Australian businesses suffer, global service sectors shrink, director sentiment at record low


    ABS survey data suggests that by the end of last month around two-thirds of Australian businesses were reporting that their turnover was suffering due to the impact of the coronavirus crisis (CVC), almost two-thirds were reporting a fall in demand, nearly half had implemented some kind of workforce adjustment, and more than a third had renegotiated property rental or leasing arrangements. And about seven per cent had ceased trading as a result of Covid-19. Our own Director Sentiment Index (DSI) has fallen to a record low with directors feeling very pessimistic about the economic outlook. The RBA has reaffirmed its commitment to unconventional policies, although success in stabilising financial market conditions is allowing it to contemplate a degree of ‘tapering’ of its bond purchases.

    The early impact of the CVC manifested in a sharp slump in February’s exports of Australian services. Global service sectors are suffering from severe contractions. US unemployment claims rose at an unprecedented rate (again). This week’s readings look at how economists are grappling with the issues raised by Covid-19, the possible lessons from past pandemics, the surge in global debt, and what everyone got wrong about the toilet paper crisis.

    It’s an earlier note this week, ahead of the Easter break. So let me take this opportunity to offer best wishes to you and yours over the long weekend as we all try to navigate our way through these strange days.

    What I’ve been following in Australia . . .

    What happened:

    The ABS released the second of its surveys of businesses about the impact of Covid-19, this time based on data collected from 30 March to 3 April. The new survey covers four main areas: (1) the trading status of businesses; (2) impacts on their workforces; (3) operational impacts; and (4) management responses and strategies.

    In terms of trading status, 90 per cent of businesses reported that they were operating in the week starting 30 March, comprising 90 per cent of small businesses (0 – 19 persons employed), 93 per cent of medium businesses (20-199 employed) and 95 per cent of large businesses (200 or more employed). By sector, the share of businesses operating ranged from 96 per cent across Professional, scientific and technical services, in Financial and insurance services, in Transport, postal and warehousing, and in Administrative and support services, falling to 76 per cent in Retail trade, 69 per cent in Accommodation and food services, 65 per cent in Information, media and telecommunications, and down to just 47 per cent in Arts and recreation services.

    ABS Industry Segments

    Source: ABS. Note that area of each segment represents the share of each industry division in the total population of Australian businesses, while the figure inside the segment represents the proportion of businesses operating in the week of the survey. For example, only 47 per cent of businesses in Arts and recreation services were operating and this industry accounted for about one per cent of the total business population.

    Of the ten per cent of businesses that reported they were not trading in the week of the survey, 70 per cent reported that this was due to Covid-19. Within this group, 84 per cent attributed the pause in trading due to the introduction of government measures.

    Nearly half (47 per cent) of those businesses that were actively trading said they had made changes to their workforce (positive or negative) over the past two weeks as a result of Covid-19. A temporary reduction in working hours was reported by 25 per cent of small businesses, 41 per cent of medium businesses and 34 per cent of large businesses.

    ABS Employee Data hire during COVID

    Source: ABS

    By industry, 78 per cent of businesses in accommodation and food services made changes to their workforce, with 70 per cent temporarily reducing staff working hours, 43 per cent placing staff on unpaid leave, and 29 per cent placing staff on paid leave. In the health care and social assistance sector, 63 per cent of businesses made changes with 44 per cent reporting a temporary reduction in staff hours and nine per cent a temporary increase. And in retail, 47 per cent of businesses report changes, with 37 per cent temporarily reducing work hours and eight per cent temporarily increasing them.

    In terms of operational impacts, 66 per cent of businesses reported a reduction in turnover or cashflow as a result of Covid-19 (although several businesses reported an increase in turnover or cashflow from the online component of their operations) and 64 per cent reported a reduction in demand for products and services (while 11 per cent reported an increase in demand).

    Finally, management responses and strategies included changes to delivery methods including shifting to online (38 per cent), renegotiating property rent/lease arrangements (38 per cent), bringing forward investment plans (26 per cent) and deferring loan payments (24 per cent).

    Why it matters:

    This latest ABS snapshot of the business impact of the Coronavirus crisis (CVC) shows that by the end of March the effects were already large and widespread: around two-thirds of Australian businesses were reporting that their turnover or cashflow was suffering due to the impact of the coronavirus, almost two-thirds were reporting a fall in demand, and nearly half of businesses said they had made adjustments to their workforce, with the most common measure a temporary reduction in staff working hours.

    What happened:

    At its meeting on 7 April, the RBA Board reaffirmed its 25bp targets for the cash rate and the yield on three-year Australian government bonds, as well as the other elements of the package it had announced on 19 March this year.

    The statement provided a review of the central bank’s actions to date, noting its success in stabilising market conditions and reflecting that this meant that the scale of future intervention might not need to be as large as in recent weeks. For example, it pointed out that ‘the yield on 3-year Australian Government bonds is now around the target level set by the Board and the functioning of the government bond markets has improved.’ Hitting that target has seen the RBA buy about $40 billion of government (including state and territory) bonds in secondary markets. The statement then went on to suggest that if market conditions continue their recent improvement ‘it is likely that smaller and less frequent purchases of government bonds will be required.’ Similarly, after noting that the RBA has ‘injected substantial liquidity into the financial system through its daily open market operations to support credit and maintain low funding costs in the economy’ it suggested that, given ‘the substantial liquidity that is already in the system and the commencement of the Term Funding Facility, the daily open market operations are likely to be on a smaller scale in the near term.

    The statement provided an update on the RBA’s views on the economy, first cautioning that there remains ‘considerable uncertainty about the near-term outlook’ before going on to warn that a ‘very large economic contraction is, however, expected to be recorded in the June quarter and the unemployment rate is expected to increase to its highest level for many years.

    Finally, the statement reminded us that the RBA ‘will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band.

    Why it matters:

    No significant change to monetary policy settings was expected so soon after the 19 March set of measures had been announced, and no significant change occurred. Instead, the RBA took the opportunity to note the success of its interventions in financial markets to date, and to signal that this success might allow it to reduce both the size and frequency of its purchase of government bonds. The RBA began its buying program with a $5 billion purchase on 20 March but has brought that down to a daily rate of $2 billion.

    Australia: RBA government bond purchases

    The RBA also indicated that – along with pretty much every other forecaster – it now expects an extremely painful June quarter marked by shrinking activity and rising unemployment.

    What happened:

    The Roy Morgan Consumer Confidence index rose by 10.1 per cent last week, staging the biggest gain since the survey shifted to a weekly basis back in 2008.

    Australia: ANZ Roy Morgan Consumer Confidence

    All but one of the subcomponents rose, the exception being a small decline in ‘future economic conditions.’ ‘Current economic conditions’ jumped by 24.6 per cent, ‘Current financial conditions’ gained 8.8 per cent, and future financial conditions rose 11.4 per cent. ‘Time to buy a major household item’ was up 17.5 per cent compared to its previous drop of 23.8 per cent.

    Why it matters:

    The big jump in the index suggests that the government’s deployment of the massive JobKeeper package, plus media commentary around the possibility that Australia is succeeding in ‘flattening the curve’ have contributed to something of a recovery in consumer sentiment. That said, however, last week’s bounce still left the index at around the lows seen during the 1990s recession.

    What happened:

    S&P Global Ratings revised the outlook on its long-term ratings on Australia to negative from stable. At the same time, it affirmed our 'AAA' long-term and 'A-1+' short-term sovereign credit ratings.

    In explaining the decision, S&P noted that the government’s announcement of several large stimulus packages to support the economy in response to the CVC meant that it now expected Australia’s government debt burden ‘to weaken materially.’ The revision to the outlook from stable to negative was therefore to ‘reflect a substantial deterioration of…fiscal headroom at the 'AAA' rating level.’

    S&P now forecast a general government deficit of around 5.5 per cent of GDP this year rising to 9.5 per cent of GDP next year, averaging around 7.5 per cent of GDP across the next two fiscal years. As a result, net general government debt is forecast to increase from 16.9 per cent of GDP in 2019 to 22.9 per cent of GDP this year and to 32.3 per cent of GDP in 2021.

    S&P’s assessment accepts that these increases in government support are designed to be temporary, and while their impact will ‘weigh heavily on public finances in the immediate future’, it also judges that ‘they won't structurally weaken Australia's fiscal position’. But while S&P expect fiscal outcomes to improve, they also judge that ‘risks are firmly pointed toward the downside. We believe there could be more fiscal stimulus packages to come and that economic conditions could further deteriorate, pushing the expected recovery beyond our current expectation of late 2020.’

    Why it matters:

    We noted last time that the extensive budgetary support now being deployed to support the Australian economy was prompting a growing focus on the implications for the profile of government debt. The S&P announcement is consistent with that expectation, but – again as noted last week – while we do expect to see a marked increase in the level of public debt as a result of Canberra’s (very welcome) economic life support measures, the likely scale of increase based on current measures does not look to have especially alarming implications for the future level of debt to GDP ratio or for the sustainability of public finances.

    What happened:

    The Roy Morgan Business Confidence index was down 9.5 points (a drop of 9.1 per cent) in March, falling to 95.1.

    Roy Morgan Business Confidence chart

    Source: Roy Morgan

    Confidence in March was down significantly for nearly all industries with the biggest declines in those sectors suffering the most from Canberra’s social distancing measures, including Recreation & Personal Services (down 41 per cent) and Retail (down 25 per cent).

    Why it matters:

    The March result was a new record low for the decade-old index and – along with the ABS survey described above and our own DSI (see below) – shows the severe impact that the CVC has already inflicted on business confidence and conditions.

    The survey also shows how abrupt that change was: Roy Morgan notes that in the first two weeks of March the index had continued its recovery from the summer bushfires and averaged 107.5, an increase of 2.9 points from February’s reading. But this recovery came to a sharp halt in the middle of the month and thereafter the index averaged only 71.4 over the last half of the month as Covid-19 hit Australia and government restrictions started to build.

    What happened:

    We now have the results from our latest Director Sentiment Index (DSI). The overall DSI fell to -59.6. That was the most pessimistic result in the history of the survey, which stretches back almost a decade.

    Australia: Overall Director Sentiment Index

    The H1:2020 survey was conducted between 12 and 22 March and an impressive 1,550 members responded. Unfortunately, the impact of Covid-19 on responses was much larger in responses falling later in the survey period relative to the earlier ones, with our survey providers telling us the difference was material. As a result, the decision was taken to only use responses from between 16 and 22 March to inform the published report (although please note that we will retain all responses and use the full sample to inform our understanding of directors’ views).

    Moreover, with the survey closing on 22 March, that was only shortly after the RBA had announced its emergency cash rate cut on 19 March and on the same day that the government announced its second stimulus. It was before the huge JobKeeper package was announced on 30 March and before tens of thousands of Australians had been stood down. All of which makes it important to remember that the responses reported below capture directors’ views during the early phase of the CVC here in Australia.

    As would be expected, survey respondents rated Covid-19 as the main economic challenge facing Australian businesses, followed by global economic uncertainty and climate change. The coronavirus was cited by 86 per cent of respondents, indicating an unprecedented degree of consensus on the key challenge: prior to this survey, the share of respondents opting for the most important economic challenge has usually been between 30 and 40 per cent. Applying that same benchmark, there was also an unusually high response rate for global economic uncertainty (54 per cent) in this DSI, which was likely also reflective of Covid-19 induced worries (which also, presumably, influenced the choice of the outlook for the Chinese economy). Climate change – which otherwise might perhaps have been expected to rank higher given the terrible summer bushfires – was still the third most important challenge identified, picked by 22 per cent of our survey participants.

    Australia: Main economic challenges facing Aus Businesses

    The economic toll of the CVC even in these relatively early days was also visible in directors’ views on the health of the Australian and international economies. For example, 85 per cent of respondents thought that the Australian economy would be weaker over the coming 12 months while just two per cent thought it would be stronger. That 85 per cent reading is the highest share of negative forecasts since the DSI’s inception. Directors were pessimistic about the health of the global economy in general, but Europe was where sentiment was the gloomiest, with 91 per cent judging that the European economy was likely to be weaker over the next 12 months versus just one per cent who thought it would be stronger.

    Global: Expected health of economy over next 12 months

    Director sentiment was also negative around most Australian economic indicators. Compared to the DSI results recorded in the second half of last year, directors anticipated a significant fall in inflation, the exchange rate, the cash rate (recall that many survey responses were received before the RBA’s emergency rate cut announced on 19 March) and the level of wages growth, and a significant rise in the unemployment rate.

    Australia: Expected level of key economic indicators in 12 months

    A look back at the history of the DSI shows that participants tend to be relatively more optimistic about the future of their own (primary) business than that of the economy overall. But here, too, the coronavirus has had a dramatic impact, with the survey recording the first negative net result in the history of the DSI to the question about the expected growth of the primary directorship company over the coming year (to December 2020).

    Australia: Expectations regarding future growth of business

    And in a worrying indicator for the future of the labour market, there was a similarly sharp decline in expected labour demand and staffing levels over the coming year.

    Australia: Expected labour demand / staffing levels

    The impact of Covid-19 also influenced directors’ ranking of short-term priorities for the federal government, with a sharp climb in health to claim third spot with 38 per cent of respondents (up from eighth place and 23 per cent in the second half of last year).

    Australia: Issues Fed Govt should address in st

    Why it matters:

    The DSI does a good job of capturing directors’ initial assessments as to the likely impact of the CVC on Australian businesses and – even at the relatively early stage when polling took place – indicates the anticipated scale of the economic shock now hitting the Australian economy.

    The DSI also offers some guidance as to potential policy priorities for Canberra once the economic stabilisation phase of the crisis response has passed, and the authorities look to move the economy off life support and return us to economic growth. In this context, respondents remain consistent in their view as to the importance of the climate change-energy policy nexus in both the short term and the long term.

    Australia: Issues Fed Govt should address in lt

    Indeed, one of the striking stories told by the DSI over recent years is the steady march of climate change up to top of directors’ list of policy priorities, alongside the convergence between treating climate change as both a short-term and a long-term priority.

    Australia: Climate change as a DSI policy priority

    Another consistent message from the survey in recent years has been the continuing demand for additional public investment in infrastructure. In the current DSI, 72 per cent of respondents think that current spending levels are still too low, with 38 per cent judging them as far too low and 34 per cent as a little low, while only 23 per cent think they are now about right.

    Australia: Opinion on the current level of govt spending on infrastructure

    Respondents’ priorities for infrastructure investment include renewable energy, regional infrastructure and the water supply. There was also an increase in the share of participants nominating telco networks as a priority (perhaps shaped a little by the challenges of remote working that are now upon many of us?).

    Australia: Top three areas for infrastructure investment

    Finally, the DSI continues to signal an appetite for additional reform of taxation. With the government set to come out of the CVC with a significantly larger burden of public debt than it entered with (see last week’s piece), this may well complicate the policy trade-offs involved. But respondents continue to see the case for reform, especially for personal income taxation, company taxation and state-based taxes.

    Australia: Priorities for tax reform (top three)

    What happened:

    According to the ABS, Australia recorded an almost $4.4 billion goods and services trade surplus in February (seasonally adjusted).

    Australia: Trade Balance 2

    Goods and services exports fell $1.9 billion (five per cent) over the month, including a drop in (typically volatile from month to month) exports of monetary gold, which fell 23 per cent. Of more note was the fact that services exports declined ten per cent. Imports also displayed some weakness over the month, down four per cent in February with falls across the board in imports of consumption goods (down eight per cent), capital goods (down seven per cent) and intermediate and other merchandise goods (down two per cent). Imports of services were also down by one per cent.

    Why it matters:

    The early impact of the coronavirus is visible in February’s trade data, especially on the services account, as official restrictions on foreign tourists and students started to take effect. Exports of travel services were down 14 per cent over the month, while tourism related services credits fell 15 per cent. Likewise, imports of travel services eased by one per cent, with tourism related services imports also declining by the same amount. With travel restrictions tightened significantly in March, next month’s services trade numbers should show further falls.

    Australia: Tourism related services exports

    What happened:

    According to the ABS, the value of new loan commitments for housing fell 1.7 per cent in February (seasonally adjusted). New loan commitments for both owner occupier housing (down 1.7 per cent) and investor housing (down 1.9 per cent) declined over the month.

    Australia: Lending to house for dwellings

    Why it matters:

    This was the first monthly drop in lending to households for dwellings since May 2019. But the slowdown at this stage was not virus related: the ABS states that there was no notable impact of Covid-19 on new lending commitments in the month, with the reference period for the series applying to the time when there was only a relatively low number of confirmed cases within Australia and before the virus was declared a global pandemic.

    What happened:

    Last Friday, the ABS published the final estimate for February retail turnover. Turnover was up 0.5 per cent over the month in seasonally adjusted terms, following falls of 0.3 per cent in January 2020 and 0.6 per cent in December 2019. (The preliminary estimate we reported a couple of weeks ago had suggested a 0.4 per cent rise in February.) In annual terms growth eased to 1.8 per cent, falling below two per cent for the first time since 2017.

    Australia: Retail trade (nominal) 2

    By industry, Food retailing (up 0.8 per cent), Department stores (3.1 per cent), Household goods retailing (0.7 per cent), Cafes, restaurants and takeaway food services (0.2 per cent), and Other retailing (0.2 per cent) all rose over the month while Clothing, footwear and personal accessory retailing fell 2.9 per cent in February.

    Online retail turnover contributed 6.6 per cent to total retail turnover in original terms in February 2020, up from a 5.6 per cent contribution in February 2019.

    Why it matters:

    Although the main impact of the coronavirus is expected to start to appear in the March data, the ABS notes that individual retail businesses have already cited a range of impacts due to Covid-19. For example, businesses in the Supermarket and grocery stores and Pharmaceutical, cosmetic and toiletry goods retailing subgroups reported an increase in turnover related to the virus. (The ABS used scanner data to analyse Supermarket and grocery store spending by Australian households and found that turnover for discretionary and non-discretionary grocery spending increased by 6.1 per cent and 9.4 per cent respectively in February 2020 compared to February 2019. The largest rises were in non-discretionary goods including frozen and canned fruit and vegetables; cereals and breads; toilet and other tissue paper products; pharmaceuticals and personal care products; and infant food and hygiene products, with businesses reporting that sales increased in the last week of the month.) At the same time, other businesses, especially those reliant on tourism, reported adverse impacts on turnover. And in the case of those businesses reporting little impact in February from the virus, many told the ABS that they expected to see significant impacts in March as trading restrictions were increased.

    . . . and what I’ve been following in the global economy

    What happened:

    The J P Morgan Global Composite PMI fell to 39.4 in March, hitting a 133-month low. The month-on-month drop in the index level was the second steepest in the history of the series, behind only the fall recorded in October 2001.

    Global: JP Morgran Global Composite PMI 2

    The global services sector saw activity fall to the greatest extent in the survey’s history, with business activity, new business and new export business measures all contracting at the steepest rate on record.

    Why it matters:

    Last week we reported the very steep declines in several key manufacturing PMIs over March. The slump in service sector activity has been even more severe, with all the services PMI surveys underlying the global measure signalling a decline in output, and with the steepest falls taking place in the consumer services and business services categories.

    Unsurprisingly, the hit to activity has tended to be largest in those economies where lockdown measures have been strictest, with European economies experiencing particularly weak results. The slump in UK service sector activity was the fastest downturn since the survey began collecting data, for example, while in the Eurozone France, Germany, Spain and Italy all suffered record contractions in services, with the falls in Spain and Italy particularly brutal.

    What happened:

    Last Friday, the US Labor Department reported that US employers cut 701,000 jobs in March, while the unemployment rate moved up to 4.4 per cent. Job losses were concentrated in the hospitality and retail sectors. At the same time, labour force participation rates also dropped sharply over the month as some Americans retreated from the workforce.

    US: Changes in employees on non-farm payrolls

    In addition, a record 6.6 million Americans applied for unemployment benefits in the week of 22 – 28 March. That was up from the previous record of 3.3 million in the week of 15-21 March. Roughly ten million people, or around six per cent of the total US labour force have now filed for jobless benefits in the space of a fortnight.

    US: Initial unemployment claims

    Why it matters:

    The fall in payrolls in March was the largest monthly drop seen since March 2009, while the increase in the unemployment rate (from 3.5 per cent in February to 4.4 per cent in March) was the largest one-month increase since January 1975. More striking than both was the rise in unemployment claims seen in the final two weeks of the month, however. The numbers here are unprecedented, far worse than in any previous modern recession.

    (So why did the March jobs report show ‘only’ a 701,000 fall in non-farm payrolls? Mainly because the timing of that report preceded the big job losses that occurred towards the end of the month. April’s jobs report is likely to make for even grimmer reading.)

    What happened:

    The non-partisan US Congressional Budget Office (CBO) released updated forecasts for the US economy, taking into account the impact of Covid-19. The new projections assume that US GDP will decline by more than seven percent during the second quarter (which would mean the decline in the annualized growth rate reported by the Bureau of Economic Analysis would be about four times larger and therefore exceed 28 percent) and that the unemployment rate will be above 10 percent during the June quarter.

    Why it matters:

    We’ve noted that the current extreme levels of uncertainty make forecasting very difficult now, with several official forecasters being reluctant to even chance their arm. That makes the CBO’s educated guesses of interest, even though it too must stress that any ‘economic projections, especially for later periods, are highly uncertain at this time.’

    What I’ve been reading

    The ABC examines Treasury’s rapidly shifting assessment of the severity of the economic shock from Covid-19.

    The AFR on shifting patterns of consumer purchases.

    NAB’s Australian wellbeing survey (pdf) finds that four in ten Australians are now ‘highly anxious’ as Covid-19 ramps up the stress levels.

    In this week’s Dismal Science podcast, Ivan references a couple of interesting papers on economic policy responses to the CVC. This paper from the American Enterprise Institute (AEI) discusses one possible approach to reopening the US economy while this one (pdf) from the University of Chicago Booth school of business seeks to frame the choices around economic and health policy as a constrained maximisation problem where keeping the average transmission rate of Covid-19 below one is one of the key constraints.

    A NYT piece on how economists are trying to answer coronavirus questions. This includes links to a bunch of interesting papers including this one (pdf) on the longer run consequences of pandemics which examines rates of return on assets focussing on 15 major pandemics (defined as where more than 100,000 people died), running from the Black Death (1347-1352) to the H1N1 pandemic (2009), and comparing this with the impact of major armed conflicts that led to a similar death toll. The authors find significant macroeconomic after-effects from pandemics that persist for about 40 years in the form of a substantial drop in the real rate of return. In contrast, wars have the opposite effect, likely reflecting the destruction of capital that happens in wars but not in pandemics. They also find some evidence that real wages are somewhat higher after pandemics. The paper speculates that the finding of lower real interest rates post-pandemic is possibly driven by a combination of excess capital per unit of surviving labour and an increase in savings, perhaps to restore depleted wealth or reflecting an increase in the precautionary motive. If that is a good predictor of our future, that finding should provide some useful breathing space for fiscal authorities who are now in the process of piling up government debt. But the papers’ authors do note that the demographics of most previous pandemics were very different from those occurring in the modern era, so there’s always the possibility that ‘this time could be different.’

    Related, Martin Sandbu in the FT reports that ‘surveys show a striking degree of consensus among top economists in favour of the lockdowns.’ The more contentious issues are around duration and exit strategies. Also from the FT, Martin Wolf has some suggestions as to next steps.

    This paper from Correia, Luck and Verner has received quite a bit of attention. The authors track geographic variation in mortality during the 1918 Flu Pandemic in the United States and find that more exposed areas experienced a sharp and persistent decline in economic activity, with their estimates suggesting the pandemic reduced manufacturing output by almost 20 per cent. They also look at the variation in the timing and intensity of non-pharmaceutical interventions (NPIs) across US cities. Here, they find that those cities that intervened earlier and more aggressively did not perform worse and, if anything, grew faster after the pandemic is over. Their results imply that NPIs not only lower mortality but that they also mitigate the adverse economic consequences of a pandemic. Or, to quote from the title of their paper: ‘Pandemics depress the Economy, public health interventions do not.’ But see also this review for some caution as to how much we can rely on these findings.

    Richard Baldwin reminds us that the global financial crisis (GFC) saw world trade suffer a sudden, severe, and synchronised collapse in 2008 that until now was the steepest drop in recorded history, as well as the deepest fall since the Great Depression. He reckons that the hit to trade from the CVC is likely to be worse. That’s because as well as a 2008-2009-style demand side shock, the coronavirus is also delivering massive, supply-side shocks across most sectors of most major economies. Considering just the US, China, Japan, Germany, Britain, France, and Italy, Baldwin notes that the stricken economies account for 60 per cent of world supply and demand, 65 per cent of world manufacturing, and 41 per cent of world manufacturing exports.

    The ILO estimates that the CVC is likely to wipe out 6.7 per cent of working hours globally in the second quarter of 2020 – equivalent to 195 million full-time workers.

    The IIF has released its April 2020 global debt monitor. It notes that global debt across all sectors rose by over US$10 trillion in 2019, topping US$255 trillion. At over 322% of GDP, global debt is now 40 percentage points (US$87 trillion) higher than at the onset of the 2008 financial crisis. The IIF points out that with ‘the Covid-19 fiscal response in full swing, the global debt burden is set to rise dramatically in 2020; gross government debt issuance soared to a record high of over US$2.1 trillion last month, more than double the 2017-19 average of US$0.9 trillion.’ The IIF’s ‘simple top-down estimation’ is that if net government borrowing were to double from 2019 and there was a three per cent nominal contraction in global economic activity, then the ratio of global debt to GDP would jump by over 20 percentage points to more than 342 per cent this year.

    David Miles and Andrew Scott ask, will inflation will make a comeback after the CVC? Drawing on the history of post-war recoveries, they are sceptical of inflation risk, suggesting that the imbalance between supply and demand seems likely to be very different from those experienced in the aftermath of wars, partly because of the different role of government during wartime, and partly because of the mass physical destruction of capital and heavy loss of life among the working age population, neither of which (thankfully) seem likely consequences of Covid-19. Likewise, although accepting that government debt will rise substantially in the next 12-18 months, they think the increase is likely to be in the 10-30 per of GDP range, which is much smaller than wartime increases. What about the huge expansion of central bank’s balance sheets? Here, Miles and Scott argue that the value of financial assets held by the private sector likely will be much lower after the pandemic (lower share and house prices), so that although the money supply may rise, the total wealth of the private sector is likely to have fallen, which is the more significant driver of consumption.

    The WEF offers a visual history of pandemics.

    Interesting ‘before and after’ table from Marginal Revolution.

    What everyone’s getting wrong about the toilet paper shortage (we also discussed this one on this week’s Dismal Science podcast).

    Latest news

    This is of of your complimentary pieces of content

    This is exclusive content.

    You have reached your limit for guest contents. The content you are trying to access is exclusive for AICD members. Please become a member for unlimited access.