Zombie economies betwixt curve and waves

It could be safely said that the spectre and fallout of COVID-19 has produced a parade of paradoxes.
Man wearing mask to protect self from the ongoing coronavirus pandemic. (Photo | AP)
Man wearing mask to protect self from the ongoing coronavirus pandemic. (Photo | AP)

It could be safely said that the spectre and fallout of COVID-19 has produced a parade of paradoxes.  The landscape is littered with seductive signs, validating every thesis and anyone with a political itinerary.  

Regimes across the world are faced with a rising tide of demand for return to normalcy. The return itself is not a switch on action and requires calibration and choreography –of the when, where, and how.

The dilemma faced by politicos is illustrated by the saga in the world’s largest economy, the United States. This week even as President Donald Trump declared that federal social distancing guidelines will not be extended, his alma mater Wharton School aka Penn Wharton released a report warning against opening up before June 30.

The report presented three scenarios. Under lockdown till June 30, loss of lives would be 117,000 and additional loss of jobs would be 18.6 million. A partial opening with social distancing restrictions would result in loss of 14 million jobs and 162,000 lives. A full opening while containing job losses to 500,000 between May 1 and June 30 but would push the death toll to 350,000 – or, nearly half of Boston’s current population. 

The Hamletian to open or not to open question is haunting the world’s largest democracy, India. This Friday, the March 24 lockdown covering 1.35 billion people was extended till May 18 with a colour coded matrix of what can or cannot be done in red, orange and green zones. A quick analysis of Maharashtra show that hyper economic regions, typically employment and therefore population dense, are in the red zone. 

The cost of the lockdown is manifest. GST collections for April are estimated to have dipped to a third of monthly average and back of the envelope estimates for loss of economic activity range from Rs 5 lakh crore to Rs 9 lakh crore for April. And rating agency Moody’s has slashed India GDP forecast to 0.2 per cent.

Audit and consulting firm Deloitte analysis shows 27 of top 100 NSE listed companies won’t be able to sustain current wage bill from its cash profits, if their revenue dips by 30 per cent or more. Imagine the state of the lesser enterprises and the self-employed. The much promised big-tag stimulus for MSMEs is yet being engineered for content and presumably for timing.

As governments seek a balance between the twin challenges of life and livelihood, the pandemic has expanded debt and deficit across countries and the obligations of the state. Countries are paying up to keep workers away from work and yet employed. The quest to save lives and  livelihoods has seen countries  unleash over $ 10.6 trillion as stimulus – for those looking for a historical perspective, that is eight times the quantum of the 1948 Marshall Plan set up to rebuild post war Germany and Japan. 

As millions nay billions are stranded in zombie economies betwixt the curve and fear of the next wave, the costs could rise further. The go-to phrase in developed economies is fiscal fatigue – that is, how much can the state do for how long – and the operative phrase for emerging economies is fiscal frailty. Over 100 countries have approached the IMF for help. Argentina is knocking on the doors of default. S&P has downgraded and revised outlook of over a third of sovereigns it reviewed and Fitch has cut ratings of more countries in three months than in 2019. 

It will take more than just staying open to restore normalcy. Sweden stayed open, and Denmark stayed shut. Thanks to fears, the consumption story in both economies is not dissimilar. China has been open now for two months, yet forecasts are scarcely sunny. Germany, which has the best record of containing COVID-19 till date, wasn’t completely locked down. Its top companies are quoting a sub-book value. Volkswagen reported 81 per cent drop in first quarter profits. Lufthansa, which is seeking a 9 billion Euro bailout, may just apply for bankruptcy protection. Data out of the US, where Boeing and Ford are in the news or from the UK is scarcely different.

The factoids reflect the nervous fissures wracking global economies.  Social distancing has distanced consumers from consumption. Closed borders have shut down exports. The supply shock in goods in services is triggering a supply shock in credit markets. The discussions on curves and waves now factor not just infections, but also deepening distress and the potential wave of defaults, bankruptcies, and job losses.  The earliest forecast for recovery is 2023, and that future economy will be different and disrupted. 

Aggravating anxieties is the lack of credible global leadership required to orchestrate concerted response — the Chinese embassy in France posted videos with a bleeding Statue of Liberty on social media while the Trump administration threatens trade sanctions on China over COVID-19. Yes, there is some sign of collaboration but more often its motion mistaken for movement. 

Every nation it would seem is on its own. The crux therefore is how well the time under lockdown is used to come out of it. There is no one silver bullet. The virus dares definition. In a battle of finite imagination and infinite possibilities, every cure comes with a price. This war challenges notions of victors and victory.

Shankkar aiyar is the author of Aadhaar: A Biometric History of India’s 12 Digit Revolution, and Accidental India and can be contacted at shankkar.aiyar@gmail.com

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