What kind of economy can we expect post-lockdown?

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Macroeconomics

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The stock market has had its best month in decades and many are clearly looking forward to May with more optimism than they could April, but a series of articles in The Economist suggest we are far from the prospect of a return to normal.

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China went into this pandemic a month at least ahead of the West, with lockdowns being enforced from Jan. 23 and only relaxed them from March in some areas (but mid-April in the most-affected areas).

Factories may be largely back to work but, in another article, The Economist reported rides on the metro and on domestic flights are down by a third. Discretionary consumer spending, on such things as restaurants, has fallen by 40% and hotel stays are a third of normal. People are weighed down by financial hardship and the fear of a second wave of COVID-19. Bankruptcies are rising and unemployment, one broker has said, is three times the official level, at around 20%.

Where China has unwillingly led, the rest of the world has even more unwillingly followed.

Europe is in the midst of an economic downturn the severity of which has not been seen since the end of World War II — and the worst is yet to come.

Christine Lagarde, the president of the European Central Bank, is reported in The Economist as saying, “The euro area is facing an economic contraction of a magnitude and speed that are unprecedented in peacetime,” warning the eurozone economy could shrink by as much as 12% this year.

Officials have already estimated economic output in the E.U. fell 3.8% in the first three months of the year, the region’s worst performance since the common currency was introduced in 1999. Some have fared worse: the French economy declined by 5.8%, Spain’s by 5.2% and Italy’s by 4.7%, their steepest downturns in the post-war period.

Governments will be buried under mountains of debt incurred while attempting to mitigate the downturns for years to come, creating pressure to raise taxes and cut spending in areas that are deemed politically acceptable. These are unlikely to be health and social services following the public’s experiences of the virus, so a shift to a higher borrowing, more socially generous but higher-taxed society is likely in the aftermath of this pandemic (at least for the next few years).

Like governments, businesses will emerge from the lockdown short of cash and with strained balance sheets.

Demand in most sectors is unlikely to bounce back fast. A few, like medical equipment, parts of the food manufacturing supply chain and online streaming services are booming, but much of the core manufacturing sector, particularly smaller businesses, are facing severe headwinds. According to The Economist, Goldman Sachs noted almost two-thirds of American small-business owners said their cash would run out in under three months.

In Britain, the share of commercial tenants who have fallen behind on their rent has risen by 30 percentage points. Last week, the boss of Boeing warned air travel would not match the level of 2019 for two or three years, while British Airways has furloughed 30,000 staff but more seriously announced 12,000 permanent redundancies – 25% of all cabin crew, pilots and support staff – as they plan for a future in which far fewer people fly.

According to the BBC, British Airways is even contemplating permanently closing all operations out of London’s second airport, Gatwick, where they dominate a whole terminal. Furloughing staff is a temporary measure, but redundancy and closing terminals is a long-term retrenchment.

The recovery will not only be slow, but also poorly distributed. Because the hardest-hit industries tend to be those that employ a lot of low-wage people — leisure, food, tourism, etc. — joblessness will be high and casual work hard to come by. Even now, in Europe’s five largest economies, over 30 million workers, one-fifth of the labor force, are in special schemes where the state pays their wages. How long those schemes will last after the current June limits remains to be seen.

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Stock markets may be looking for a V-shaped recovery, but low investment due to strained balance sheets and residual high unemployment are going to drag on for months, potentially years, to come.

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