Last week’s piece was headlined “Facing A Recession,” and everything that has happened this week has confirmed that. This is now a recession. In the past day or two we have heard talk of the next step – a global depression. The last time that happened, in the 1930s, it took a decade and more for the world to emerge from it, with a world war as part of the process. Closing down economies for three or six months, as a wise man said, is not like suspending viewing of a Netflix TV series.
The scourge of the virus still has a long way to go to before it is passed, and in India, Africa, the Philippines and Latin America – places where medical systems and poverty levels conspire to create huge breeding grounds for infection – the death rates are going to be significant. What impact the toll in such places will have on the global economy is unclear. But for the US and Europe … how will this play out in the context of three months from now? It could be nuclear winter, or it could be that people just get tired of lockdown and want to go out to dinner again. Our guess today based on nothing much other than gut feel after a bunch of conversations, is that a depression, while possible, is unlikely and that the Western economies are likely to bounce back reasonably fast and that pent-up demand will provide some oomph. For China, however, it could be harder due ultimately to systemic rigidity. Also, demand elsewhere for a wide range of China-made products has fallen, and to the extent that China’s economy is dependent directly or indirectly on exports, it is going to be a slow recovery. That is in addition to the mid-February visceral decision of companies around the world that they have to make changes to their supply chains to make China less essential. Then comes China domestic demand. It’s going to be a slow ramp-up, again for largely systemic reasons.
The big question is which system is going to emerge from this test in better shape. The official view is that China will emerge earlier and more organized and will reap the benefits of that. The alternative view is that the messy flexibility of the Western systems provides more rebound potential than the rigid hierarchical Chinese approach. “No one move until we tell you to,” was great in terms of control of infection rates, but it is not necessarily the best approach in terms of kick-starting economic activity after a lull. We will have to wait and see. Factories are back in operation, but where are the orders? The restaurants and hotels are opening, but where are the patrons? The stimulus question posed last week has been answered this week, and the Chinese authorities have made the decision to pile on debt to address the problem, in spite of the already-high leverage levels. How risky this is, is impossible to calculate.
Beyond all that detail, there is an overarching sense of a change, the end of an era. What follows, it is too early to say, but systemically, things are likely to get much harder in the future.
Globalization is also a topic worth pondering more. On one side, there is now no other way – iPhone production cannot be shifted back to the US, and while supply chains are going to change dramatically, for many companies, products and processes, there is no alternative to the Shenzhen and YRDelta ecosystems. But on the other hand, decoupling is a real thing, and both sides are helping it along with consequences that cannot be predicted. One Chinese view is that China already got 70% of what it needed from the West in terms of the globalization open door, and it is now self-sufficient enough to muddle through, but we don’t agree. China, to be sustainably stable and prosperous, needs to be integrated into the world. And the world needs China too, you say. True. It is that old balance of who ultimately needs who more. The virus is pushing the story along at rollercoaster speed.