The Super Economic and Social Depression of 2020
Wimmer Family Office
In the past three decades, China has emerged as one the most admired economies and a super engine for global growth. In the first three weeks of March 2020, China’s coronavirus could trigger the worst economic and social depression the world has experienced since the Great Depression of the 1930s.
The Super Economic and Social Depression of 2020 has already wiped out trillions in global equity, commodity and credit market valuations. Moreover, the widespread containment measures many governments around the world have imposed on their populations - to deal with the spread of the virus - will result in the sharpest decline in second quarter global economic activity in almost 100 years. Every component of aggregate demand is collapsing including consumer consumption, capital investment, and residential investment with no near-term end in sight. The duration and severity of government mandated quarantine and self-isolation policies will have far reaching implications beyond the financial market and economic impacts to the cornerstones of democratic principles including freedom, liberty and the pursuit of happiness both individually and collectively.
In many respects, the 2020 Super Economic and Social Depression of 2020 is much more severe on the average global citizen than the Great Recession of 2008. Indeed, the financial crisis of 2008 was primarily centered around the global banking system and housing markets. Although the global economy and banking sectors were strong when the pandemic started, the 2020 Super Economic and Social Depression of 2020, will wipe out entire sectors of the global economy beyond the likely headline and high-profile bankruptcies of the largest airline, hotel, cruise ship, and hospitality companies. More importantly, small and mid-size businesses that have been the backbone of a majority of global growth and ingenuity will not be able to survive a protracted economic slump. The global trend over the past 50 years away from large industrial conglomerates and the exponential growth in the service and technology economies have resulted in a paradigm shift toward small businesses, self-employment, partial employment, outside contractors, and freelancers; otherwise known as the “gig” economy. The gig economy may be as large as a third to a half of some developed world economies, including the United States. These individuals do not have a “safety net” to fall back on in times of global economic and financial distress. The result could be unprecedented mass bankruptcies among small and mid-size companies and a sharp spike in global unemployment. This has far reaching implications for society in terms of economic and political stability.
Social distancing has become the new normal for possibly the remainder of 2020 and beyond. Almost every person on the planet is under mandatory or voluntary quarantine/ isolation to prevent the spread of the deadly COVID-19 virus, which does not differentiate between social class, race, colour, culture, nor religion and because of modern transportation has become a global pandemic in a matter of months. The most heart wrenching is that the most vulnerable to the virus are the oldest and weakest members of society that once exposed must be isolated and thus can’t be with their loved ones for worries over contagion.
On a positive note, the crisis has prompted unprecedented policy responses from central banks that have reduced interest rates to 0 and flushed the global economy with liquidity. Global policy makers and world leaders are implementing fiscal measures to help businesses and people. In this regard, the United States has announced the largest government stimulus package in the country’s history of $2 trillion that could grow to over $6 trillion to help the country’s struggling businesses and its citizens. European government will likely follow with large government spending initiatives. These measures should help lessen the impact on companies and individuals, but they are only temporary measures. Moreover, with the resulting blow up in government budget deficits (some cases as large as10-15% of GDP), they will eventually need to be monetised with future impacts on interest rates, inflation and global growth. In the interim, the United States government spending package includes an immediate and one-time government check/direct deposit of a $1000+ to individuals and families. This may cause a small spike in U.S. consumer spending (in particular online shopping), but it is not sufficient to cover rent and mortgage payments, food, medication, and utilities for the masses. Thus, larger scale government intervention measures will need to be taken for both companies and individuals beyond the immediate fiscal pump priming such as mandatory deferments on rent and mortgage payments, taxes, utility costs, etc. Otherwise, the implications for the U.S. and global banking system will be severe as consumer and commercial loan defaults spike alongside public panic. The result will be further falls in global equity and credit markets and a sustained decline in economic activity.
Away from the financial market and economic impacts of COVID-19, there are encouraging social signs that highlight some of the best aspects of humanity in times of crisis. Indeed, people are coming together and helping each other. This can best be seen by the unselfish and tireless support of doctors, nurses and other healthcare workers putting their own lives at risk to help others. In Italy, people are singing from their balconies to remind their neighbours that we are all in this crisis together. Another trend is that companies both large and small are recognizing that people working from home can be just as productive and successful as they are in the office workplace. This trend has implications for the continued trend toward flexible work arrangements such as telecommuting and remote working from home and can be supportive in the future to the continued growth in the global Build-To-Rent (BTR) market.
Hopefully, government-imposed containment measures will succeed in levelling the number of Covid-19 cases by midyear 2020, which combined with the support of the massive policy responses, will result in a “V” shaped bounce in economic by Q4. Unfortunately, the new normal for our global village will be further global pandemics, heightened volatility in financial markets, sharp swings in economic activity, and social distancing. How governments and individuals respond in the future will be the true test of humanity, but thus far there are reasons for optimism.
Peter Plaut is an Executive Director at Wimmer Family Office in London with a focus on financing real estate development projects across the globe with a target size of $200mm to over $1 billion. Mr. Plaut is consistently recognized as a leader in the industry. Among his many achievements and awards, he was ranked as one of the Top 20 Rising Stars of Hedge Funds during the 2008 financial crisis – a recognition of his ability to manage through crisis and create positive investment opportunities in all environments, During the late 1990s, while employed at Salomon Brothers, Mr. Plaut served as Rating Advisor to the Republic of Korea and as a result of his work was extended an invitation for Term Membership to the Council on Foreign Relations.
*The thoughts expressed in this paper are of the reporter's own sentiment and not necessarily the thoughts of GRI Club