Argus Chief Economist David Fyfe considers more broadly the changes this cruel coronavirus episode might force upon international commerce, global relations and the commodity markets.
It’s all too easy to be overwhelmed by the current global crisis, and this episode of “From the Economist’s Chair” takes a step back from the day-to-day maelstrom of likely crude oil price floors, inventory capacity, ultimate demand loss and upstream budget cuts. What shifts may be ahead in the global economic and financial system as a result of this pandemic?
Welcome to this “From the Economist’s Chair” podcast and blog from Argus, a leading independent provider of energy and commodity price benchmarks.
I’m David Fyfe, chief economist with Argus Media, and it’s the week of March 23. Today I’ll be taking a look beyond the maelstrom: how might coronavirus alter markets?
It’s all too easy to be overwhelmed by the current global crisis which, as well as being a human tragedy, is also providing market commentators (your podcaster included) ample scope for hyperbole. For once however, the phrase “things may never be the same again”, looks apposite.
Making any kind of point forecast at a moment such as this looks like a fool’s errand. Of course, Argus — just like fellow analysts, banks and consultants — will continue to produce its regular stream of projections and analytics to help decision-makers assess possible outcomes amid unprecedented levels of uncertainty.
Nor is any criticism of the forecasting profession intended by an observation that any market outlook produced in the first-half of 2020 may inevitably have a fairly short shelf-life. Few analysts or investors are successful in trying to “catch a falling knife” — a metaphor surely made specially for today’s economic, financial and commodity market melt-down.
Nor should forecasters be criticised for shifting their view at times like these: The economist John Maynard Keynes is credited with saying “When the facts change, I change my mind. What do you do, sir?” Everyone’s expectations for the epidemic, for the broader economy, and for the commodity markets will therefore change beyond recognition in the months ahead, as more information about potential end-games becomes available.
So rather than attempting the impossible here, I’d like to stand back from the day-to-day maelstrom of likely crude oil price floors, inventory capacity, ultimate demand loss and upstream budget cuts to re-state some things we do know about the epidemic and its impact, but also to think more broadly about the changes this cruel episode might force upon international commerce, global relations and the commodity markets.
At the time of this podcast, in the fourth week of March, infection with COVID-19 has been confirmed among some 82,000 people in China, although case numbers have broadly stabilised since early-March. Unlike some of the liberal democracies, China was able to impose virtual lock-down quite quickly to help control the spread of the disease internally. The death toll in China aligns with the global average level at around 4pc.
It is outside of China that coronavirus is now growing exponentially, with reported cases increasing by around 15pc per day and the total is rapidly approaching 280,000. However, in reality, the total numbers infected are likely many times that number. On the one hand, this suggests that reported mortality rates are an exaggeration of the true situation. On the other hand, national health facilities risk being overwhelmed by many millions of ultimate cases.
Put simply, as the time lag for both mass vaccination and nurturing population-wide immunity may be a year or more, this is a phenomenon that will affect mobility, education, employment, industry, trade and the commodity markets for many months to come. It’s possible the initial international peak in infection and mortality may recede in the second half of this year, but the trick then will be to avoid a resurgence in cases next winter. Government intervention to control that spread may therefore also prove long-lived.
More optimistically, a narrow consensus of commentators today sees the hit on the global economy shaped rather like the letter “U”, with activity levels picking up again after mid-2020. Even if that proves to be the case, and there is a sharp recovery in economic activity in the second half of this year, the loss accruing to the global economy from effectively six months of recession could be at least 2-3 trillion dollars. On top of that, governments and central banks worldwide are enacting emergency fiscal and monetary stimulus programmes, themselves equivalent to many trillions of dollars more.
It’s interesting to note that China’s GDP loss this year could be 700-800 billion dollars, with the potential US GDP shortfall at around 400 billion. That latter figure, coincidentally, is equivalent to 2019’s US trade deficit with China. It rather begs the question, when this is all over, how long until the blame game begins?
Those who thought the preliminary trade deal reached between Washington and Beijing at end-2019 somehow marked a potential thaw in relations might be in for a disappointment. Of course, the US economic recession, now near certain for first-half 2020, could scupper a widely predicted return of President Trump to the White House next January. But it would be foolish to think that a Democratic President would soft-pedal in post-coronavirus relations with China either.
COVID-19 may therefore potentially re-ignite international geopolitical tensions, lead to demands for reparations and also (depending on government success in combatting coronavirus) a loss of faith in national governments in some countries. The episode may also re-enforce a tendency - in the developed economies at least – that has become increasingly apparent over the last decade: namely de-globalisation, or to paraphrase the French expression, “re-localisation”. After all, with international borders temporarily closed, nation states are being forced to become much more self-reliant.
Environmental activists and political nationalists may initially look like curious bed-fellows (figuratively speaking of course, given today’s social distancing imperative!) Ironically however (and forgive the over-simplification), both groups agitate for greater reliance on local industry and less dependence on international trade. The motives may be different, but a common aspiration seems to be for a return to an earlier, less interconnected and less inter-dependent world. It’s no coincidence that some within these groups also tend to support massive state financial intervention in support of their policy goals.
Is one potential “silver-lining” to the heavy cloud of COVID-19 therefore a completely re-modelled global economic and financial system? One in which local manufacturing becomes rejuvenated, governments intervene benignly across the breadth of national economic activity, self-sufficiency is paramount and international trade becomes much less prevalent?
Amid the many rapid, fundamental and as-yet unpredictable transformations that COVID-19 will impose on the global economy, it would be foolish to predict exactly the state-of play when this episode ends. However, nothing in modern history suggests that isolationism combined with greater state control of the means of production represents a route to greater human wealth and contentment.
The balance between the state and private enterprise may indeed shift. The doctrinaire clamour for rigid financial austerity may lessen (even if there will surely be a price to pay for today’s gargantuan borrowing). International collaboration in disease prevention and control will surely be enhanced. And, yes, the tide may partly turn on the de-localisation of key national industries seen over the last 50 years.
One element of the international economy that will remain resolutely global, and internationally traded, however, is the commodity sector. As has been noted many times before, governments can “onshore” some types of manufacturing, but conjuring self-sufficiency in the primary commodities that are building-blocks of modern life is much less easy to do. Global commodity markets will eventually recover from today’s gruelling times. And the influence of OPEC and US shale production may change from what we’ve become used to in the last decade. Nonetheless, throughout the coronavirus hiatus, and beyond, reliable, transparent commodity pricing benchmarks will be as important as ever in ensuring the availability of primary materials, the liquidity of physical flows and in minimising risk exposure.
That’s it for this episode, and thanks for listening. You can find more news and content on our website, and you can visit www.argusmedia.com/coronavirus to see more about the pandemic’s impact on markets. You can also find more podcast episodes on www.argusmedia.com/podcasts or on streaming services such as Apple Podcasts, Google Play Music, Stitcher and Spotify. Thanks again.