Economy after coronavirus: protectionism, over-production and another 10 trends of the new world

Slow growth, deflation, modesty of consumers and the confidence of investors to risk. What will happen to the economy and the markets after coronaries

Экономика после коронавируса: протекционизм, перепроизводство и еще 10 трендов нового мира

Coronavirus COVID19. Three months after the detection of the first patient in China, the virus has killed more than 11,000 people worldwide. And has dramatically reshaped the world economy: the stock market collapsed, the raw material is cheaper, the financial markets are close to stupor, the estimated decline in GDP from 5% to 15%. Humanity will win sooner or later virus. But by that time it will be with the global economy, and most importantly — what will happen after?

An American financial analyst Gary Shilling in his column for Bloomberg provides the answer to this question and he is not very optimistic. Postcoronary the US economy grows slowly, has a constant risk of deflation and the confidence of investors in the shares as a financial instrument. translated the main thesis of the article Shilling.

1920-e years would not “rattled” in the history of mankind, if not it is depressed 1930s. similarly, following a serious global recession that will trigger a coronavirus, 2010 years will seem to us the Golden age of slow but steady economic growth and employment growth, lower inflation and interest rates.

That is what we should expect when the world returns to “normal state”.

1. To accelerate the transition from free foreign trade and globalization to protectionism, the green light which was given in 2001 after China’s accession to the world trade organization. The decline in manufacturing activity and jobs in the West as a result of globalization and the vulnerability of global supply chains will promote independence and self-sufficiency of countries, but also the accompanying inefficiency. The hopes of politicians that protectionism will lead to job growth in their States and increase the incomes will be destroyed. An example of the 1930-ies showed that trade barriers reduce economic growth and give rise to deflation.

2. The suspension of business and educational process in connection with the quarantine will reduce the frequency of business trips and study time. The practice of personal meetings will not disappear, but will not be as popular as before. During the quarantine people will appreciate the advantages of communication with “hardware and software”. In turn, this will hit the airlines and hotel industry. In addition, working from home will become more acceptable employees.

3. Consumer caution will remain a lot longer than since the financial crisis of 2008. The attitude of the population towards the purchase or use of certain goods and services as such, without which you can do, can prevail over the years. This will affect consumer spending and correspondingly, retail sales.

4. Will increase fiscal stimulus because monetary policy is impotent. In addition to reducing the level of unemployment caused by the recession, and the additional income, the likelihood of major infrastructure costs. In the US both Republicans and Democrats agree that this is a necessary measure, and falling yields of U.S. Treasury in a situation of rising Federal deficit, extinguished fear Washington in front of a huge borrowing to Finance deficit spending.

5. With the exception of total protectionism in the world offer will continue to exceed demand. As a result, excess saving would lead to lower inflation and interest rates. Low inflation and possibly even deflation will weaken the zeal of the population to the expenses, further stifling any economic recovery.

6. Recession may kill hope Donald trump for re-election for a second term and put at the helm of the White house and Congress Democrats. Then, most likely, will be implemented some kind of Federal medical care for all. In addition, can strengthen tax rules to redistribute income from rich to poor.

7. The fall in crude oil prices could push the Saudis and the Russians to cooperate, so they try to supplant the us oil sector. Oil prices then recovered to $40-60 per barrel, but stable oil companies will be new colleagues at their heels.

8. The result of the recession many of the so-called junk bonds can be defaulted, particularly as it may relate to the energy sector. The growing list of “fallen angels”, or those issuers that have lost their credit ratings investment grade may lead to a collapse in the prices of bonds with a junk rating and cause a jump in US Treasury bonds.

Will tightened lending standards, as in the case of the mortgage loans after the collapse of subprime lending.

9. Treasury bonds, which are final assets-shelters are still attractive even with the same or perhaps negative real returns in a deflationary climate conditions. However, in contrast to the European Central Bank and the Bank of Japan, the Federal reserve will probably refrain from negative short-term interest rates.

10. Also will be worried and pension funds due to the transition to more risky investments in search of higher returns in recent years. Options to achieve their ambitious goals — the reduction of pension benefits, increased contributions from employees and increased funding from sponsors — will be equally unattractive.

11. When investors finally feel the full depth and length of the recession, stocks will fall, probably 20-30% below current rates. After 2007-2009 years, individual investors will slowly return to the market. In the long term, stock markets can be considerably inferior to the level of the economy, since higher ratio of price and profit for the last three decades will return to more normal levels, if not reduced.

12. As with any negative developments, in this case also you will need to find a scapegoat who will take the blame for coronavirus crisis, recession and falling stock prices. Among candidates — the US Federal government, particularly health officials, as well as high-frequency trading on wall Street. As usual, expect more government regulation in response.