COVID-19: Economic and geopolitical fallout and responses
The world is facing an unprecedented global health emergency. The scale of the pandemic and the quarantine measures adopted by many countries to curb the outbreak have brought our way of life to a standstill, with unforeseen and far-reaching impacts on our livelihoods, our jobs, our economies.
As Marie Bogataj, Head of the AXA Research Fund puts it, “The world is now facing multiple crises. And while unprecedented support has been provided to households, firms and the domestic market, which is crucial for a strong recovery, there is considerable uncertainty about what the economic, social and political landscape will look like when we emerge from the crisis.”
To inform decision-making and provide a possible path to mitigation the AXA Research Fund has brought together 9 of its prominent Chairholders to form a COVID19 Taskforce. In the first of a three-part expert series, three of these top-tier researchers provide insights into the pressing issue of economic and geopolitical fallout and responses. Listen to the replay here.
Read the second article in this series: Climate change, biodiversity and epidemics: Lessons for the next global crisis
Read the third article in this series: COVID-19: Health systems response, role of data and AI and mental health effects
Prof. Lily Fang
AXA Chair on Financial Market Risk, INSEAD, France
“I’m bullish about our economic future beyond the immediate shock. The COVID-19 crisis has forced us to rethink our priorities and be very creative and innovative.”
Prof. Luigi Guiso
AXA Chair on Household Finance and Insurance, Einaudi, Italy
“We have to defend Europe. Everyone should do what they can to put pressure on their government to make it a priority: Europe first should be the motto. Without this effort, people will lose their European identity. We cannot afford this.”
Prof. J. Peter Burgess
AXA Chair in Geopolitics of Risk, ENS, France
“The COVID-19 crisis is a problem that we need to approach with the help of wise economists and clever scientists. Among other things, it is about how we choose to live together, to share our values, and trust each other in times when it is the most challenging.”
What is the potential economic impact of the crisis? Was the lockdown necessary?
Prof. Lily Fang – Everyday, we are receiving a lot of statistics and it is hard to find good news. I want to cite three figures, one for each of the major economies. In the United States, 22 million people have gone unemployed in three weeks. This is unprecedented, crushing all previous records. If you look at China, the first GDP number just came out and it showed a contraction of 10% relative to the last quarter of 2019, so that is an annualized 40% drop. In Europe, most forecasts indicate an annualized contraction of about 20 to 30%. The economic downturn is very severe. Now the question is, will it be a 6-month event, a one-year event or a multi-year event? The key to determining what happens to the economy next very much depends on the lockdown. Half of the world is currently under some kind of confinement, and the severe downturn that we are experiencing is primarily driven by this.
Prof. Luigi Guiso – The lockdown is definitely an extremely costly measure economically speaking. You are bringing a whole economy to a halt, with the exception of the actors that are necessary for survival. There is nothing in history that remotely resembles such a sudden stop of the global economy. My idea is that the alternative, not locking down, would have been worse, both in terms of deaths and in terms of economic downturn. The economy would have naturally locked down in the end anyway. But in addition, it would have been an extremely uneven event, much more unequally distributed among the socio-economic groups. The evidence from the early 20th century influenza speaks in this direction. Now, why are some countries doing better without shutting down? I think is different for Asian and Scandinavia countries. Asian countries had the previous experience of SARS. They already had the infrastructure to deal with the management of a virus spread and they could react promptly. In Western countries, such a situation hasn’t happened in recent history. In the case of Sweden, a crucial aspect is the level of civic culture of the population. Swedes tend to abide by the rules, they complied with social distancing. Similarly, in Italian provinces known to be more civic, people were able to deal much more effectively with the spread of the virus.
Is the crisis affecting households unequally?
Prof. Luigi Guiso – There is strong evidence that poor people do worse in terms of exposure to the crisis. One of the reasons is that some of the jobs that require closer proximity to others are typically low-paid jobs, with the exception of doctors and nurses. But there are also factors that contribute to inequality from an economic perspective. Those that have lost their jobs and who are not able to find another one immediately need to rely on the help of governments. But the liquidity doesn’t seem to be flowing fast. And so, they become poorer. The same goes for the self-employed, who were forced to close their activity from one day to the next. The only way they can manage the crisis is by accumulating debt, or by liquidating their assets if they any. In both cases their wealth depletes. Furthermore, if they liquidate assets must do so at low prices. The buyers of these assets are people who don’t need liquidity, typically located at the very top of the wealth distribution. These people are buying at low prices today, and when the crisis is over, they will make important capital gains. This is another way this crisis will increase inequality. A third potential issue is the fact that the return of some assets that are particularly important for the middle class, like housing or small commercial real estate, are definitely going down. The rents cannot be paid, and they are likely to be renegotiated. What I foresee for the future is that wealth inequality will most likely go up and the situation is likely to last. It will be a while before low and middle-income segments of the populations are able to resume and restore their assets.
What are the effects on international institutions and global stability?
Prof. Peter Burgess – What we are facing now is not one, but two crises. A sanitary crisis, and an economic crisis. And they don’t map exactly the same way. The difference between the two is their cultural, social, the political, even the racial dimensions, which vary across the world. Just an illustration, we have all heard that in the US, the African American community is far more touched by the health crisis. In Chicago, 70% of COVID-19 deaths are among African Americans. It is not only attributable to lower income, it’s also attributed to pre-existing conditions, higher unemployment rates and lower access to health services. This new and unprecedented constellation of health and economic problems is putting pressure on the international systems in its different forms and on different levels. The Bretton Woods system is really under severe pressure. The IMF, the World Bank, the International Bank for Reconstruction and Development are now seeing financial challenges they were not designed to confront, and I think they will be pulled and stretched in a way that might cause them to reform. We have also seen international tensions between the US and China. There are ongoing tensions with Russia exacerbated by the virus. Isolation is causing a trust problem. The United Nations is essentially absent from the conversation; the World Health Organization is in hot water, to put it lightly. It’s an existential moment for the European Union. The only good news I can find internationally is, an analysis that many have made already, that the best crisis managers around the world now are women. Germany, Finland, New Zealand, Iceland, Taiwan… You see this combination for scientific rigor, humanity and empathy that somehow has led the way.
What should we expect in developing countries?
Prof. Peter Burgess – There is a lot of anxiety and it is really well founded. The brunt of the crisis has not reached the sub-continents yet, sub-Saharan Africa, Brazil… They have very few hospital beds compared to their population and not a lot of ventilators. For instance, I have just learned that India has 40,000 ventilators, and that means one ventilator per 35,000 people. Now this is a humanitarian catastrophe first, and I hope you will receive it this way, but it also has deep implications for global trades, international migrations, investment, on a scale that we probably don’t have the tools to really understand yet. We need to be thinking fast, not only to restart our economies, but to absorb it as it reaches the developing world.
Prof. Luigi Guiso – Indeed, there is a very important global stability issue. Most nations are essentially disregarding it at the moment as they are focused on their domestic issues. There is a need, at a certain point, and not too late, for our countries to take a more global perspective. Peter talked about the scarcity of medical equipment in developing countries, more severe than in developed countries. There is another potential case for asymmetry that I think we need to consider as soon as possible. The vaccine will most likely be discovered first in Europe, the United States or China. If this happens, it will amplify the inequality across countries both in terms of the humanitarian dimension and the global stability. We urgently need a plan in order to make sure the vaccine will go where it is the most needed.
Prof. Lily Fang – I completely understand my colleague’s take on the need for rich countries to help poor countries, but I do want to highlight a slightly different narrative. The reason why developed countries, the US in particular, are disrupted in such a way by the virus is because they haven’t had to deal with a pandemic in 100 years. They are completely caught flat-footed. On the other hand, African and Asian countries have had a lot more practice, they have a playbook on how to react. Scientists and policy makers there understand what they need to do first. In Korea, after the MERS outbreak of 2015, they made a 74-page response manual that lays out exactly what you need to do. Tests, tests, tests… We have a lot to learn from the developing countries. Yes, we need to extend our hand to help, but we also need to have humility.
Will there be consequences for democracy, human rights, press freedom?
Prof. Peter Burgess – As Lily said, the most powerful economies in the world are the ones that are ultimately the most vulnerable. And really, we can say the same thing of democracies. It’s already happening now, and we need to draw attention to it. You might not know this, but there are seven EU member that have requested derogations from the European Convention on Human Rights. In addition to that, we can see that there is a number of human rights that are being pressured by our confinements. Confinement itself is a violation, although you could say we are doing this voluntarily. We have growing stigmatization of minorities, problems with the rights to medical care, violations of international humanitarian laws, in the treatment of migrant workers… There are also threats to political rights, exploitation of vulnerable territories… Not to mention labor law. Healthcare workers are being exposed to danger in ways that would be unacceptable under ordinary conditions. Same thing for Amazon workers, Uber drivers, etc. One last thing, tracking devices are on the rise, many are advocating that it is time we lifted some of our rules on human privacy, in the name of the public good. There is also a loosening of standards in terms of sharing health data. What is acceptable now was not acceptable just one month ago. There are many more examples like this. My appeal is that we should be attentive to this and understand what we are signing onto.
What strategies to reopen the economy? Do we reorganize production processes?
Prof. Lily Fang – This is an urgent question. What we have at our disposal at this point in time is the advance of technology. An amazing amount of innovation is happening as we speak because of the crisis. Overall, there is a path for relying on technology and innovation to restart the economy. Specifically, I have been working on a three-point technology-driven reopening plan: the first is relying on diagnostic and tracing to protect the health system from being overwhelmed, the second is the urgent need for antibody tests (serological tests). They give you three things that the diagnostic doesn’t: they shed light on the true extent of the infection in the population, identify people who have antibodies, and identify recently immune people that can go back to work. The third aspect is the use of advance computing technology to help us predict population groups that are at risks and where the next spike will be. In combination, this plan is a hopeful way to deal with the crisis. I would like to add that the current discourse unnecessarily pits health and safety against reopening the economy. One cannot go without the other. From a political discourse point of view, the fact of the matter is we must have both. There is no choice. We’re talking about lives on both sides. The virus exerts a huge death toll, but at the same time there are also severe tolls on livelihoods because of economic hardship. During the 2007 economic crisis, which we now know pales in comparison to the current downturn, there were 5,000 extra suicides in the US alone.
Prof. Luigi Guiso – Ideally, we would like to identify people that are not-infected or are immune from those who are currently infected. The first could go back to work and the second should be isolated in quarantine. We cannot do this essentially because we lack the tools to do so on a large scale.. Social distancing, I think, and social distancing at work in particular, is part of the solution. Another one is to prioritize the re-openings. Some industries are more central to the working of the economy. Similarly, there are sectors that cannot stay locked down for too long, or they will lose their mark. We have the information necessary to lay out a plan to gradually exit the lockdown, while at the same time limiting the risks the virus starts spreading too fast again. What’s more, I think one of the legacies of the crisis will be the transformation of production processes. Maybe we will discover that multiple shifts are more efficient. As Lily said, new technologies are going to play a huge role. Digital technologies, in particular. This, I think, will be a legacy of the crisis: lifting the reluctance towards these cheap, adaptative, fast and economic tools.
This article was first published by the AXA Research Fund.
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document. Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.
This document has been edited by AXA INVESTMENT MANAGERS SA, a company incorporated under the laws of France, having its registered office located at Tour Majunga, 6 place de la Pyramide, 92800 Puteaux, registered with the Nanterre Trade and Companies Register under number 393 051 826. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.
In the UK, this document is intended exclusively for professional investors, as defined in Annex II to the Markets in Financial Instruments Directive 2014/65/EU (“MiFID”). Circulation must be restricted accordingly.
© AXA Investment Managers 2020. All rights reserved