The economic reality of Covid-19

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The coronavirus has made economic forecasting as close to impossible as it can go. The bad news is that this is likely for the foreseeable future, certainly until we can see past the Covid-19 pandemic.

Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley, says that ‘we have never seen a drop in output and employment…as fast and as far as what's happened in the last twelve weeks’. He says that there are ‘two prerequisites for recovery’ the first is to control the virus and the pandemic and the second is to find a way to turn the economy back on. He says that ‘we flipped a switch and turned the economy off, we can't simply flip a switch and turn it on again’, it has to be a conscious rebasing.

But how can this happen? In China, political control of its population is central to the operation of the vast majority of the economy. To this end it is easier for the government to restrict movement and to ensure people stay within the tight limits of control. Will the freedoms, that here in the west we have come to expect, be reigned in?

While Eichengreen does not see any major change in political control, he does suggest that there may well be a period of ‘rethinking’ around public health, racial inequality and some aspect of privacy. People, he says, may see a ‘trade-off between privacy on the one hand and contact tracing for example on the other’. Governments in Europe are grappling with whether information about the health condition of individuals should be centralised in the hands of government or whether public health can be adequately managed and maintained on a more decentralised basis.

What about the shape of the recovery? Eichengreen says that the path will be given direction by those same public health policies. So, if we open up now, the recovery will begin to look like a U or a V or a swoosh. But then if the virus comes back we're going to have to lockdown again and then it will begin to look like a W or an L’ This, he says, is all dependent on the course of the coronavirus.

What Professor Eichengreen says is clear is that ‘the economy has been transformed in ways that will require lengthy and costly process of reallocating resources.’ He quotes the economist Joseph Schumpeter, who referred to ‘creative destruction where we have to see the destruction of certain old companies and business models and then lengthy and difficult process of discovering what will work in the post corona virus world along this line of recovery.

The other sensitive area is inflation. The interview goes into how prices could evolve and Eichengreen suggests that record low rates may be with us for some time to come. However, prices will have to begin moving up, if for no other reason than in response to all the stimulus that has been put in place, globally. Add to this the potential for shorter supply chains, which will also bring higher prices across many areas. He reminds us that we've lived with inflation in the mid-single digits, and even higher, without catastrophic consequences akin to the consequences of this virus. Upward movement in inflation also shrinks debts, another area of grave concern for many.

The interesting thing is that, despite all this disastrous economic data, markets appear to have moved on, for the time being, at least. Is it just a question of how long the positivity can hold out before reality comes back to bite us with another, possibly severe, second wave of the pandemic?