The impact of the lockdown has varied by industry, but the most adverse impact has been in the areas of accommodation and food services, arts, entertainment, and recreation. The OECD estimates that shutdowns in these industries averaged 70 — 80% across most countries.
Retail sales statistics have racked up record falls everywhere. In the eurozone industrial production has dived by almost 30%. It didn’t even manage that sort of fall in the GFC. Exports are down a similar percentage.
The most vulnerable eurozone economies remain those with high public debt levels and anemic growth. The IMF estimates that by the end of 2020 gross government debt relative to GDP will amount to 200% in Greece, 166% in Italy and 135% in Portugal. None can ‘print’ as those tools were given away when the common-currency bloc was formed. Interest rate policy and the printing presses remain in the hands of the ECB. They cannot depreciate their currencies and they are fiscally constrained because of eurozone policies. Both Italy and Greece will end 2020 with real GDP no higher than the level prevailing 20 years ago whilst Portugal will be only marginally ahead. The OECD estimates that Italy’s real GDP will fall 11.3% this year, Portugal’s 9.4%, and Greece’s 8% (assuming no second-wave of the virus). Either the rule book is thrown out and eurozone-wide debt pooling is formally adopted along with fiscal integration or selective exits from the ‘zone’ must be contemplated. The grand experiment which began in 1999 cannot in any sense be called a success. COVID-19 will either hasten its demise or result in significant reconstruction.
Hong Kong finds itself in a pickle. The suffocating Beijing blanket is descending despite the ‘one country, two systems’ policy that was, in theory, in place for 50 years post-handover to the communist power in 1997. We have no idea where this is heading, no one does, but it cannot be a good sign that the rules appear to be changing less than half-way through the 50 years.
In the meantime, the Hong Kong economy has imploded. GDP was already tumbling in the final two quarters of 2019 but then a nosedive occurred in the first quarter of 2020 (down 9% on a year earlier). The second quarter of this year will see it fall further. Retail sales are down over 40% (year-on-year) but one of the most startling statistics is the number of visitor arrivals. Prior to COVID-19 there were almost 7 million a month. Today, the numbers are down to a trickle. There is, however, a benefit- Hong Kong has been virtually virus free but for an economy that relies so heavily on tourism and trade it is a hefty price to pay.
Hong Kong has always been a favoured destination for expatriates. It provided a combination of very low taxes and an exciting, vibrant commercial and financial hub where careers could quickly advance. The property market boomed on the back of the ex-pat community and the massive inflow of people and cash from China (which accelerated after the 1997 handover). The consequence is that Hong Kong has the most expensive real estate market relative to median incomes in the world – or, at least, it did. Quite where it is now is hard to say. It seems that a good number of ex-pats are waving goodbye to their Hong Kong sojourn whilst the dramatic drop in visitor arrivals will also be biting on property prices. Back in the ‘old days’ Hong Kong property was always a boom and bust market. Perhaps it will now revert to type.
In China real GDP has suffered its first year-on-year fall in decades – down 6.8%. We get so used to the carefully managed upward trend that it is a shock to see a sizeable negative number. Retail sales fell by 19% and investment in fixed assets by 16% in the first quarter. China locked down before other countries and re-opened earlier than most so it is possible that the second quarter will see some pick-up but these are such unusual times that it is dangerous to make forecasts – particularly in relation to an economy where all data releases can be subject to ‘interpretation’.
In Japan retail sales volumes have dived to a level significantly lower than 30 years ago whilst real household living expenditure has maintained a steady downward trajectory – but with a spectacular fall in the latest quarter. Real wages peaked in 1997. Since 2011 real labour productivity growth has averaged just 0.2%. Japan is suffering from a declining population so it will come as no surprise that retail sales are weak, but the erosion of real incomes is painful.
In the US, the most spectacular COVID chart relates to unemployment – zooming to 14% in a blink of an eye – and this springing from a level that was getting close to equalling a 70-year low. As the various States sporadically and unevenly reopen there will be a bounce back from this shocking number but in common with many other countries there will be some who will choose to accept the variety of government hand-outs in preference to re-entering the workforce.
On average, US industry will now be seriously unprofitable. In the first quarter whole-economy pre-tax profits fell by 14% to take them back to the level last prevailing in the third quarter of 2011. Even before this tumble pre-tax profits had been flat for six years – not something that was obvious from stock market moves or the President’s Tweets. In the second quarter we can expect further dire profit reports. Whether the plunge from peak to trough will equal the 2008 wipe-out – a fall of 40% from 2006 – is something that is impossible to forecast as the extent and pace of global re-opening is still uncertain.
In its recent Economic Outlook the OECD commented on a survey of almost 1 million firms across Europe and discovered that without any policy intervention 20% of the firms would run out of liquidity after one month, 30% after two months and 38% after three months. If the confinement measures lasted seven months, more than 50% of firms would face a shortfall of cash. Most of the firms are profitable and viable companies… “however, a sizeable share of these firms do not have enough collateral to bridge a shortfall in liquidity with additional debt and/or are too highly leveraged to bridge the crisis through further bank loans.”
In its economic overview the OECD states that in a “typical” OECD economy, even assuming some recovery in 2021, real per capita income will only get back to the level prevailing in 2016. If there is a virus second-wave real per capita income will fall to the 2013 level. In other words, the world is facing a decline in income equivalent to at least five years growth. Possibly a lot more.
Translation: this is serious.