Life in the time of an economic pandemic
“I still think we are going to have the worst recession since the Great Depression”
— Mohamed El-Erian, Allianz, Chief Economic Adviser
“While there is never a good time for a pandemic, the Covid-19 crisis has arrived at a particularly bad moment for the global economy. The world has long been drifting into a perfect storm of financial, political, socioeconomic, and environmental risks, all of which are now growing even more acute.”
— Nouriel Roubini, economist
I first read Gabriel García Márquez’s One Hundred Years of Solitude 35 years ago, and I was transfixed. It was the greatest work of fiction I had ever read. And over the decades I had read just about everything I could get my hands on.
This was followed years later by his other seminal work, Love in the Time of Cholera. The book explored the romantic lives of characters set against the backdrop of a cholera epidemic.
Márquez, a Nobel Prize winner, was a true artist. I mourned his loss to the world. He had the knack of making the fantastical and the real coexist on the page in a way that it all seemed so natural. His imagination was transcendent.
I imagine how he would write about this viral pandemic. Covid-19 and the human stories it has unleashed would have been tailor-made for the man who made the supernatural natural while exploring the inner rooms of human consciousness.
They described his style as magical realism. He had few masters when it came to writing about the affairs of the heart, the paradoxes that inform life or the depths of downright despair. And always in the background accompanying his work were the fates — at times magical and at times exceedingly cruel. Just like now.
A Great Depression Redux
Everyone has become, it seems, a prognosticator as to how this will evolve over the mid to long term. Theories including the most bizarre conspiracies abound. But no one really knows how this will play out with any reasonable specificity over the long term.
However, there are signs as it relates to the short to midterm impact coming from credible voices asserting that the economic damage arising out of this crisis will make 2008 look like a tea party.
In 2008 we do know that the ability of Western and/or developed nation central banks, such as the Federal Reserve in the United States, in opening the floodgates to abundant credit via monetary policy precluded the possibility of a repeat of the Great Depression of the 1930s.
The same process appears to be the case now, but on steroids. The Fed led the way very early in this thoroughly global crisis in an extraordinary example of largesse that far exceeds the amount of liquidity it pumped into the financial system in 2008.
Coupled with the trillions passed by the US Congress at the fiscal level, the American response has been extraordinary and yet it is still viewed by persons, including the chairman of the Federal Reserve, Jerome Powell, as being inadequate as long as the viral pandemic and the economic pandemic it spawned remain tied at the hip.
The economist Miguel Purroy, who is also a director of Hotelco, which is developing the St Regis resort in St George’s, described in this paper the Fed’s actions as showering “helicopter money” at the systemic level in terms of monetary policy.
The European Central Bank initially pumped 750 million euros into the eurozone in March, which was a more circumscribed commitment, and is now seeking to do much more — even to the extent of breaking monetary taboos with respect to the north-south divide in the EU.
Britain and Japanese central bankers have largely followed suit. There has been no banking collapse yet. But as Nouriel Roubini has warned, the deflationary pressures that have existed since 2008 have been exacerbated enormously.
Disney has seen demand for its signature theme parks totally disappear by way of the deflationary spiral causing overall revenues to fall by 90 per cent.
The damage to economies globally has been significant and will continue to produce economic dislocation, massive unemployment and social harm on an epic level.
Is a global economic depression likely or even already upon us?
Ian Bremmer, of the Eurasian Group, recently answered in the affirmative. Others are prepared to say that we are not there yet, but all the road signs globally — Bermuda included — are pointing in that direction. The worst recession since the Great Depression as per the comments of Mohamed El-Erian? Certainly, that is now irrefutable.
The Disunited Kingdom
The United Kingdom’s Office for National Statistics stated that data indicates that the first quarter of 2020 shows Covid-19 will easily eclipse the 2008 crisis there. And according to them, the “ … worst damage is yet to come”, as the country broke all records for monthly gross domestic product decline — 5.8 per cent — and did so in only two weeks.
That feat accordingly took 12 months to occur during the first year of the previous recession in 2008. The Guardian newspaper reports that in essence the UK is experiencing the worst recession it has had in 300 years.
Incredulous? Don’t be. Lloyd’s of London, with strong ties to the Bermuda market, now predicts the biggest losses perhaps ever in the modern era for those in its syndicate.
The American Picture
Early on in the US alone, there were predictions that the country would approach the 20 million unemployed mark. These predictions were not unfounded, as that figure was achieved more than four weeks ago. The unemployment figure now stands at 36 million. Fed chairman Powell has not ruled out unemployment going to 25 per cent at its peak, which would rival the Great depression.
To place this in perspective, the 36 million who are now unemployed in the US were gainfully employed only nine weeks ago. As in many countries, though, with the phased reopening of economies globally, significant numbers will return to the ranks of the employed, but no one who is credible would suggest that the unemployment now affecting millions globally, and thousands of Bermudians, will not persist. The only question is by how much and for how long.
Morgan Stanley, the US investment bank, has forecast that American GDP will likely fall 30 per cent for the period April through June. Additionally, there has been a concerted effort by an increasing number of US states to bring legislation that will retroactively impose liabilities on insurers for business losses in the context of the pandemic that were not covered by existing policies. These claims that they are seeking to impose, if ultimately allowed by the courts, would represent billions of dollars that will seriously impact the bottom lines of insurers and reinsurers in all of the major markets, including Bermuda.
The Bermuda Impact
Correspondingly, our finance minister, Curtis Dickinson, has forecast a decline in GDP for Bermuda of between 7.5 per cent and 12.5 per cent, and a reduction in revenue of $200 million. This economic pandemic may affect all of us long after the viral one has been brought to heel. Even a vaccine that would essentially free us from Covid-19’s malevolent embrace is not a done deal, although optimism is growing that it will be deliverable sometime in the next 12 months.
It is an extremely complex process. How many years have we been waiting for the promised vaccines to combat dengue fever and HIV-Aids?
Bermuda has registered nine deaths, including a modest number of those infected to date. We are also ranked tenth globally in testing per capita. Our government — led by the Premier, David Burt, and health minister Kim Wilson — deserves to be commended for the job it has done in leading the fight to contain the spread of the disease.
The Premier, too, was wise to make this a largely bipartisan effort by reaching out to the Opposition, the One Bermuda Alliance, early in the crisis and keeping it in the information loop.
Social-distancing v Social Engagement
Returning more specifically to the economy, let’s be clear we have or, perhaps, had up until about 15 weeks ago a consumer-based, service-based economy that at its core relied on social engagement in a physical sense as opposed to what we have now with social and physical-distancing. It relied on consumer demand for goods and services, conspicuous consumption and forms of economic exchange that are largely not available at this time. Consumer demand, the lifeblood of this economic system along with abundant credit, ideally, has cratered with a major global deflationary cycle being a big risk as outlined by Roubini.
Therefore, social-distancing in a physical sense as an ethos and in terms of an act that most of us are at times struggling to conform to is the direct antithesis to the types of social engagement that have been a fundamental reality and precondition of our market-based, consumer-oriented economy.
Only recently, the chief executive of Heathrow, by way of example, acknowledged that he does not see how social-distancing can work at airports worldwide. Apparently, it does not work for Uber, either, for the time being at least, with revenues down 50 per cent and 3,000 employees let go. Neither will it support the traditional business models found in so many other business sectors.
The losers, though, are clear: hospitality (tourism, restaurants), bricks-and-mortar retail and travel, specifically the cruise ship industry and airlines. Industries providing live entertainment, including professional team sport, musical events and the myriad of supply chains that make those businesses tick are also at great risk.
It is the so-called experiential side of our consumer-based, globalised economy, which has been the fastest growing along with tech over the past couple of decades, that has been impacted the worst by the viral pandemic.
The Final Word: Travel Anyone?
Would any of you, for example, bet on our cruise ship season returning for a full season before 2021? If we are lucky? Moreover, will we even return before next year to the levels of airlift we enjoyed only 20 weeks ago?
Bermuda Day has already been cancelled, but will there still be a Cup Match? If you answer yes to any of these, I would characterise you as a reckless optimist.
In 2019, Bermuda saw a combined 808,000 visitors, the most ever recorded. Most of them, of course, came off cruise ships with the remaining leisure visitors, some 191,417, arriving via air travel (source: BTA).
That industry has now totally collapsed. Tourism will go from representing 8 per cent of our GDP to somewhere south of that. Hopefully, not Tierra del Fuego south, but south enough. And we will see a tremendous fall in visitor spending, which last season stood at $419.3 million.
Those two outcomes are unavoidable, although tourism minister Zane DeSilva is working tremendously hard to jump-start what has become in effect a moribund industry
As we move forward, countless businesses in Bermuda, small to medium and some fairly large, will not be able to survive.
In part three of this series, I will examine the fairly substantial numbers of mostly low-skilled foreign workers that may have to be repatriated over the coming weeks as the summer rolls in, and the Government continues its seemingly Herculean task to re-engineer Bermuda’s economy.
The biggest job will be preparing Bermudians to confront the sheer enormity of what will confront us, including that these kinds of existential crises always leave a humanitarian one in its wake.
• Rolfe Commissiong is a government backbencher and the MP for Pembroke South East (Constituency 21)
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