The incoming greatest depression since World War II

Chan Kung

Think tank predicts global doom and gloom caused by COVID-19 pandemic

With the spread of the Novel Coronavirus (COVID-19), extreme locking down measures have been ongoing in various countries. Poland, previously eager towards the European Union, has now taken drastic measures to shut down its roads and cut off its frequently used highway network connecting to the rest of Europe. The United States and European countries, and most of the Asian countries as well, have all imposed locking down measures and closed their borders, refusing entry to foreign nationals. These measures are all unprecedented. Such closure and isolation actions have paralysed the entire world and caused the global economic situation to change dramatically. Every day we see new developments in the situation.

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In the United States, many are frightened by the turmoil on Wall Street. At first, it was thought that the market would return to normal the day after the crash. This was especially true after the Federal Reserve’s intervention, when people became optimistic that this would not be a financial crisis. It wasn’t until after seeing successive slumps that people realised things were turning ugly. Almost suddenly, the US stock market had fallen by one-third and global liquidity had suddenly tightened, while the US dollar exchange rate has been continuously hitting new heights. In the United States, the pandemic has just entered the outbreak phase, and the number of cases is still breaking records, causing widespread tension and crashes on Wall Street. As the COVID-19 outbreaks in the US territories and states become worse, many US politicians are basically in a condition of mental breakdown. To curb the spread of COVID-19, the US government has ordered millions of workers, students and consumers to stay behind closed doors, resulting in a surge in unemployment claims across the United States.

In Ohio, more than 48,000 people applied for jobless benefits in the first two days of last week. In the same period the week before, there were only 1,825 people. In Pennsylvania, about 70,000 people sought unemployment assistance in one single day, which is six times the total of the previous week. As more people apply for jobless benefits checks, a new problem arises. Treasuries in the US are in a state of collapse. Whether the different states have enough funds for the government to weather this unemployment wave until the end of the crisis is very questionable. Many people are wary that the demand for aid will exceed the ability of the states.

“Our unemployment insurance fund is getting hit pretty hard right now,” said Governor Gina Raimondo of Rhode Island. In Rhode Island, 18,000 jobless claims related to COVID-19 have been received in a week. Raimondo, a Democrat, said that Rhode Island needs funding and wants the federal government to help. Just as Pennsylvania finally repaid the last payment of the multi-billion-dollar bond issued in 2012 in January this year, settling the unemployment fund debts from the last recession, now new troubles are rising. In Tennessee, the number of new unemployed applicants has doubled. Michigan’s unemployment insurance agency said on March 18 that they received more than five times as many unemployment applications as normal; Minnesota said it received more than 2,000 unemployment applications per hour, compared with usually only 40 or 50.

The actual situation may be even more serious because the current order to avoid gathering has made the application of benefits more complicated. Some states’ unemployment offices have been closed to the public. Each state has transferred a large part of unemployment application processing from the office to online, or by phone. New Jersey Governor Phil Murphy said the state’s Department of Labor and Workforce Development website had crashed because there were simply too many applications for unemployment last week. Governors and lawmakers in many states have moved swiftly to make it easier for citizens to get unemployment benefits. Kansas lawmakers quickly passed legislation on March 17 that removed the time limit for benefits to begin to be paid after a week of unemployment and extended the benefit period from 16 to 26 weeks.

The symptoms of the COVOID-19 pandemic are not just respiratory agony but also fear of wage cuts, job losses, empty shelves from panic buying and economic collapse. AFP

The economic stimulus package proposed by the Trump administration may be close to $1 trillion, including issuing checks to US citizens within weeks to help them pay for food, bills, mortgages and rent. The Senate approved another bill on March 18 that will inject US$ 1 billion into the state unemployment insurance plan. However, efforts of this size may not be able to solve the problem. The last recession caused the unemployment trust funds of 35 states to go bankrupt. In order to pay the wages of unemployed workers, these states had to bear more than $40 billion in debt. Many states have increased taxes on employers in order to pay their debts and some states have reduced the amount and duration of benefits for future unemployed to make it difficult. Goldman Sachs estimated that to initially resolve the current problems in the United States, trillions of dollars will be needed. As of now, the US federal government’s assistance will almost certainly exceed the “Great Recession” of 2008. As for the future US economy, more and more economists believe that it may enter or has already entered the first recession since 2008. .

The actual deterioration of the global economy will not be solely felt by the United State. China, too, will not be exempted

China, like the US, is the world’s largest economy and also faces the impact of the viral outbreak. The number of cases in China is almost four times that of the US and the number of deaths is 12 times that of the US. The impact of the COVID-19 outbreak has been far more severe in China than in the US. Despite China and the US having different economic structures, industries, levels of wealth and living standards, the macro scale of the impact on the US economy can still be compared with that of China. If the US needs trillions of dollars to put its economy on a sounder footing, China’s needs shouldn’t be much different. If anything, perhaps the biggest difference is that the US can still “print the notes and let the world pay the bill”, while China can only pay its own bill, thanks to a delayed internationalisation of the yuani and an imperfect bond market.

In fact, China’s economic and financial situation was facing huge difficulties even before the outbreak began.

China’s economy as a whole is still on a downward trajectory. From 2013 to 2019, China’s economic growth rate over the years were 7.7 percent, 7.3 percent, 6.9 percent, 6.7 percent, 6.5 percent and 6.1 percent, respectively. Even under “new normal” circumstances, the economy has continued to slide. Such a situation is far from comparable with the economic resilience during the SARS outbreak in 2003. Although the Chinese economy was greatly affected by the SARS outbreak, the Chinese economy was taking off at that time and investment, consumption and export were doing well. There was no big problem in the world market. With the support of external demand and the continuous transfusion of foreign funds, China was able to recover quickly, and the economic growth rate of the whole year still reached 10 percent in the end.

In the field of government finance, the central government has already had a budget deficit and now it is even worse. The finances of local governments are also very difficult. In 2019, the fiscal deficit of first-tier cities such as Beijing and Shanghai were respectively 102.3 billion yuan and 40.8 billion yuan. Even in the golden period from 2007 to 2016, the local budget balances were also negative. In 2019, many of China’s so-called economically strong provinces have fiscal deficits; Guangdong’s fiscal deficit was 341.8 billion yuan, Sichuan’s was 535.3 billion yuan, Jiangsu’s was 236.7 billion yuan, Shandong’s was 302.1 billion yuan, Zhejiang’s was  190.9 billion yuan and that of Hubei, which was greatly affected by the epidemic, was  348.7 billion yuan. Now many local governments are relying on mixed-ownership reform, i.e. the purchase and sale of shares in state-owned enterprises. In fact, it is supported by spending local governments’ entire assets, with non-tax revenues in support. In short, the local financial burden is already heavy to the point of despair.

On the other hand, the business and household sectors are also facing a similar issue. A euphemism for S&P Global Ratings is that Chinese companies have little room to grow their debt, but will be less profitable than in the past few years. In other words, the pressure facing the business sector is greater. So far, the debt-to-GDP ratio of Chinese government, enterprises, and households as a whole have exceeded 300 percent and reached 303 percent. China’s manufacturing purchasing managers’ index (PMI) plummeted to 35.7 percent in February 2020 because of the epidemic, down 14.3 percentage points from the previous month, according to the National Bureau of Statistics. In fact, China’s economy is already teetering on the edge because of the restrictions on land and real estate transactions, which are tantamount to a limited source of capital. China made concessions in its trade war with the United States to preserve its overseas markets and maintain its current economic growth, but now that the outbreak has occurred, even without a trade war, its overseas markets have fallen. The Chinese overseas exports of currently much-needed products, such as masks and ventilators, cannot solve the problem at all, let alone the fact China needs them for its own use. Therefore, such products cannot be effectively exported and maintain China’s export market share.

Just like the situation in China, other Asian and also European countries have little room for optimism. The number of the outbreak cases in Europe has been on the rise rapidly and death toll similar to China is being experienced by Italy. Forced by the situation and facing condemnation from many, blockades between European countries have basically been fully implemented. A tide of unemployment and bankruptcy is emerging, the economy and markets are also on the verge of collapse.

Therefore, considering the continuation of the current global pandemic, the results are pessimistic. Facing the epidemic situation, under the tremendous pressure of public opinion, every country has implemented extreme measures despite knowing it is impossible and, even if it can hold up until the end of this summer, it will still lose half a year. In these six months, the population of 1 billion people in the developed markets will stay at home; 850 million students will remain suspended from school and the world economy will be essentially stalled. Obviously, countries around the world currently have greatly underestimated the impact of the epidemic. Imagine that in these six months, everyone in the world will not be working, or will be having “holidays”, many value-generating industries such as tourism and service industries will be still ongoing and there would still be consumption, but not during the lockdown worldwide. If this situation can still produce good results and the world economic order returns to normal, it will simply be a miracle. Of course, we do hope that miracles will happen and the virus might gradually disappear when summer comes, but it is very likely that miracles will not happen on the economic level and heaavy losses are certain, which means that the greatest depression after World War II will likely occur.

For China, what needs to be warned is that, just a few days ago, China might still blame countries around the world for not taking drastic measures and failing to do a good job to prevent and control the outbreak of the virus. However, it may not take long and soon it will be forced to change to require these countries to open their boundaries and restore and stabilise economic order. No one can afford to drag on like this and all economies would start to collapse. What is more terrible is that the authorities in the global medical community do not dare to guarantee that this virus will not make a comeback at some point in the future. This alone means that the entire world is in a deep environmental crisis.

All these have exposed the fragility of the world economy and it is difficult for any country in the world to survive alone. Some people may have witnessed the Wall Street stock disaster in 1987, some have seen the Asian financial crisis and some have experienced the subprime crisis in 2008. These moments of crisis cannot be compared with the global depression that is about to occur. This is the biggest post-war depression, and now is the time for us to pray.

Chan Kung founded Anbound Think Tank in 1993 and is now China think tank Anbound’s chief researcher

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