Covid-19’s footprint on the global economy
THE global economy is now entering the phase that I call “chaotic numbers.” We all know that the harsh lockdowns around the world have generated an economic meltdown in many countries. This is no surprise, but now, the economic data starts to describe how wild the situation is in some countries, and even in very important economies. I refer to a part of the macroeconomic data as “chaotic numbers,” because they are partially extreme and are especially important, since they originate from large economies.
The prime example is the labor market data from the United States. The April unemployment rate was 14.7 percent, a historic high in the world’s largest economy. On June 5, the rate will reach an even wilder high at around 20 percent, but so far the financial markets are very relaxed. The world economy will improve after this coronavirus disease 2019 (Covid-19) downturn, and many countries will move forward as countries begin to open up again. But how many of the millions of those unemployed in the US will go straight back to their jobs? Many will, but not all of the newly unemployed people can get their jobs back, and the reality is that nobody knows how many will end up jobless. The US has the biggest economy in the world and nobody really knows where its labor market is heading. This is why I call this piece of data a “chaotic number.”
Italy was not just a hotspot for the Covid- 19 outbreak in Europe, but also a long-lasting hotspot for economic trouble in the eurozone. This increases the “chaos factor” as the total lockdown of the country caused an 18.4-percent yearly drop in retail sales in March, followed by another nosedive of -25 percent in April. It might not come as a surprise, but consumers need to go back to the shops again.
Another “nonsurprise” is how the service sector is suffering. The latest reading of the service sector Purchasing Managers’ Index for April was at 10.8 — another chaotic number. And index of 50 is neutral, where a move of plus or minus five index points is almost extreme, so this shows that Italy does not just need to recover; it needs to recover a lot.
In my view, it remains a distinct risk that the macroeconomic chaos is a bigger issue than parts of the financial markets currently “signalize,” but should the investor just focus on these issues and fear?
The coming economic growth packages that will most likely be introduced in many countries are particularly important to assess. The size of the growth packages is of importance, but particularly important is how the money would be spent. In general, I claim that the worst solution in many countries is to build more bridges, railways, roads and other old- fashioned growth solutions. Within infrastructure investments, the smarter governments have chosen to quickly upgrade the internet infrastructure and get the Fifth Generation ( 5G) mobile network expanded countrywide. A 5G network can lead to a digital quantum leap jump for a whole country, even for example, the agricultural sector in an emerging market country.
I regard these packages as having a medium- term effect, like two years ahead. In my company, we always include megatrends in the long-term picture, but the megatrends are, of course, at the minimum, heavily shaken by the chaotic numbers. Though I have started to reconsider the megatrends, where some will just change, while others might even be inverted.
For years, I have argued that inflation would stay low due to ample supply of energy, workforce and production capacity though during 2019, I saw a slight risk for an increasing inflation pressure. This risk is surely gone and inflation will remain low for years to come. It might sound sweet in many emerging market countries, but there is a high probability that the low inflation will be caused by lower demand and lower housing prices, which on the contrary, is less rosy.
An example of a megatrend that is about to invert is the public sector debt mountain. I had expected that more Western countries would let the government debt explode by the end of the 2020s to boost growth, but it is already happening now, and a part of the refinancing will be carried by the national central banks. This weakens the fiscal situation for many countries and they are suddenly less crisis- resilient, which is a big sudden change. A function of this new megatrend will be intensified, wherein large global corporations will stand out even more strongly than a number of countries. Surely, there is no doubt that the global economy will become more extreme and challenging as a consequence of Covid-19. Peter Lundgreen is the founding chief executive officer of Lundgreen’s Capital. He is a professional investment adviser with more than 30years of experience and a power entrepreneur in investment and finance. He is an international columnist and speaker on topics about the global financial markets.