🔒 WORLDVIEW: No safe spaces in a post Covid-19 economy

At the start of the year, things seemed good. Economies in Europe were slowly getting back to growth and the US economy was apparently firing on all pistons. China looked solid, smaller Asian countries were growing fast thanks to the US obsession with moving manufacturing out of China, and commodity prices were solid. Then Covid-19 happened.

Suddenly, all bets are off. Job losses have savaged workers around the world as lockdowns have shuttered economic activity and nervous households and businesses have held off on spending and investment. Countries everywhere are facing some of the worst recessions ever recorded. And it increasingly looks like there will be no safe places in the post Covid-19 economy.

Job losses are broad and deep

In the early days, it seemed that job losses would be confined to the hard-hit industries – tourism, hospitality, and personal services like massage or hair styling. It also seemed that the crunch would be temporary, a few months of isolation and then back at it.
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Neither of those hopes have come to pass. Initial job losses were indeed in the high-touch industries mentioned above – travel, especially, has been hit hard by closed borders and cancelled flights. But data increasingly suggests that job losses are spreading. Many white-collar professionals, for example, have been indirectly hit by the closure of high-touch industries.

A shuttered hotel means, first of all, job cuts for serving and cleaning staff. Then, it means job cuts for middle managers. Then, it means job cuts at the advertising agencies, accountants, employment agencies, consultancies, and banks that provide services to the hotel.

And those job losses feed into further job losses. Every person who loses income cuts their spending, and every spending cut means less money circulating in the economy, which means job losses at the places that would previously have absorbed the lost spending.

It’s a vicious cycle and one that we have seen in every recession we’ve ever been through. Downturns feed on themselves.

In practical terms, this means that no industry will escape the Covid-19 crisis unscathed. There will still be jobs, of course, and there will still be opportunity. But there will be fewer jobs and more people applying for them. There will be fewer people out spending and wages will grow slowly (if at all). No industry will be sheltered from the storm – even healthcare jobs are vanishing as nervous would-be patients stay away and avoid unnecessary medical procedures.

Economies are reshaping

Covid-19 is doing more than causing job losses. It is compelling many companies to fundamentally rethink their businesses. Countries are seriously asking themselves about the risk of outsourcing all their manufacturing to China and other Asian nations and making plans to onshore more of their supply chains. Many giant retail chains are going bust, and landlords don’t know who or what will be filling empty storefronts in the future. And companies spending a fortune on office space downtown are asking themselves whether traditional offices truly make sense.

Some of this is just jitters. Many companies will dutifully reopen their offices with a few cosmetic changes and expect workers to be back at their desks from 8 to 5. And many shops will reopen. But many won’t. Many businesses will offer more remote working options to ease congestion in their downtown facilities and many stores will have to limit shoppers and spend more on cleaning and supplies like masks for workers.

All of this means that the post Covid-19 economy won’t look exactly like the pre Covid-19 economy. The Economist coined the term “the 90% economy” to capture what this will look like – we’ll be back to something like, but not identical to, normal.

Again, there will still be business and jobs and general economic activity. But it will be different to what it was like before and there will be less of it all. After ten years of “boom time” – at least, ten years of slow but steady recovery for the world and ten years of slow but steady decline for South Africa – we’re entering a bust phase.

Assets are struggling

In response to all this, asset prices are struggling. While some sectors of the market are doing great, specifically the big tech companies that have benefited from lockdown and remote working, many are in trouble. Global car manufacturers have taken a hit, global healthcare looks wobbly, and global retail is a bit of a mess. Global property prices are coming under pressure as tenants stop paying rent.

In South Africa, virtually all asset prices have taken a knock as the rand has depreciated. With government borrowing set to expand significantly to deal with the Covid-19 fallout, the prospects for domestic assets are not encouraging.

This is a daunting problem for savers and retired folks. There are a few bright spots in global markets, to be sure, but for South Africans, local has never looked less lekker.

The next couple of years will be tough. There will be jobs and things will pick up as lockdowns lift. But it won’t be the same and getting back to anything like normal will probably take longer than we expect. In the meantime, the massive global expansion of debt threatens future inflation and even a Covid-19 depression.

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