall soon become a passing memory and we can be grateful for advancing through another moment in history.

Caveat: While my own peripatetic economic analysis plans have been possibly/probably postponed for this May to Poland, Ukraine and Romania, let me paint a picture of the “creation of an anti-crisis shield” that is taking place in Poland which will give us a better understanding of what needs to take place in other countries.

Poland and the creation of an “anti-crisis shield”

Poland has not experienced a recession in 30 years. It has been among the most aggressive in the EU in responding to the outbreak by closing its borders, banning large gatherings, and ordering most non-essential shops to close. Such measures are a sensible response to the pandemic. But, together with the slump in demand, they will experience high strains on the country’s businesses.

The government spelled out how it plans to mitigate this. The 212bn zloty (US$52bn) package will allow companies to defer social security payments; provide government support for up to 40 percent of workers salaries’ at companies that have seen their turnover drop as a result of the pandemic; offer support for the self employed; and includes 7.5bn zloty of health spending and 30bn zloty of infrastructure spending.

Poland’s banks themselves last week pledged to allow retail and business customers hit by the crisis to suspend loan repayments for 3 months, giving people confidence in the anti-crisis shield that, with time, things will improve and soon get back to normal. The key is to survive the acute phase of the crisis, as unscathed as possible and then, later, work on rebuilding confidence.
The total amount of 212bn zloty (which equates to 9 percent of GDP) includes not only direct fiscal stimulus, but also central bank actions including repo operations, a TLTRO-like program (targeted longer-term refinancing operations used by the EU during the financial crises of 2008) and the purchase of treasury bonds on the secondary market. This would be a package to get through the end of April. If Poland is still in lockdown in May, it would not be enough. So if this crisis proves more than a passing one, businesses will need more radical assistance. Just as important as the size and structure of the “anti-crisis shield”, are the details of how it will work.
Overall government backstops will need to be as automatic as possible and the rescue packages will only be as effective as the bureaucracy administering it, so let’s hope and pray we can rise to the occasion of this crisis as Americans and set partisan politics aside, as least for the moment, or maybe learn an important lesson and make it permanent.