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Ten Ways Covid-19 Has Changed the World Economy Forever – Bloomberg

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Bloomberg Best Of The Year 2020

Economic shocks like the coronavirus pandemic of 2020 only arrive once every few generations, and they bring about permanent and far-reaching change.

Measured by output, the world economy is well on the way to recovery from a slump the likes of which barely any of its 7.7 billion people have seen in their lifetimes. Vaccines should accelerate the rebound in 2021. But other legacies of Covid-19 will shape global growth for years to come.

Some are already discernible. The takeover of factory and service jobs by robots will advance, while white-collar workers get to stay home more. There’ll be more inequality between and within countries. Governments will play a larger role in the lives of citizens, spending—and owing—more money. What follows is an overview of some of the transformations under way.

Leviathan

Big government staged a comeback as the social contract between society and the state got rewritten on the fly. It became commonplace for authorities to track where people went and who they met—and to pay their wages when employers couldn’t manage it. In countries where free-market ideas had reigned for decades, safety nets had to be patched up.

Digging Deep

Governments ran bigger fiscal deficits to shield economies from pandemic

Source: IMF Fiscal Monitor, October 2020

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To pay for these interventions, the world’s governments ran budget deficits that add up to $11 trillion this year, according to McKinsey & Co. There’s already a debate about how long such spending can continue, and when taxpayers will have to start footing the bill. At least in developed economies, ultralow interest rates and unfazed financial markets don’t point to a near-term crisis.

In the longer run, a big rethink in economics is changing minds about public debt. The new consensus says governments have more room to spend in a low-inflation world, and should use fiscal policy more proactively to drive their economies. Advocates of Modern Monetary Theory say they pioneered those arguments and the mainstream is only now catching up.

Even Easier Money

Central banks were plunged back into printing money. Interest rates hit new record lows. Central bankers stepped up their quantitative easing, widening it to buy corporate as well as government debt.

All these monetary interventions have created some of the easiest financial conditions in history—and unleashed a frenzy of speculative investment, which has left plenty of analysts worried about moral hazards ahead. But the central-bank policies will be hard to reverse, especially if labor markets remain fractured and companies continue their recent run-up in saving.

Global Easing in 2020

Central banks across the world cut interest rates this year

Source: Bloomberg

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And history shows that pandemics depress interest rates for a long time, according to a paper published this year. It found that a quarter-century after the disease struck, rates were typically some 1.5 percentage points lower than they otherwise would have been.

Debts and Zombies

Governments offered credit as a lifeline during the pandemic—and business grabbed it. One result was a surge in corporate debt levels across the developed world. The Bank for International Settlements calculates that nonfinancial companies borrowed a net $3.36 trillion in the first half of 2020.

With revenues plunging in many industries because of lockdowns or consumer caution, and losses eating into business balance sheets, the conditions are in place for a “major corporate solvency crisis,” according to one new report.

Undead Debt

Zombie firms are sitting on an unprecedented $2 trillion of obligations

Source: Bloomberg

Note: 2020 figures are as of most recent quarterly data. Zombie firms are companies that aren’t earning enough to cover their interest expenses

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Some also see danger in offering too much support for companies, with too little discrimination over who gets it. They say that’s a recipe for creating “zombie firms” that can’t survive in a free market and are only kept alive by state aid—making the whole economy less productive.

Great Divides

The stimulus debate can feel like a first-world luxury. Poor countries lack the resources to protect jobs and businesses—or invest in vaccines—the way wealthier peers have done, and they’ll need to tighten belts sooner or risk currency crises and capital flight.

The World Bank warns that the pandemic is spawning a new generation of poverty and debt turmoil, and the IMF says developing nations risk getting set back by a decade.

Extreme Poverty

Forecast of the global poverty rate at US$1.90-a-day

Source: World Bank

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Creditor governments in the G-20 have taken some steps to ease the plight of the poorest borrowers, but they’ve been slammed by aid groups for offering only limited debt relief and failing to rope private investors into the plan.

K-Shaped

Low-paying work in services, where there’s more face-to-face contact with customers, tended to disappear first as economies locked down. And financial markets, where assets are mostly owned by the rich, came roaring back much faster than job markets.

Two Tracks

Change since end-2019 in:

Source: Bureau of Labor Statistics, Bloomberg

Note: Stocks = S&P 500 (30-day moving average); Employment = Total non-farm payrolls (seasonally adjusted)

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The upshot has been labeled a “K-shaped recovery.” The virus has widened income or wealth gaps across faultlines of class, race and gender.

Women have been hit disproportionately hard—partly because they’re more likely to work in the industries that struggled, but also because they had to shoulder much of the extra childcare burden as schools closed. In Canada, women’s participation in the labor force fell to the lowest since the mid-1980s.

Rise of the Robots

Covid-19 triggered new concerns about physical contact in industries where social distancing is tough—like retail, hospitality or warehousing. One fix is to replace the humans with robots.

Who’s Automating?

Asian powerhouses lead among world’s top 10 manufacturers

Source: United Nations Statistics Division, International Federation of Robotics

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Research suggests that automation often gains ground during a recession. In the pandemic, companies accelerated work on machines that can check guests into hotels, cut salads at restaurants, or collect fees at toll booths. And shopping moved further online.

These innovations will make economies more productive. But they also mean that when it’s safe to go back to work, some jobs just won’t be there. And the longer people stay unemployed, the more their skills can atrophy—something economists call “hysteresis.”

You’re on Mute

Higher up the income ladder, remote offices suddenly became the norm. One study found that two-thirds of U.S. GDP in May was generated by people working at home. Many companies told employees to stay away from the office well into 2021, and some signaled they’ll make flexible work permanent.

Work-from-home has mostly passed the technology test, giving employers and staff new options. That’s a worry for businesses catering to the old infrastructure of office life, from commercial real estate to food and transportation. It’s a boon for those building a new one: shares in videoconferencing platform Zoom jumped more than six-fold this year.

Not Working

Google mobility data show workplace activity is still below pre-crisis levels

Source: Google, Bloomberg calculations

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The option of remote work, along with fear of the virus, also triggered a stampede of urbanites toward the suburbs or countryside—and in some countries, a surge in rural property prices.

Not Going Anywhere?

Some kinds of travel came to a near halt. Global tourism fell 72% in the year through October, according to the United Nations. McKinsey reckons a quarter of business trips could disappear forever as meetings move online.

No Travel

International tourist arrivals were down 72% through October

Source: World Tourism Organization

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With vacations upended and mass events like festivals and concerts called off, the trend among consumers to favor “experiences” over goods has been disrupted. And when activities do resume, they may not be the same. “We still don’t know how concerts are going to be, really,” says Rami Haykal, co-owner of the Elsewhere venue in Brooklyn. “People will be more mindful, I think, of personal space, and avoiding places that are overly packed.”

Travelers may have to carry mandatory health certificates and pass through new kinds of security. Hong Kong based China Tech Global has developed a mobile disinfection booth that it’s trying to sell to airports. Chief Executive Sammy Tsui says it can clear pathogens from the body and clothes in 40 seconds or less. “You feel some cool air on your body, and some mist,” he says. “But you don’t feel wet.”

A Different Globalization

When Chinese factories shut down early in the pandemic, it sent shock waves through supply chains everywhere—and made businesses and governments reconsider their reliance on the world’s manufacturing powerhouse.

Sweden’s NA-KD.com, for example, is part of a flourishing “fast fashion” retail industry that moves with social media trends rather than the traditional seasons. After deliveries got jammed this year, the company shifted some production from China to Turkey, says Julia Assarsson, head of inbound and customs.

Globalization in Reverse

Cost to 2050 GDP if global ties unravel versus advance

Source: Bloomberg Economics

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That’s an example of globalization adjusting without retreating. In other areas, the pandemic may encourage politicians who argue that it’s risky to rely on imports of goods vital to national security—as ventilators and masks turned out to be this year.

Going Green

Before the pandemic, it was mainly environmentalists musing over theories of peak oil—the idea that the rise of electric vehicles could permanently dent the world’s demand for one of the most polluting fossil fuels.

But when 2020 saw planes grounded and people staying home, even oil majors like BP felt a real threat from the world getting serious about climate.

Cleaning Up

Power sector expected to lead decline in global emissions

Source: BloombergNEF

Note: Forecasts after 2019

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Governments from California to the U.K. announced plans to ban the sale of new gasoline and diesel cars by 2035. And Joe Biden was elected with a promise the U.S. will rejoin the Paris Agreement.

— With assistance by Olivia Rockeman, Brendan Murray, Matthew Boesler, Patrick Gillespie, Shelly Hagan, Mario Sergio Lima, and Jess Shankleman

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    Vaccine-Resistant Variants Could Result in a Stop-Go World Economy – Bloomberg

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    Despite the rise of the delta variant, Bloomberg Economics’ base case remains that the world economy will see a continued recovery in the second half of 2021, underpinned by strength in the U.S., acceleration in Europe and India moving out of its slump. Further out, the increase in cases is a reminder that Covid-19 is likely here to stay, raising the prospect of permanently lower output relative to the pre-Covid path as contact intensive services suffer. In the worst case scenario, the appearance of vaccine resistant variants could result in a stop-go world economy, with sporadic lockdowns and reopening dragging major economies in and out of recession.

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    What Does the Delta Variant Mean for the U.S. Economy? – The New Yorker

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    People dining in a restaurant both indoors and outdoors.
    Veteran economists are optimistic yet concerned that the Delta variant could prompt new closures that might slow American economic recovery.Photograph by Andrew Lichtenstein / Corbis / Getty

    What a difference a couple of months makes. “As hopes rise that the pandemic is ebbing in the United States and Europe, visions of a second ‘Roaring Twenties’ to match the last century’s post-pandemic decade have proliferated,” the Associated Press reported, in late May. “For some, it feels like party time.” That was when the daily tally of new COVID-19 cases in the United States had dipped to about twenty-two thousand and the number of people vaccinated was rising sharply. The travel-and-leisure sector appeared to be rebounding strongly. Economists were predicting that the gross domestic product would grow at an annualized rate of close to ten per cent in the second quarter, followed by continued strong growth through the rest of the year and into 2022.

    Now that the spread of the Delta variant has pushed the seven-day average of new cases above fifty thousand, and the number of hospitalizations has jumped by more than fifty per cent in two weeks, economists and investors are reassessing the prospects. Last Monday, the stock market tumbled on concerns about the variant, before rebounding on Tuesday. Later this week, the Department of Commerce will publish its initial estimate of actual G.D.P. growth in the second quarter. The Federal Reserve Bank of Atlanta’s GDPNow model, which incorporates a range of recent economic releases, estimates the figure at 7.6 per cent. In normal times, that would be a blockbuster figure. However, it is significantly below some of the estimates from May, and it shows how in some regions and industries, even before the rebound in COVID cases, shortages of labor, computer chips, and other components were holding back the recovery. Now worries about the resurgent virus have been added to concerns about supply constraints. Where will the economy go from here?

    On Friday, July 23rd, I spoke with two veteran economists who have been following developments closely since the start of the pandemic. They both expressed optimism that the Delta variant wouldn’t derail the recovery, but they also expressed some serious concern, especially if the spread of the variant persists into the fall. Mark Zandi, the chief economist at Moody’s Analytics, told me that he and his colleagues are still expecting a “very strong second half of the year.” More specifically, they are predicting that G.D.P. will expand at an annualized rate of about six per cent, and total employment will rise by more than five hundred thousand a month, on average. For the variant to have a major impact on G.D.P. and employment, Zandi said, businesses would have to close down again and people would need to go back to sheltering in place, both of which he considers very unlikely.

    Moody’s Analytics has constructed a “Back-to-Normal Index,” which tracks real-time economic data, such as restaurant bookings, the number of people flying, and initial claims for unemployment benefits. At the national level, there is little sign that the variant is affecting these statistics, Zandi told me. However, the index has dropped in some hard-hit states, such as Florida, where case numbers are rising fast and the number of hospitalizations has returned to levels last seen in February. “Six or eight weeks ago, Florida had completely recovered from the pandemic: the index was back to one hundred,” Zandi said. “Now it’s moved back to the low nineties. That’s consistent with the idea that the Delta variant is having some impact.”

    Ian Shepherdson, the chief economist at Pantheon Macroeconomics, pointed out that many of the states where the Delta variant is spreading rapidly are low in both population and G.D.P. “To move the needle on a macro level, things will have to get a lot worse,” he said. “I’m still bullish on the second half of the year because I don’t think Delta is going to go exponential nationally. If it just moves up fairly steadily, and it doesn’t lead to a big wave in hospitalizations, I think most people will be fairly relaxed about it, and won’t change their behavior much.”

    Shepherdson, who works in both the United States and Britain, pointed to the example of the United Kingdom. The number of infections has increased dramatically since the start of June, particularly among younger people, but the number of hospitalizations and deaths has remained fairly low. Last week, the British government lifted nearly all of its COVID restrictions, which led to scenes of jammed night clubs and bars. “Most people still wear masks in shops, but they go out and spend,” Shepherdson said. “The general attitude is, I might get it, but it’s not going to make me really sick. After sixeen months of this, many people have had enough.”

    As the Delta variant continues to spread on this side of the Atlantic, many Americans may adopt the same attitude. But Shepherdson also noted that it’s possible to build “a more negative scenario” for the United States. In the places where Delta-variant cases are multiplying fastest, far fewer middle-aged and older people have been vaccinated than in the United Kingdom, which makes the situation potentially more dangerous. Also, there is much less testing in this country, which makes it harder to know what’s really happening. On a per-capita basis, the number of tests being carried out in the United States is one-eleventh of the figure for Britain, Shepherdson said. “I can say right now Delta isn’t a big macroeconomic issue, but it can go from zero to sixty really quick,” he added.

    Both economists said that a key moment will come in a month or so, when schools are scheduled to reopen across the country. The forecasts of rapid employment growth in the second half of this year hinge on many more parents, particularly women, returning to work as child-care concerns ease. Over the past twelve months, Shepherdson pointed out, there has been virtually no change in the labor-force participation rate of females aged thirty-five to forty-four, and the participation rate of women older than fifty-four has actually fallen a bit. “The reopening of the schools potentially brings a lot of people back into the labor force,” Shepherdson said. But if a surge in COVID prompts school boards in large population centers to reintroduce remote classes, that scenario could be upended.

    Zandi said that the possibility of further school closures, or partial closures, is just one example of how a COVID-19 resurgence could stunt the longer-term growth of the economy. As the Delta variant spreads in other parts of the world, particularly Asia, it could accentuate problems in the global supply chain, which are already affecting the industries behind products like cars and semiconductors. And, on the demand side of the economy, the rise in cases could undermine the confidence of consumers and business leaders, which has rebounded sharply since the depths of last year. “It puts into clear relief the fact that the pandemic is still here—is raging in some areas,” Zandi said. “And why would this be the end of it? There will likely be other variants. We are in an arms race with the virus.” For reasons of both economics and public health, he added, policymakers should take steps to arrest the rising case numbers. “I would go back to the mask mandate, particularly in urban areas, for things like ball games, mass transit, and large gatherings. It would be prudent to be cautious here.”

    Over all, the message from Zandi and Shepherdson was somewhat reassuring. But both of them emphasized that the Delta variant has added a lot of uncertainty to the economic outlook, and raised the risks to the downside. The darkest economic scenario is the one that Zandi alluded to: the emergence of another highly contagious strain of the virus, one that is more deadly and resistant to vaccinations than the Delta variant. Assuming that doesn’t happen, the economic recovery seems set to continue, but talk of another “Roaring Twenties” was premature, at best. “I think the chances of the economy really taking off are fast diminishing,” Zandi said.


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    Action on climate change can provide a shot in the arm for the global economy, economist says – CNBC

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    An employee with Ipsun Solar installs solar panels on the roof of the Peace Lutheran Church in Alexandria, Virginia on May 17, 2021.
    Andrew Caballero-Reynolds | AFP | Getty Images

    Ramping up investment in policies and technologies to tackle climate change could play a significant role in the global economy’s recovery from the coronavirus pandemic.

    In a recent note, Charles Dumas, chief economist at U.K.-based investment research firm TS Lombard, said that action on climate change is often criticized as moving too slowly. However, with governments increasing spending to aid their post-Covid economies, they may start catching up. 

    A key tenet of this is the ever-decreasing cost of electricity per megawatt hour, according to figures from TS Lombard, with costs of solar, offshore and onshore wind dropping over the last 10 years, while gas and coal have remained largely the same.

    “Effectively by 2030 the cost of renewable electricity is going to be half that of coal and gas sourced electricity,” Dumas told CNBC.

    These trends will bring many of the various pledges to reach net zero more closely in sight.

    The fatal floods in Germany in recent weeks have put the impacts of climate change firmly in the spotlight again but they are only the latest in a series of devastating extreme weather events of late, including the sprawling wildfires in Oregon.

    COP26 priorities

    Amid this backdrop, the United Nations Climate Change Conference, better known as COP26, will meet in Glasgow in November. It will mark one of the most significant multilateral meetings on climate since the Paris agreement.

    Dumas said that as COP26 approaches, governments need to understand their key priorities, and among them should be infrastructure investments as numerous technological and engineering challenges continue to obstruct renewable energy.

    “I think the intermittency problem is pretty serious and it’s not just that the sun goes down at night,” Dumas said.

    In the case of solar power, output can be mixed depending on the location of infrastructure like solar farms.

    “There’s huge variation with sunny days in winter and sunny days in the middle of summer so the intermittency takes on a very big seasonal aspect,” Dumas said.

    “You can have vicious weather for a long time in the middle of December or January and lo and behold you wouldn’t want to be depending on solar power.”

    Energy transmission could be another bottleneck, he said. While the developing world, including several African nations, has great potential in developing sites for generating solar power, that power needs to move easily.

    “The issue of transmission technology is really major. If you want Chad to be the new Saudi Arabia, because of the Sahara Desert there’s a lot of sun there, but you want the electricity to be used in Europe then you’re talking about some expensive processes and processes needing a lot of research and a lot of further investment.”

    Storage and carbon capture are all areas that require hefty investment, Dumas added, if governments are to reach their net-zero targets.

    “What we need is a very clear public policy lead in order to get anywhere near these net zero promises and I suspect that actually what it’s going to be about is a carbon tax, which the Americans may resist but will be necessary,” he said.

    Job creation

    Paul Steele, chief economist at an independent policy research institute called the International Institute for Environment and Development, said that climate action and renewable energy investments will serve the dual purpose of tackling the climate crisis while creating jobs for the post-Covid economy.

    “One of the priorities coming out of Covid is to create labor intensive employment. Both in developed and developing countries, you can provide labor intensive employment through renewable energy,” Steele said.

    One example, he said, was the retrofitting of boilers in homes in the U.K., which would help push the country toward its climate targets and create new jobs while being relatively inexpensive in the grand scheme of things.

    Steele said that investments to drive a climate-friendly economy cannot be short term or have quick goals.

    He pointed to the various government support schemes for the airline industry, which has been battered by the pandemic. Just this week, the European courts gave the nod to a $2.9 billion bailout for Air France-KLM’s Dutch business.

    Bailout funds like these should be tied to sustainability commitments by the airline industry, he said, but that can be a dicey proposition to get over the line.

    “Governments aren’t making the connections enough and traditionally treasuries and particularly the ministries of transport are still dominated by road building lobbies and people who like to build highways and increase transport rather than people who want to invest in sustainable alternatives.” 

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