The COVID-19 pandemic, that the IMF has termed the “Great Lockdown,” is a crisis like no other. In order to contain the health impact from the deadly virus, millions across the world have been left stranded at their homes. There is a wide range of opinion over the shape of the recovery with opinions ranging from a U-shaped, V-shaped, and X-shaped recoveries. Some even see the recovery to look like a tick mark which would mean a slow and steady recovery. However, there look some imminent risks in a post COVID-19 world. These include.
Let’s discuss these in perspective.
Markets are currently not focusing much on the rising fiscal deficit. On the contrary, every new stimulus is being celebrated. That said, every stimulus comes with a baggage of a higher fiscal deficit. In the US, the fiscal deficit is set to rise to levels last seen during World War 2. Some even expect governments to monetize their debt. It’s worth adding that globally, governments did not fully wean away from the higher fiscal deficits incurred during the global financial crisis. Current fiscal extravaganza, although necessary, might lay the seeds of the next debt bubble. That’s not to say that a debt bubble was anyways underneath. The global debt to GDP ratio anyways hit an all-time high last year.
We could see a change in consumer behavior post the pandemic. More individuals would now look at increasing their savings. The pandemic has exposed the vulnerabilities of low savings and EMI culture. While I don’t expect consumers to totally shun EMIs, there are bound to be some changes. While the world is not embracing minimalism after the pandemic, consumers might try and live within the means.
Also, while Work from Home or WFH would not necessarily be the new normal, more companies would now look at WFH favorably. TCS, India’s software giant, is reportedly looking at making 75% of its employees work from home by 2025. If WFH takes off in a big way, it would hamper the demand for commercial office spaces. Furthermore, Zoom meetings might replace at least some of the redundant corporate travel.
Share buybacks have been an enabler of the US stock market rally over the last few years. Going forward, buybacks might take a backseat as debt repayments might take center stage for some companies.
The pandemic has exposed the vulnerability of relying too much on China as the world’s factory. No matter how many times US President Trump labels the COVID-19 as the “Chinese virus,” the United States has to import medical supplies from China only. More and more countries are now talking about self-sufficiency. This could lead to more protectionism across the globe. The US-China trade war saga was only about a trailer of what could lie ahead. Lest we forget, the brief US-China trade war led to a massive sell-off in US equity markets.
On a related note, China would now vigorously pursue the indigenization of technology as an alternative to US giants like Microsoft and Alphabet. In short, we’d see more polarization of global polity, last seen during the Cold War. There would be opportunities for countries like India that are perceived as stable, unharming, and an ally against China. The Indian leadership took lead by dispatching medicines to friendly countries. However, sending medical supplies alone might not help India attract global companies and a lot of work has to be done. All said, the current pandemic looks a once in a generation opportunity for the country.
There is also bound to be some churn in global institutions. President Trump has already stopped the funding for WHO and has no love lost for the WTO and the UN either. The calls to reform the post World War 2 global order could get aloud in the coming days.
The European Union has been a divided house even after Brexit. Italy, that at times has looked more of a Chinese ally than a NATO member over the last few years, has already said, “If we do not seize the opportunity to put new life into the European project, the risk of failure is real.” The European Union has anyways been under regular stress over the last decade. The pandemic would add another dichotomy to the block. Though it may not trigger the eventual demise of the EU, it would add another dimension to the already high differences within the block.
The pandemic would have a long-term impact on some industries, especially on aviation and tourism. It would be a folly to expect people immediately jumping on the next flight for a vacation after the pandemic. The banking sector would also face higher delinquencies and it would take a long time to clear the books.
All said we could be in for easy monetary and fiscal policies for quite some time now. The global economy was anyways not in the pink of health before the pandemic struck. The pandemic is an opportunity for governments to pursue structural reforms that might not have been feasible under normal scenarios.
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