The media has emphasized the volatility of the global economy leading to sovereign defaults, surging financial uncertainty, economic activity contraction, investment bust and a financial crisis. Finance professionals rely on quarterly economic assessments oblivious to the fact that they do not provide insights into the future of economies. Contrary to the expert’s assessments the global economy will not lead to a systemic meltdown.
Recessions caused by economic crisis take longer to recover but the present recession is a non-economic crisis which will last for a brief period. Unlike natural disasters it has not resulted in massive destruction of infrastructure. In the past two decades, disasters caused direct economic losses worth $3 trillion globally.
The pandemic has disrupted and not destroyed the global economy. It hindered production and investments. Several sectors such as utilities and finance were unaffected while Mergers and Acquisitions (M&As) and foreign investments (FI) were taking place.
Countries and international organizations disbursed trillion dollar rescue packages. Advanced economies spent about 6% of their GDP on relief programs. US and India implemented measures to increase domestic demand and growth. Pent-up demand for retail goods, travel and cars will spur consumption.
Historically, economies are not impacted by pandemics. Smallpox did not derail the Industrial Revolution. Smallpox declined sharply after vaccination was widely adopted. The 1918 Spanish Flu challenges were more daunting than today’s crisis.
Pandemics and the global economy
The Spanish Flu Pandemic
In 1918 the world witnessed geopolitical events such as the end of WWI, the Russian revolution and the US Senate’s rejection of the Versailles Treaty and President Woodrow Wilson’s plan to join the League of Nations. Spanish flu devoured more lives than WWI and WWII combined. F. R. Velde concludes that Spanish flu had a negligible effect on the US economy as it grew by 42% from 1921 to 1929. Economic activity increased by 1923 driven by consumerism, household appliances sales, growth of radios and cinemas, Ford model T car, Federal Highway Act of 1921 and country wide electrification projects.
The technological and macroeconomic conditions across the two time periods have significantly improved since 1918. The Spanish flu’s mortality effect dwarfed Covid 19. In 1918 a majority of the global population was economically poor, suffered from poor health and lived in low hygienic conditions. By comparison 2022 will be more settled and calmer despite huge disruptions.
Economically, infrastructurally and socially WWII was more devastating as compared to Covid 19. Yet the post war US economic growth proved economists Paul Samuelson and Gunnar Myrdal both future Nobel Prize winners wrong. Samuelson mentioned an economic downturn while Myrdal wrote about societal turmoil.
The US spent 42% of GDP due to an increase in the war budget by 1944. War rationing provided a boost to economic revival. Rationing led to an increase in US household savings of 40% of GDP. The expansion of the highway system led to the development of new suburban areas. Cars contributed to the flourishing of the entertainment and hospitality sectors as people had easy access to resorts and restaurants.
The post WWII world ushered in an era of international organizations. Container ships expanded global trade. The Golden Age of Capitalism witnessed the birth and flourishing of development economics. The Marshall Plan invested $22 billion or roughly $182 billion in 21st century dollars in European economic assistance. The US invested $2.2 billion in Japan’s reconstruction programs from 1946 and 1952. Contemporary Japan is a democracy, the world’s third largest economy and America’s significant security partner in the Indo Pacific region.
The US established its position as the world’s economic superpower by manufacturing airplanes, ships and refrigerators. Its economy grew by 37% and the GNP skyrocketed to $300 billion during the 1950s compared to $200 billion in 1940. By 1960, it had topped $500 billion.
The post war period was one of the finest eras of economic expansion in world history. US GDP increased from $228 billion in 1945 to under $1.7 trillion in 1975. By 1975, the US economy represented 35% of world industrial output.
Businesses during the pandemic
Stable capital expenditures has led to soaring cash balances. The cumulative global funds for long-term investment is approaching $3.5 trillion. The total firepower could exceed $10 trillion with the addition of private funds. The IHS Markit’s purchasing managers’ indices indicated expansion of the US services sector during the pandemic.
There are 1200 companies with a record $3.8 trillion in cash reserves. Assets under management of sustainable funds nearly doubled from roughly $900 billion in 2019 to over $1.7 trillion in 2020. TSMC announced an investment of $12 billion in a US chip factory. Amperex Technology declared an investment of $5.1 billion in Indonesia. Honeycomb Energy Technology invested $2.3 billion while Groupe PSA invested $2.2 billion in Germany. The top 5,000 non-financial listed companies increased their cash holdings by more than 25% to $8 trillion. Toyota increased cash holdings by more than $30 billion (up 68%) and Volkswagen by $22 billion. Suez Canal’s annual revenues in 2021 were $6.3 billion, the highest in the waterway’s history. The high levels of cash reserves will boost foreign investments in the next decade.
Low borrowing costs and buoyant financial markets are leading to M&A activities. Global M&As in the first four months of 2021 recorded higher value. M&A grew to $73 billion especially in the technology, financial services and consumer goods sectors while chemicals and information and communication sectors led to 24% increase. Notable deals include the purchase of Cypress by Infineon for $9.8 billion. The pandemic led to a revenue increase of 15% in the health care sector. One of the biggest deals was the acquisition of The Medicines by Novartis for $7.4 billion. Among the largest acquisition were the purchase of Carlton United Breweries by Asahi Group for $11 billion and Hitachi’s acquisition of ABB Power Systems for $9.4 billion.
Countries and the pandemic
Countries are liberalizing regulations and simplifying investment procedures. G20 announced fiscal packages exceeding $10 trillion while the WB provided $160 billion to developing economies. The US has proposed a multi-year infrastructure package and launched the American Rescue Plan of $1.9 trillion and $5 trillion in stimulus funding. Tax increases are likely to follow the present measures.
India’s $280 billion economic package is 10% of its’s GDP. India implemented the $24 billion social support plan. India has launched several reforms to attract organizations that are looking for an alternative to China. Several sectors such defense, aviation and insurance were liberalized. The easing of lockdowns in India led to a rise in economic activity. During Diwali 2020, e-commerce giants reported a 55% jump in sales in just one week to $4.1 billion, compared to $2.7 billion during the same period in 2019 according to CMIE.
The next decade
The global economy is poised to stage its most robust post-recession recovery in 80 years in 2022. Fewer barriers to investments is associated with lower macroeconomic volatility and smaller output falls during downturns. Productivity drives economic growth. US and India will experience lower crisis duration as they have higher productive capacities as measured by the Economic Complexity Index.
Fourth organizational revolution
Crises can spur the adoption of new technologies and business models. The pandemic has accelerated the fourth digital revolution. Digitization is implemented as automation and online services increase. The SARS outbreak is often attributed with the growth of online shopping in China, accelerating Alibaba’s rise. Organizations will invest in cloud computing, medical technologies and robotics.
The unprecedented global stimulus of 20% of GDP alongside the gradual reopening of economies will make this the shortest recession in post-war history. The recovery in global trade will be broad based with consumer goods and industrial supplies all back at or above pre-pandemic levels. Governments will implement macro policies to ensure financial stability in a prolonged environment of low interest rates and high liquidity.
Fiscal stimulus measures and consumer demand are expected to revive the US economy. US fiscal policy has strongly boosted business activity. US economic growth is expected to reach 6.8% in 2022, the fastest pace since 1984. President Joe Biden infrastructure plan, consumer demand and the implementation of 5G infrastructure will lead the economic recovery. The Federal Reserve’s monetary policy will remain accommodative with quantitative easing and zero interest rates for an extended period.
India is situated in the most volatile region of the world surrounded by two hostile nuclear powers. China and Pakistan have fought wars with India. Since the last 30 years various geopolitical events and crisis situations such as the 1991 economic crisis, Pakistan aiding terrorism, the Kargil war, scams between 2004 and 2014 and the Covid 19 pandemic have taken place.
Yet India is attracting foreign direct investment and foreign institutional investors and its citizens are investing in the India story. The $3 trillion Indian equity market is on a history making spree as it touched the 60,000 mark during the pandemic. India is projected to be the fastest growing economy in 2022. India will grow by 8.5% while China is projected to grow by 5.6% in 2022 according to the IMF. India is implementing structural reforms and public sector privatization. The e-commerce market in India is projected to expand by 150%. The opportunities in the next 25 years are greater as compared to the last 25 years. India will continue to grow.
China’s economy will lead to a downward trend and diminishing productivity in response to belligerent foreign and military policies, US trade wars and global decoupling from China.
FI will recover to pre-pandemic levels of about $1.5 trillion by 2022. In 2023, investments in developed economies are expected to increase by 20%. FI in the US is projected to increase by 15%. In 2022 emerging markets are expected to accelerate to 6% supported by high commodity prices.
Consumers will be excited to get back to shopping and socializing. During Covid the personal savings rates surged above 20% of disposable income. Consumer spending will increase due to higher savings as compared to the pre covid levels. US households saved $1.6 trillion according to Oxford Economics. Retail and travel sectors will benefit as consumers start spending, restrictions are lifted and people are vaccinated.
US retail sales could rise as much as 8.2% to more than $4.33 trillion in 2022. In India the 2021 Diwali shopping sales broke the 10-year record as sales generated ₹1.25 lakh crore. Consumer spending will lead to gross tax revenues which will expand to the highest pace as compared to pre pandemic levels.
Organizations will focus on portfolio optimization. It is a buyers market and deals will be the most consequential activity of this decade. The world should expect a rise in M&A as volumes and shareholder returns will likely reach or exceed pre-pandemic levels driven by plentiful cheap liquidity. The hunt for good assets will continue to be competitive with an estimated $3.1tn in dry powder globally, a low interest rate environment and promising new opportunities.
Fleet expansion plans by shipping companies means trade is picking up. Cargo growth has led to a $10 Billion buying spree for containerships. At least 47 ultra-large container vessels are expected to be delivered by 2024 according to research firm Drewry. CMA CGM has ordered 22 containerships while Ever Given’s Operator has placed an order for 20 New Ultra-Large Ships. Korea Shipbuilding & Offshore Engineering and Samsung Heavy Industries have won combined orders worth $3 billion for 25 container ships,. The Port of Los Angeles closed its fiscal year with volumes of 10,879,383 TEUs, setting a new Western Hemisphere record.
The 20th century witnessed several crises such as WWI, Spanish Flu, WWII, cold war, collapse of the Soviet Union and dot com bubble. The first decade of the new millennium brought a financial crash and the rise of global terrorism. Each of these historical crisis periods was succeeded by an economic revival. The aviation industry was not permanently affected by 9/11. Terrorist attacks have not prevented people from travelling to the Middle East and Europe. A similar pattern of renewal will emerge from the present crisis.
Historically crisis events have spawned new trends that are favorable for the economy. The Spanish Flu led to research in infectious diseases and 9/11 led to a secure environment. The pandemic will eventually give way to commercial activity, innovation and global cooperation.
A century ago our predecessors did not have the benefits of technological and scientific advances and international organizations. Today governments are supporting their economies through the crisis. The world will be out of the bunker as the effects of the pandemic fade away.