• EconAfterHours

A Führer of Pandemics

By Jasjeev Singh Sahni and ZInnia Aurora


Introduction

Shaving off the trades and tantrums of a trembling Tinker Bell? Ah, well, in this case, you do not find a Terence or Pixie Dust to subtle your wounds and scars. What pestilence brings upon us is yet to be deciphered to its brim, its treachery is yet to be decoded. What stands before us in times like these is a jargon of death and numbers running astray. But again, nature reaps what it sowed- us. This us is synchronised with a social, a political, an economic. The milieu of life is something that cannot be and should not be tampered, hence, we drive our assumptions and estimates to bring before you a simple outline of a Byzantine system of functioning - the economy, something that we may (or maybe not) cradle as per our whims.

The land of cronies and depraved stands at an echelon of grave shame and stark mismanagement while the Dragon sits and exacerbates its misfortuned fortune of stepping in. On the other hand stands the democratic Reich of chalant deeds- sitting atop a possible recession brought upon it by some who we do not speak of. Schemes and measures have been implemented, the pandemic has gripped the houses and mansions and slums and crow-holes.

The economy braves itself through the smallest of actions like that of you reading this on Instagram or Facebook, into the gargantuan task of rambling up stocks of oil barrels. There stands a shipment, awaiting your touch, awaiting your money. Meanwhile, the spiked-monster lingers onto the towers of amity and might, while the strongest of men give into this turbulence. There also sits a platinum-ed man on Wall Street, cramming his misfortunes and collecting them in a jar of contracted supply, falling demand, increasing fiscal deficits, sky-rocketing debts and what not.

Join us in our endeavour to fix a scaffolded understanding of the impacts Coronavirus has had on two of the world’s largest economies - scaling them to its knees.

We bring to you : Washington’s child - The United States of America & European Union’s golden boy - the land of Germania - Germany.

One Nation, Under Uncle Sam

The Then

Before the ink dried when Thomas Jefferson consigned the collective destiny of a nation to pursue “life, liberty and the pursuit of happiness”, the American agency exemplar -Uncle Sam- was hardwired to felicity and self-preservation.

Indeed, the thirteen newly abrogated American colonies from Pax Britannica had the prerogative of evasion from the ruthless Stamp Act taxes- an excuse for the birth of an American nationalism. The metamorphosis of the state agency, now with the notion of manifest destiny coursing through its veins, saw new economic highs due to yeoman farmers and slavery. Its expansion post fissiparous intra-political and constitutional battles made it a pilot of entrepreneurship and an industrial heavyweight. Its tango with other world powers in the two world wars heralded a new shift.

The Bretton Woods institutions rose as Lady Liberty’s remote control of the world and echo-chamber of its predilections. The Cold War system reinstated the USA and the USSR as the two world camps at loggerheads- only as an alibi for the two nations to boost their economies by leeching off satellite states and alliances built on a foundation of nerves. The US Pentagon system provided jet-fuel for Keynesian investment led economic basking.

The banner of American liberalism brought with it the ideals of strong social safety nets and a foreboding centralisation of powers. Roosevelt’s New Nationalism, Wilson’s New Freedom, FDR’s New Deal, Truman’s Fair Deal, Kennedy’s New Frontier and Johnson’s Great Society were iterations of ideological edifices personified into economic instruments.

A globalized economy with the USA at the helm has upped the ante of antagonists- systemic, ideological and agenital.

But Uncle Sam works in mysterious ways, dear reader.

The Now

It is forecasted that beyond the burgeoning effect of the pandemic, the suspension of the Boeing 737 MAX productions and exports, a decline in energy investments due to the Saudi-Russia oil debacle and the trade war with the People's Republic of China, the headwind to the first half of the annual US economy grade-sheet is expected. The global economy, which needed nothing but a nudge to fall into recession, was mercilessly bulldozed into a chasm by the COVID-19.

The Fourth Quarter of 2019 saw a noteworthy increase in the Real Gross Domestic Product, with retail trade, finance and insurance, utilities and government spending being the trailblazers of this expansion. It is safe to say that clinging to the memory of these good stats is all that is left to do. Though the growth in the previous quarter may leverage a seemingly minute 1% fall in the GDP numbers in the first quarter, the fulcrum will eventually break, culminating in a 6% decline in the second quarter. Attestations from the economic ombudsman at McKinsey & Company are not required for the layman to assess that the “economic impact could exceed anything experienced since the end of World War II”.

Denuded Consumer Spending

The aura of social distancing has penetrated vital structures of the economy. The sudden pitfall in consumer spending is due to the Center for Disease Control and Prevention's endless jeremiads and voluntary moments of truth among the citizenry; economic transactions in the public sphere have eventually abbated. Public transportation, recreation and leisure activities would not lift their shutters till the end of May, after both official dictums and public fear dissipate. The comatose personal care and clothing services, religious services, food and accommodation services, and social services cling on for their dear life as social distancing measures further trouble supply chains.

Non-discretionary services like utilities, housing and medical expenses may keep their head above water, despite the general trend of the drowning of durable and nondurable commodities. It is speculated that consumer spending would consequently fall down by 14%. Previously the guardian to the US economy in the trade war, giving refuge to two-thirds of the national growth in turbulent times, losses in the consumer spending sector will have atrophied the economy. Lingering effects of the crisis in the household sector may be an apotheosis to a $84 billion void in the economy by 2023.

This bubbling pot of massacred money of the households, bundled with a fourth consecutive contractionary quarter for the private nonresidential fixed business investment -erstwhile shouldering 14% of the GDP- may make the pot burst.

Lay-bour

As keeping personnel on payroll becomes arduous when revenues plummet, businesses have heavy-handedly made reorientations in their staff structures. Layoffs abound.

A grand 6.61 million Americans filled jobless claims in the week ending April 4. Treasury yields pared declines and US stocks increased after these statistics saw the light of day. Jammed Department of Labour websites and phone lines prophesied a trend unlike any other- one that would last for a while, at any rate. Social distancing has necessitated inevitable job losses -a faustian bargain for flattening the bell-shaped pandemic curve.

The unreal situation of the Real Estate

A delay in the monthly average commercial rent of $81 billion in the US may jam the cogs of the real estate apparatus. Only 69% of these payments were made by April 5 -a fall from an 81% by March 5- giving a glimpse to emptying household savings. If the economy is to remain dormant through the entirety of the summer, 15 million households could default on rent. Though the knee-jerk reaction of temporary bans on foreclosures and evictions is a welcome move, multifaceted measures are required to prevent the spreading of the pain from tenants and property owners, to lenders and beyond. Speculators aren’t shy of calling it a deja vu- real estate investment trusts have been forced to sell off mortgage securities at crunching discounts to meet the margin payment from their lenders. This is emulating a trend which birthed the Global Financial Crisis of 2007-08. Only in an election year, it wouldn't be the most hunky-dory of images if the administration plans on bailing out over-leveraged firms.

The plight of the Asset-Backed Securities

The US Commercial Asset-Backed Security is mimetic of a spectrum of industry and equipment typologies, and servicers. Small-independent finance companies, specifically those with exposure to non-essential business, are most probable to be at the edge of the sword, risking immediate deferrals, delinquencies, and losses. Some key sectors may be harmed: the agricultural sector may experience collateral exposure from hobby farmers; fleet lease sector may be exposed to the travel, and the oil and gas industries; information technology may see a collateral exposure to the travel and hospitality industries. It is upon the volition of the extant servicers to provide payment-deferral to these sections.

The Raft of the Government Sector

The chambers of the levithan, it seems, would be instrumental in fighting the economic drag.

A gargantuan Congress stimulus bill does preempt the economic sink and provide a motley of provisions for the same. In fact, Alexander Hamilton’s financial institutions were yet to witness an economic stimulus package of this scale; the two trillion dollars of the Families First Coronavirus Response Act will be routed towards paid leave guarantees for certain workers, emergency paid sick leaves, expanded food assistance, unemployment benefits, employer tax credits, job restoration mechanisms, healthcare personnel protection, medicare funding and COVID-19 testing. The Joint Committee on Taxation proclaims a hefty cost to this enterprise- $292.4 billion over a decade.

State unemployment offices and other ancillary institutions are, on the other hand, outgunned- their physiognomy is not capable of disbursement such a large scale of benefits. Sloth persists in the deliverance of small business loans; the catapulting of these loans through private banks, who are yet to make their way out of a labyrinth of unworkable and undelivered guidelines, is a beautiful disaster.

The Federal Reserve has pledged an additional $2.3 trillion in loans to small and medium ventures, and would provide money for the purchases of high-yield bonds, collateralized loan obligations and commercial mortgage-backed securities. The direct purchase of municipal debt would unquestionably put it in a precarious political situation. Sailing into the uncharted territory of fiscal stimulus poses powerful questions about the future role of the Fed in the economy.

The recent quagmire of the US Postal Service can be seen as an apt case study of the Oval Office politics bypassing the watertight compartmentalisation and a predilection for institutions like the USPS itself which are relegated to the periphery of fiscal priorities. A reluctant POTUS allowed the borrowing of a miniscule $10 billion from the Treasury for the USPS. For an institution tantamount to the 44th entity on the Fortune 500, these peanuts aren’t going to take its 630,000 strong staff far. The treatment of government employers such as itself as gangrened limbs may prove fatal to the Federal body politic.

Off the chains Supply Chains and Sectoral slumps

The most lucid, disastrous impact of the virus is the disruption of supply chains across continents. The early Chinese shuttering of factories and the consequent early opening of the same may keep American industries at gunpoint, since the world’s two largest economies are inextricably entangled. The dispersion may lead to a lack of substitute goods production from US factories. Auto industries and the IT industry have seen some early onset effects of this problem.

Auto-industry:

Despite the tapestry of the United States-Mexico-Canada Agreement (USMCA) providing a cohesive, protected supply chain, the North American subsector heavily relies on China. Automobile titans, General Motors and Fiat Chrysler, will see grave effects from this disruption.

Tourism:

Offshoots of the sectors, such as tour operators and travel agencies will wallow in deep losses due to the virus. An effect breeding from this is the decline of 1.6 million visitors from China, and a concomitant $10.3 Billion.

Semiconductor and Circuit Manufacturing Industry:

This US industry is a major supplier of diodes, microcircuits and other semiconductor devices, and accounts for $54.1 billion. The Chinese shift to higher value-added telecom and electronic equipment manufacturing makes this US industry a pivotal global player. The Chinese city-wide quarantine would result in a reduced demand for these, along with a near abatement of investment.

Medical Devices:

While the Food and Drug Administration has attempted to contact and coordinate with the 63 manufacturers upon which US medical companies rest their faith, the industry is in a purgorary. Notwithstanding, the FDA cites no shortages in personal protection equipment- surgical gowns, gloves, maskes, respirator or other medical equipment vis-a-vis distribution lines.

Moreover, wrought with uncertainty, the US investor-commandeered Utility Sector has taken precautions to maintain liquidity. Having collectively raised $25 billion in 2020 so far, these entities seem to have strong accounts. Evidently, these monopolies are less prone to shocks from the stock markets. However, if the downturn is prolonged, they would delay certain investments, and reduce operational and maintenance costs, keeping the pipeline for capital expenditures at the same rate.

The nosedive of the demand in the commercial aerospace, travel and insurance industries is estimated to be five-to-six times greater than that post the 11 September 2001 catastrophe. Among other ripples, the prospect of aluminium demand has dipped deeply. The two-week shutdown has harmed nearly 240 million lb of shipments- in an already flat trend expected year.

It is gold in decay. The uber economy isn’t living up to the ubermensch it endeavoured to be.

THE WAR

Deutschland stands constructed on the morgue of conspicuous ebbs and troughs. It has built and destroyed and built and destroyed itself over and over again. Its eclectic history pringles the sharp beginnings of its existence, one to always stand up after a war - emerging stronger and healthier only to give into the melancholy happiness. It all started with the Franco-Prussian War post which the Germans were deprived of the Industrial Revolution of sorts that was experienced by their neighbours. Taking lead from those that had already gone through it, it imported the technical aspects from these nations and undertook innovation and developed its economy at a mind blowing rate. It surpassed the US and UK in steel production in 1900 which was, then, a strong measure of Prosperität. It was, thus, dubbed to be the German miracle.

It went on to brutalise itself most pitiably thereafter. It was forced to pay war reparations and reconstruct itself. The nation was beat down over and over again. - hyperinflation, currency falls, worst financial crisis in history - things were not well and so, it made ground for the darkest period in its history. After this came a blow of another World War - the Luftwaffe had plummeted underneath the ground. The nation was then divided between allies in the west and the USSR in the east. Now came a division that still infests on the economy - East Germany and West Germany - standing across each other while the big beautiful wall stood between the red and white.

The Marshall Plan was brought in to reconstruct the European economies and Germany benefited limitlessly from this. It flourished a very strong export economy that followed a unique strand of capitalism - Rhine Capitalism, one which is essentially a hybrid of the best capitalist and social democracy policies.

The economy now stands clapping out exports, leading the European Union into the prospectiveness of the reality. The government heavily pushes competition in the market, flourishes on robust manifestations of true biz-charisma.

Üter stands Bart-ed.

Recently, however, the apple has fallen far from the tree. It has recorded the lowest growth in 6 years. At +0.6%, about half the rate for the Eurozone as a whole, German GDP grew at the slowest pace since the region’s sovereign debt crisis.

The subdued outlook for the German economy provides a glimpse of a “stranded” future. Europe’s economic powerhouse is struggling to keep up with structural change, putting it at risk of becoming a “stranded economy”. (Ludovic ; 2020)

CONCOMITANT(?) ISSUES

After four consecutive years of strong economic growth above the potential rate, the high-flying German economy experienced a sharp deceleration in momentum in 2018. There are various reasons for this which include the fuming trade war between the United States of America and China, structural changes in the car industry, change of technology due to an increasing demand for environment friendly automobiles- electrification , auto driving, the Brexit fiasco, the Global Financial Crisis, the Eurozone crisis, an increase in protectionism. Since Germany is an open economy with foreign trade accounting for approximately ninety percent of its Gross Domestic Product, it has been harshly impacted by the scaling back of globalization with an increased trend of sanctions and tariffs owing to popularization of protectionism. The United States and Germany are also seen to mingle and mutinize each other. The US claims Germany is using a “grossly undervalued” Euro to “exploit” the United States and its European Union partners.

The United States has complained about the German current account surplus for years and so has the European Commission. A set of policy recommendations directed at Germany: raising public investment, especially in infrastructure and education at the municipal level; increasing competition in business services; increasing incentives for later retirement; and reducing disincentives to work for second earners. Most of these policies would reduce the current account surplus and stimulate growth in Germany and the euro area. (Zettelmeyer; 2019)

Another issue is that of the Nord Stream-2. The U.S. has threatened the countries and companies with sanctions in event of furtherance of their work on the same. This has caused much geo-political ado, especially straining the economic relations of Germany with Russia at this point of time.

There is a benign hope for economic growth due to increase in fiscal spending that has been observed recently. Pumping in money is believed to aid in helping the labour market as well as in pushing for liquidation, but the cyclical cementing of the problem reaps benefits that are not intended. Added to this is the competition from Chinese products which have become better quality. Chinese automobile industry has been spreading its wings at an unprecedented rate which has caused harm to the German exports.

Germany has not been able to catch a break. Despite this, it is the 4th largest economy in the world, just behind Japan. Between France, Germany and Italy (considered to be wealthy), Germany stabilizes and carries the economic baggage for them. It has remained a stabilizing force in the Eurozone and prosperity has overflowed across Europe due to its prowess, but permanence is a myth.

THE NOW

COVID-19 came to Germany on January 19th, when a businesswoman landed in Munich from Shanghai, China. The German government was swift in calibrating a response to the about-to-be pandemic. Chancellor Merkel, who herself is a scientist, rigorously formulated various policies to format the outbreak’s aversion. Germany developed test kits and currently, it is testing 100,000 people daily. As soon as the disease was found to have infected a small number of its citizens, it immediately enthused itself to contain it better.

It has been able to develop its healthcare system with greater per capita intensive care beds and ICU beds - 34 beds per 100,000 people. It has been able to score a low fatality rate due to its concerted efforts, 35 times fewer than Italy.

A political crisis is also infesting upon the nation. Angela Merkel's successor has stepped down just before the elections and has caused political turmoil in this sphere. Moreover, unfortunately, Thomas Schaefer, the finance minister, commited suicide because deeply worried by the economic fallout due to COVID-19. This has disturbed the market adversely.

Which global sectors are most at risk?

Transportation, automotive, electronics and retail; it is all suffering, no relief. Global lockdowns are wreaking havoc on airlines, with the RPK or Revenue Passenger Kilometers for top air carriers plummeting by -40% since last December. Collapsing stock prices are also jeopardizing indebted and unprofitable (low-cost) airlines. Meanwhile, the pandemic is exacerbating problems for the automotive sector, already struggling with existing structural challenges.

The global market is facing a slump of over -10% in 2020 (after -4% in 2019). Retailers/ wholesalers are on the front line, but suppliers are not immune, in particular to cross-country supply-chain risks. The electronics sector is battling a demand-driven deterioration in Europe, with expectations of much weaker electronics sales to local industries. And within the retail sector, Asia-Pacific discretionary retailers have been hurt badly by prolonged store closures and the collapse of Chinese tourist flows.

Overall, Western Europe and Asia are the hardest hit. (Utermöhl; 2020)

Based on a survey conducted in March 2020 among 15,000 companies, almost 100 percent of businesses in the hospitality industry stated they already notice the impact of the virus. It has caused a contraction in demand for the hospitality sector thereby leading to huge amounts of economic and monetary losses.

The lockdown of one third of the world population is wreaking havoc on transportation, especially the air transport segment, which could receive public support. In automotive, the strong dependency on the top three markets is aggravating ongoing structural challenges. Lockdowns will hit sales badly in non-food retail and squeeze margins of already vulnerable companies. Metals are already weak, with structural challenges. Machinery faces challenges from a fragile global backdrop in many end markets due to the weak economic environment, and we identify potential insolvency risk across APAC in construction. (Vestraete ; 2020)

The automotive sector posted a noticeable drop of its market capitalization, with a decline exceeding -15% for car makers and -20% for automotive suppliers, for the six weeks following the beginning of the outbreak. The Covid-19 related shock is a major additional headwind for the sector, which was already – and remains - challenged by declining top markets and the need for massive investments in electric vehicles, connected cars and mobility services. Small and independent retailers and wholesalers are the most at risk, even if the shock were to be temporary.

The spread of Covid-19 is a major threat, firstly because it is one of the largest markets. The shock on demand will exceed the one expected at a macro-level, since a car purchase is a typical durable good that consumers would postpone buying, focusing instead on ‘necessary’ products. (Engelskirchen;2020)

Import dependency from China stands high and due to partial discontinuation of trade, supply from various industries have been impacted.

Labour Market

In order to slow down the spread of the Covid-19, German economic activity has largely been put on pause. A sharp - but comparatively more temporary - recession à la 2008/09 will be unavoidable, but the length of the lockdown will determine the setback for economic growth as well as the labour market.

The unemployment rate looks set to record the first pronounced increase since the early 2000s, rising at least temporarily above the 6% mark. This puts an end to the German labour market’s remarkable run over the past 15 years, which saw the unemployment rate more than halve since 2006 – from 10.8% to 5% in 2019 – and barely budge neither during the great financial crisis nor the Eurozone sovereign debt crisis.

The longer the economy is on pause, the more difficult it will be to restart the growth engine and the probability of downside risks materializing is rising sharply. In such a scenario, German GDP could contract by -7% and the unemployment rate may rise above 7% in 2020 with the number of unemployed reaching more than 3 million.

Oil

Tens of millions of cars are parked in garages or on parking lots. The effect on the oil market is being boosted by the fact that the world’s passenger air traffic is almost dead. In Berlin, it has decreased by 95 percent. Only the air freight market is running itself through slim trade. Kerosene purchases have dropped because Jet A fuel is not needed, as of now. Because of it all, the crude oil prices slid from down from $69per barrel in January, 2020 to $26 pb. Storage facilities are full while the production in Russia and OPEC(+) states is going on, which is why they need to get rid of their oil, no matter how low the price. They have, however, consensually decided to cut down production.

The following table briefly displays the support being provided.


At this juncture, keeping in mind the condition of the economy before the pandemic, what is needed is a significant long-term investment plan focused on upgrading infrastructure, updating the education system, boosting research & development capabilities and creating a venture fund to co-invest in promising start-ups so as to inject capital into the economy. But solely throwing money at the problem is not the solution. Instead the German economy’s digital catch-up initiative needs to be accompanied by a “simplification shock“ i.e. a notable reduction in red tape to allow for a better delivery of large-scale infrastructure projects, as well as to make life easier for corporates, particularly SMEs. (FMEA; 2019)


Conclusion


The Reichsadler Imperial Eagle and the Yankee Bald Eagle have historically perched themselves at the top of the global food chain. Differences persist: the Reichsadler is an avian of discipline, a reincarnated ethic of persistence. The bald eagle is an awakening of liberty, a manifest of the one true individual agency. Intently encircling and encroaching upon the gains of their preys, these eagles have built themselves nests of unfathomable spoils.

The weather worsens. The old eagles retreat to their nooks. Their nests -their will itself writ large- need but a touch of the cold storm to crackle.

Their nests must be saved.

Lest the already credulous nature of this metaphor be vilified, it will be safe to say that nesting itself in its nook will be as safe for the mighty eagle as for the average American and German economic actor.

Indeed: a hibernating economy, protecting itself from cold headwinds, is better than a lifeless one.

“Thou wast not born for death, immortal Bird! No hungry generations tread thee down; The voice I hear this passing night was heard.”

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