March 23, 2020, Interview with Argumentum magazine of Albania on the Economic effects of the Coronavirus

Interview of Les Nemethy by Argumentum.

Mr. Nemethy, thank you for giving us the possibility to have your opinions, and at the outset, please, what can you say on the economic impact of coronavirus pandemic worldwide and the forecast for the future because everyone is asking?

The situation does not look good.  We have multiple crises occurring simultaneously:  A health crisis, an economic, financial and liquidity crisis, an oil/energy crisis, and in some countries, a leadership crisis.  

On the economic side, the shock is both to the supply side (as staff become sick or go into quarantine) and to the demand side (falling orders, people with less purchase power due to lost jobs, etc).   

Insofar as investors are concerned, there is nothing worse than uncdertainty, so in most areas, investment is grinding to a halt.  Forecasting is difficult at the best of times. As the saying goes, “forecasting is difficult, especially the future!” But here forecasting is much more difficult than usual, as we have no idea as to the course of the disease.  Perhaps when COVID-19 cases enter a sustained decline one might venture a forecast. But take China as an example: cases have gone down, but the country may experience a second wave of the virus; it is also a highly export driven economy, and exports will remain virtually impossible to forecast.

I think it is safe to say that the first half of 2020 will see an unprecedented decline in global GDP, both globally and in virtually every country.   Goldman Sachs for example has forecast a US GDP decrease of 24% for Q2, and another forecast recently predicted 30% unemployment in the US.  

My own view is that forecasting the beginning of a recovery s will very much depend on the course of the virus.  This is not your typical case of econometric forecasting. Forecasting depends on the assumptions made by the forecaster.  I am sure, for example, that there were assumptions underpinning the Goldman forecasts, but things are so volatile, so fluid, the chances of those assumptions being accurate are low.

– Which are the economic and financial implications caused by this situation and what hurts more the economies, consequently people’s wellbeing?
As you know, there are certain industries which have been very severely affected, like hotels, restaurants, airlines, automotive, but even shopkeepers, dentists, masseurs, etc.  These and other activities are experiencing a temporary shutdown and will see massive layoffs. This creates a multipier effect, which reverberates through the economy.  

Unfortunately, the world has much more debt today, even as a percentage of GDP, than during the 2008 crisis.  In other words, neither Governments, corporations nor individuals learned the lesson of the 2008 crisis, and at each of these three levels, we will likely be experiencing high levels of bankruptcies throughout the world, which in turn creates additional supply and demand side shocks.  This potential domino effect forces Governments to intervene.

Governments are already rolling out massive interventions.    In different countries, different solutions are being applied.  As this article goes to press, the US is considering an unprecedented $4 trillion stimulus package. In the US, every adult will receive $1000 or more.  In the UK, a guaranteed income scheme may be adopted. Hungary and Croatia have allowed debt moratoriums on personal and corporate debt. These steps are likely to be just the first of even larger Government interventions.  

These interventions will dramatically increase Government indebtedness and monetary supply.  This will, in the long run, diminish the purchasing power of our currencies, (you will have much more money chasing fewer goods).

– Is the world threatened by a recession, and given the anti-Covid actions taken, particularly by big powers, how long can it last and at what price?
Economists in most major countries are in consensus that a recession is already upon us.  The collapse in financial markets rivals that of the 1929 crash. How long it lasts will depend on what strategy is adopted for fighting the disease and how long the COVID-19 is with us.   

It is ironic that to fight the disease, we have to inflict damage to our economies (e.g. by ordering lockdowns).  The more severe the lockdown, necessary for fighting the disease, the greater will be the economic contraction in the short term. Assuming that these lockdowns are successful, it will be at least several weeks before we begin to see declines in the number of cases and deaths.  The price will be enormous, as of today still unquantifiable.

– According to your estimations Mr. Nemethy, the economies of which countries will be hit most, and secondly which are the implications for Albania, a Balkan country which you know very well in every aspect?
I hope that Albania immediately adopts a vigorous strategy of virus suppression, and does not satisfy itself with mitigation.  In other words, social distancing is necessary, but insufficient: test extensively, ensure that people stay home for the next few weeks, and shut down avenues of contagion (e.g. trace and quarantine people who were in contact with know victims). 

Albania, being a small export driven economy, will not be able to escape declines in export, inbound tourism, etc.  Albania’s major export markets in Western Europe, such as Italy, Germany, Spain, etc. are being hit extremely hard by COVID-19.

– After a hopeful resumption of life as normal how do you see the global economic picture of the world? Will the current global economic order remain unchanged or it can be redesigned?   
The economic contraction shall be so large, that it will be a challenge to regain our activity.  Every restaurant or hotel that re-opens will be a challenge and a struggle. The economy will not just bounce back of its own accord;  it will be a slow, arduous, step-by-step struggle to recover.

It is very likely that the post coronavirus global order will emerge changed from the pre-coronavirus global order.  Global political and economic systems are under huge and ever increasing pressures, and like a tire that is under too much pressure—blow-outs are likely to occur.  It is very difficult to predict how these might occur: might a currently authoritarian Government like Russia, China or Iran experience its “Chernobyl moment”, where the population no longer tolerates authoritarian regimes?  The need for quick decisions may trample over our civil rights.  

I am particularly worried that the US and major Western European countries have postponed testing, mitigation and suppression of the disease, hence may be hit extremely hard by the virus.  May this tempt an opportunist authoritarian leader to undertake a land grab?  

Every country will also be facing momentous internal moral decisions, which may shape societies for generations to come.  Do we sacrifice individual freedoms to allow artificial intelligence to track and combat the disease? If so, what checks and balances do we put in place?  Do we suspend constitutional rights (as the US Department of Justice has recently suggested?)  

And we have to decide who we subsidize.  Does the US bail out airlines and other companies that have been using cash to buy back shares and enrich shareholders since the last recession?  Or does the US Government ensure free medical care, even for that 10% or so of the population that has no entitlement to medical programs or insurance?  

Every country will face similar decisions. These are moral questions that will define the future shape of our societies, and determine whether income disparities continue to increase.  

– Mr. Nemethy, is there anything else you would like to say to our readers?
Despite all the pessimism, I would like to end on a positive note.   One should hope for the best and prepare for the worst. Any interviewee would be shirking his or her responsibilities in answering your questions if it did not motivate people to prepare for what is potentially a very negative short- to mid-term scenario.  

I am an optimist by nature, at least about the long-run. I believe there is a good probability that 18 months from now we will have put COVID-19 behind us, and that we will once again be on a path of economic growth (albeit from a smaller base of economic activity than existed in 2019).  This is thanks to the power of science. There is a race among at least 20 vaccines under development, the first of which may come on stream as early as the second half of this year. A vaccine would help build what is known as “herd immunity”, that is to say, enough people are resistant to the virus, that the virus cannot spread. That herd immunity could also be built by approximately 60% of the world’s population contracting COVID-19 (with many millions of deaths), or by way of vaccine. But it would be far better for a vaccine to provide herd immunity.  Herd immunity is the only way to end the uncertainty. Hence it is a race against time for a vaccine.  

Once a vaccine is in place, we have to prepare for the next bug or virus.  It is amazing how complacent corporations and Governments were over the past years in cutting funding for virus research.  We must not let that happen again.  

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