• Wide-ranging fiscal and monetary policy measures have succeeded in averting a global financial meltdown. To do so, by the end of this year, OECD countries will probably have taken on an extra USD17tr of public debt, increasing their debt to GDP ratio from 109 to 137%. So far, bailouts have been remarkably effective at providing life-support and saving the patient, but the struggle for the global economy is far from over. The path to economic recovery is going to be a long, uncertain one, constantly dogged by the risk that the current consumer liquidity crisis morphs into a corporate solvency crisis. Hertz’ bankruptcy could be the canary in the solvency crisis mine.
  • For the next few years, unemployment will be by far the greatest economic issue. In contrast to growth, it has an immediate and direct effect on peoples’ lives and wellbeing. Lockdown-layoffs make current figures catastrophic (almost 24% real unemployment rate in the US, 23% in France, rising in similar proportions elsewhere). As confinement measures ease, these numbers may improve, but the overall situation will go on deteriorating as labour-intensive industries (hospitality, travel, retail) start dismissing employees who were until now on temporary layoff. Many of them will become structurally unemployed – i.e. permanent job losers.
  • It is the younger generation entering the labour market today that will feel the effect of the current crisis for decades to come. Study after study shows that it should expect lower employment rates, lower incomes and greater social problems (like more divorce and more premature deaths). This translates into palpable consequences for business and investors. One illustration: over the past weeks, Chinese millennials have increased precautionary savings while analysts were anticipating the opposite: “revenge spending”. Those “Waiting for Godot” run the risk of disappointment. Godot probably isn’t coming.
  • There are zillions of reasons why some countries have (so far) successfully dealt with the pandemic, while others have not. These causal elements are so intricate and interdependent that they cannot be disentangled from each other, but for the sake of shedding some light on this, let us offer three intriguing correlations underlying relative success. They may seem far-fetched and simplistic, but they say something and offer interesting lessons for businesses and investors.
  • (1) Women – So far, countries led by women have 6 times fewer Covid-19 deaths than those led by men. They also seem to be recovering faster. Three main reasons could explain this “women leadership premium”. (1) They did not underestimate the risks and acted fast. (2) They focused on preventative measures. (3) In policy terms, they’ve always favoured wellbeing – a source of greater resilience (Denmark, Finland and New Zealand come to mind as exemplary in that domain).
  • (2) Populism – The fallout from Covid-19 tends to be harsher and deeper in countries led by populists, like Brazil, the US, the UK and Russia. A core feature of populism lies in the rejection of expertise. For Covid-19, this translated into ill-preparedness and the late-adoption of social distancing measures.
  • (3) Size – Governance seems to be easier in small countries, not as obvious as it seems, and suggests that diseconomies of scale were penalizing larger ones. Singapore, Israel, Taiwan, Iceland, South Korea have done much better than the US, Brazil, India and Russia, and in a less “invasive” way than China.
  • There are many unsung Covid-19 winners ignored by the Western-centricity of the international media. Ghana, Senegal, Mongolia, Uruguay are a few examples and all great successes… In Europe, the winner is Denmark. It was one of the first countries to close and one of the first to reopen, proving that acting fast and decisively was the most appropriate strategy in dealing with the pandemic. Denmark did everything that Sweden (the focus of international attention) did not: closing its border, schools, restaurants, etc. Today, it has much fewer cases of infections and death (a fourth) than its neighbour, and its GDP for the year is expected to do better than that of Sweden’s (-5.3% versus -7%).
  • Three very different events (two negative and one positive) epitomize how Covid-19 accelerates existing trends while amplifying their effects in a non-linear fashion, bound to take investors by surprise.
  • (1) In the US, the riots and social explosion superimpose a societal crisis on an epidemiological one. The murder of George Floyd triggered the fury, but Covid-19 ignited the outrage. The disproportionate amount of pain inflicted by the pandemic on African Americans has crystalized a sense of unfairness and fuelled convictions that the US social contract is broken.
  • (2) In Hong Kong, the decoupling between the US and China, exacerbated by Covid-19, has taken a turn for the worse. After China enacted a national security law for the territory, the US secretary of state declared that the US would no longer certify Hong Kong autonomy. However, revoking HK special status cannot occur overnight and carries high stakes. This said ceaseless frictions between the two giants are inevitable. Investors beware of the crossfire.
  • (3) In Europe, Covid-19 may well succeed in pushing the EU towards further integration. If the €750bn recovery fund (500 in grants and 250 in loans) put forward by the European Commission sees the light of the day, then what seemed unimaginable just a few weeks ago will become policy, with a beginning of debt mutualisation in sight. Europe’s burgeoning “Hamiltonian” moment will have come, once again proving the doubters wrong (the currency markets have taken note). And the plan is green! On many fronts, Europe is an enticing model.
  • There is so much currently up for discussion! The above is a mile-wide inch deep For an in-depth analysis of any of the bullet points – please contact us and ask about gaining access to our unrivalled network. You can start by participating in our MB100 Club Ask our Experts online conversations on it. #10: “Three global scenarios for the post-pandemic era” (Dark Ages, Walled Gardens and Renaissance) will take place on Wednesday 3rd June at 15.00 CEST, presented by Peter Kingsley, the founder and managing partner of The Oracle Partnership. In a period of radical uncertainty, scenario thinking and planning makes the most sense.