A decade ago, we defined Shifting Wealth as the
shift in the gravity of the world economy and as the switch in net foreign
assets toward Asia. The gravity shift occurred as a result of superior GDP growth
of economies with large populations (notably China and India, some 40% of world
population) from the 1990s. The switch in assets resulted from structural
deficits of the US that were financed by Asian saving surplus[1].
Starting with a deliberate China containment
poliy from the early 2000s by the US and Japan in particular, reinforced by a
clearly protectionist policy stance by the Trump administration, the 2019–20 coronavirus
(also COVID-19) outbreak has the potential to end three decades
of Shifting Wealth.
End 2019, the coronavirus was first identified
in the Chinese Hubei province, in Wuhan. China has by far the highest number of
coronavirus-related infections (80k), recoveries (57k) and deaths (3k); other
countries hard hit are South Korea, Italy and Iran[2].
The Chinese purchasing manager index Caixin
Services PMI in the services sector collapsed almost 50% as a result of the
Corona Virus pandemic as economic activity came to an abrupt halt between
January and February 2020.
As a result of Shifting Wealth, China plays a
far greater role in global output, trade, tourism and commodity markets than
only 20 years ago. This magnifies the economic spillovers to other countries
from an adverse shock in China. In its latest Interim Projections, the OECD
estimates China´s real GDP growth rate (year-on-year) to drop from 6.1% in 2019
to 4.9% in 2020, but then to recover to 6.4% in 2021. Under this optimistic
scenario, the China´s growth delta would be restored quickly, and Shifting
Wealth would continue, reinforced by India´s high growth. The OECD optimism is
grounded on the assumption of a V-shaped recovery.
The key question now is whether the world will
enjoy a V, just like a seasonal flu or a common cold from which people tend to
recover quickly. There are other possibilities which, taken together, are more
likely. A W-shape as people recover from coronavirus but then relapse; a long
slump (U) as economic shock could cause lingering pain as the world economy
digested the 2008 global financial crisis; finally, the world economy might
suffer an L-shaped slump as it did after the 1970s oil shocks.
A ‘V-shaped’ hit seemed likely several weeks
ago when infections were mostly a Chinese problem and China was dealing with it
forcefullywith the coronavirus. While the spreading of the virus has now slowed
down to a trickle in China, the virus is now multiplying rapidly in Europe, in
the US and elsewhere. As of today (8th March), the coronavirus has
hit 103 countries and territories around
the world as well as the Diamond Princess cruise ship
harbored in Yokohama, Japan. Many of these countries don´t have an
efficient public health system (most prominently the US where testing is
limited) or refuse to seriously engage in global solutions to the coronavirus
crisis. On the altar of faith in the primacy of individual freedom and superiority
of the market economy, strict quarantine campaigns are being launched too late
or not at all[3].
The best broad assessment about the economic
fallout comes so far, in my view, from Richard Baldwin and Beatrice Weder di
Mauro (2020)[4]. On
the back of evidence and analysis by leading economists, their overall
assessment is: “While a short-and-sharp crisis is still possible, it’s looking
less like the most likely outcome”. By comparison, most German economists,
money advisers and journalists still seem too complacent about the coronavirus
threat. And they recommend what they always do: Keynesians demand stimulation, Ordoliberals
warn against activism, financial advisors and journalists recommend not to sell
but to keep on buying stoically (while the knife keeps falling). Financial markets
are now reacting in a way that will impose additional pain on the real economy.
Baldwin and Weder discuss the virus in terms of
the relative importance of supply vs. demand shock that determines the
effectiveness of policy stimulus. They stress the supply-shock character of
output disruption as supply shocks are more tangible, from an infected
workforce via shuttered schools and workplaces, to hits to productivity.
Countries at the core of global value chains (GVCs) are especially hard hit by
the virus-induced slump in manufacturing output – next to China (at the GVCs
center), these are South Korea, Japan, Taiwan, and Vietnam. These countries
form the GVCs core and - via intense trade, banking and investment links with
the G7 economies – dominate world GDP, manufacturing and exports. That
dominance results, at least in the short and mid term, in global supply-side contagion. Industrial sectors hardest hit are
likely to be the optics and car industries. Protectionist deglobalisation
measures will deepen the slump as there is little official understanding of the
global public goods character of open borders in times f the coronavirus.
The presumed dominance of supply-side shocks is
not to belittle the demand effects of the virus. Immediate aggregate demand
effects arise from suspended consumer purchases of goods and services for fear
of viral contagion, such as cruise holidays or air travel, visits to rock
concerts or theaters. Each of these first-round demand shocks are likely to be
subject to Keynesian multiplier amplification. Not all demand, though, is gone
definitely, as some demand is reoriented toward the internet.
Stock markets have taken long to discount for
the unique economic effects of the coronavirus pandemic. The MSCI
WRLD PI USD peaked on 12th
February; since then, it has lost 12 % (only) but CBOE volatility has spiked
and the US dollar has weakened against the funding currency euro as carry
trades were dissolved and bond rate differentials shrunk. This is far from a
financial market crash so far; should it come, negative wealth effects and
pension returns will deepen the slump. Corporate bond markets have also started
to price in default risk.
A sudden
deglobalisation – and hence a structural break to Shifting Wealth – is still in
the cards. Official deglobalisation measures that hinder
the flow of goods, service and people could well make the economic effects of
this pandemic more persistent: “in times of rising nationalism and populism,
people’s fears and suspicions of ‘others’ might become a force for
disintegration and deglobalisation”.
The West could have benefited earlier from the Chinese experience. But parallel to protectionism, a chinaphobic attitude has developed in the West, which wants to deny itself insights from other systems, with finger pointing at re-education camps and surveillance cameras. At the same time, a great self-sufficiency was fed in the media regarding the supposed superiority of the West. If Western narrow-mindedness continues, the 21st century will finally become Asian.
The West could have benefited earlier from the Chinese experience. But parallel to protectionism, a chinaphobic attitude has developed in the West, which wants to deny itself insights from other systems, with finger pointing at re-education camps and surveillance cameras. At the same time, a great self-sufficiency was fed in the media regarding the supposed superiority of the West. If Western narrow-mindedness continues, the 21st century will finally become Asian.
[3] Fischer
& Mayer (2020), https://www.nzz.ch/meinung/es-ist-fahrlaessig-covid-19-durch-die-systembrille-zu-betrachten-ld.1544570,
NZZ.
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