The Economy

Although the rapid spread of Covid-19 elicited a global health emergency, by August 2020 the economic crisis that has followed in its wake looks likely to have a much broader and more lasting impact. The lockdowns instituted in March/April 2020 brought much of the global economy to a shuddering halt, and in the following months most countries saw falls in GDP of between 10 and 20 per cent, a worldwide collapse in production even greater than that of the Great Depression of the 1930s. As lockdowns eased or ended, differing models of the economic consequences were proffered. Some argued that the recovery would be V-shaped, rebounding quickly to pre-pandemic levels. Others anticipated a less rapid, U-shaped recovery. Others that the ongoing impact of the virus on behaviour, and the measures taken to prevent contagion, would cause the economy to exhibit ‘hysteresis’ – an ongoing failure to snap back into its previous shape, leading to a ‘90% economy’ that would have a long duration. Some asserted that despite the concerted efforts of governments to contain covid-19’s spread, these would only be partially successful, leading to second and third waves of infection, forcing repeated lockdowns and hypothesised a W-shaped economic future. Given the differential impact of the pandemic on different economic sectors, all such predictions have been considered by some as over-generalisations, and have referred to a K-shaped recovery, where some sectors (e.g.Tech, pharmaceuticals, food supply) would soar, while others withered and died. Perhaps most extraordinarily, the fortunes of the ‘real’ economy and the stock market appear to have completely uncoupled, with equities showing some of the greatest rises in value in recent history while huge sections of the economy collapsed and unemployment levels mushroomed.

On August 27th the pandemic perspectives group attempted to get to grips with this vast subject, guided by two leader articles written early on in the pandemic from The Economist, ‘A Dangerous Gap – the markets v the real economy’ of 9 May, and ‘The 90% Economy’ of May 2nd, and two more recent Economist articles ‘It’s coming’, on unemployment in the UK (August 22nd), and ‘Buttonwood’s’ ‘Foam Party’, on stock-market bubbles from the same issue. To prevent the debate becoming too abstract, articles from the Guardian focusing on the restaurant trade, on the London economy and on car dealerships where also included.

Ronan Love, whose research expertise is the financial crises of revolutionary France ably led much of the debate.

David Christie started by raising the issue of the gap between the stock-market and the ‘real’ economy, asking whether the disconnect was indicative of a stock-market bubble, and hypothesising that a financial crash was likely to occur in the not too distant future. He also raised the issue of the rapid rise in day trading through platforms like Robinhood with its 13 million users in the US, suggesting that many new investors were treating the stock market like a gambling website where (in a bull market) they were guaranteed to win.

Ronan was sceptical of the influence of day traders, pointing out how the real driver of rising equity value was the massive intervention of the major central banks. Explaining that, in March alone, the G7’s central banks had bought $1.4 trillion worth of financial assets. This unprecedented extension of ‘quantitive easing’, (the purchase of government bonds and corporate debt), he argued, was adequate to explain the inflated value of equities. He pointed out that David’s division between the ‘real’ economy and the stock-market would also be disputed by many economists, who argue that financial markets are integrated with the rest of the economy, although he personally debated the extent of that integration. He was likewise sceptical about the likelihood of an imminent crash, arguing instead that the major threat to the global economy due to quantitive easing was the creation of ‘zombie businesses’. These, he suggested, were companies that, granted opened ended supplies of money via the central banks, were no longer reliant on profit-making, reducing their need to innovate and invest, and would include some businesses that were actually no longer viable trading concerns. He also pointed out the way in which this accelerated inequality, enriching already wealthy shareholders and financial institutions, and, through the process of buying back their own shares, vastly enriched senior company executives at the expense of investment in increased productivity. He pointed out, however, that such interventions did serve a purpose, noting that they effectively ‘calmed’ the markets that had begun to shed value precipitately at the onset of lockdown.

The debate moved on to the nature of any post-covid recovery, and again, led by Ronan, two opposing outcomes were put up for debate. In the first scenario, the end of lockdown would release pent-up demand and the economy would rapidly regain the lost ground. The sharp rise in house prices (outside London), the return to restaurants under ‘eat out to help out’ and car sales were noted as supporting this hypothesis. The opposing conjecture was that rapidly rising unemployment, fear of future unemployment, concerns about contagion, and the collapse of sectors hit hardest by covid, would suppress demand in the long term. Concern was expressed at the UK government’s plans to end the furlough scheme in mid-October, and the consequences of the probable surge in unemployment that would follow. It was noted that the French equivalent was intended to run for two full years.

Comparisons were made with the financial crisis of 2008. Ronan pointed out that the global economy at that time was partly ‘saved’ by the vast infrastructure programme of the Chinese state, which sucked in raw materials and finished goods on an enormous scale. It was noted that this was unlikely to be the case this time, particularly, as Niall Gallen pointed out, given the moves in geo-politics that were driving China and the US apart.

Ronan considered the key issue to be government’s future fiscal policies, arguing that rather than propping up existing companies, the need was for a new inventiveness; in job creation schemes, means of reducing youth unemployment and concerted investment in future growth areas such as green tech, automation and AI. He saw little sign of this taking place. Richard Kendall, supported by new member Alex Doak (our first mathematician) argued that after a suitable interval the government would instead be likely to return to austerity, the pandemic having given them a ‘get out of jail free card’ where the ‘necessity’ of further reductions in spending on social welfare would be apparent to all. Others disagreed arguing that such a move would not be politically possible for a populist government.

Ronan also pointed out, that neglected in much of the contemporary debate, was the impact of the pandemic on the Global South, noting that beyond the human cost in countries with minimal welfare systems and inadequate health provision, the downturn in the global economy had created ruinous debt burdens in many developing countries. He noted that Nigeria and Ghana had already reached the point where 40% of government revenues was spent servicing existing debt, a ratio worse than that of the French monarchy in 1789. He noted that without global cooperation for sustained debt relief, particularly in sub-saharan Africa, the prospects were dire.

Sadegh Attari raised the question of the differential impact of the economic crisis on different socio-economic groups. The following debate was lively and long-lasting…

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