Today I am going to expand last week’s post on the coronavirus by incorporating the macroeconomic, and microeconomic, implications of the virus into my account of the current situation. It is clear that the virus is becoming a strain on the global economy, as more and more businesses are restructuring their everyday work to handle the risks associated to the virus. Currently the most impacted area is China, Japan, and South Korea, all of which should see substantial economic slowdown. But as the virus spreads, more and more areas will be affected.
The Western economies are not only going to be affected by disrupted supply chains in Asia, which would be significant in itself, but the virus is affecting us in real terms as well. We should expect a slowdown, which not only might be here for the long term. The complicating aspects are many, and we may see a recession that is deeper than ever before. Why? The Western world is pretty much stuck in a liquidity trap, and the means of affecting the economy through monetary policy are few. The regular measure taken by central banks when faced with economic slowdown is to lower the nominal rate, and therefore increase investment. But, in the low rate environment we are in today the CBs won’t be able to lower the rates as much as needed. During the recession after the subprime mortgage crisis in the US, the Fed lowered the rates by almost 5%. That probably won’t be possible today, instead other measures must be used.
Another implication of the virus is its impact on the global order. An interesting voice on this topic is Peter Zeihan, specialist in geopolitics, economics and more. In his view, the old order of increasing globalism and, relative peace and prosperity, might come to an end soon. Mainly because of the breakdown of economies, in the wake of demographic strains. He has also argued that the Chinese importance in today’s economy is going to be significantly reduced. As their position in the global economy is artificial. It is artificial because of their inability to fulfill their energy needs etc.
One could argue that the virus has brought us a glimpse of the future. The disruption of supply chains has led to manufacturing already being moved to the US again, and that development might not stop after the virus is gone. The US may not be able to fulfill its commitment to global peace and trade in the future, which is why Zeihan predicts the breakdown of the global order. What will emerge of this global reorganization of power? The US as the definite hegemony, once again. The US is one of the few large countries globally that has the ability to defend itself, through a large army, and the ability to be entirely self-sufficient in energy, thanks to US shale.
Anyways, the future will most definitely be interesting. The best thing one can do, is to try to enjoy the show.