The “new, new normal” post-Covid-19

After the GFC of 2007-8, we were told to get used to the “new normal” – of low/slow/no growth, record-low interest rates, constant tech disruption and market dislocation as economic systems became increasingly decoupled from one another. And just as we had begun to adjust to this new reality, along comes Covid-19 and totally knocks our expectations sideways, backwards and upside down, and with it some negative long-term consequences. Welcome to the “new, new normal”.

Just what the doctor ordered: “Stay home and read a book!”

In the intervening years since the GFC (and don’t those days seem positively nostalgic from our current vantage point?), we have already seen ever lower interest rates, even faster disruption in business models and services, and a gradual dismantling of the trend towards a global economy. The pre-existing geopolitical landscape has either exacerbated this situation, or has been a prime beneficiary of the dismantling of the established structures of pluralistic, secular, non-sectarian, social-democratic and liberal societies.

First, relations between the Superpowers (USA, Russia and China) have not been this bad since the Cold War. Second, nationalism has not been as rife since the 1930s. Third, political leadership has tended toward the lowest common denominator of populist sloganeering. Not to mention the rise of fundamental religious sects, doomsday cults and tribal separatist movements. Let’s agree that even before the current pandemic, our resistance was already low….

Whatever your favourite conspiracy theory on causes and cures for Covid-19, it’s increasingly apparent that populist leaders of both the left and the right will use the pandemic as vindication of their policies – increased xenophobia and tighter border controls, increased centralisation of power and resources, greater surveillance of their citizens, a heightened intolerance of political dissent, a continued distrust of globalisation, and a growing disregard for subject matter experts and data-driven analysis.

The writing’s on the wall? Message seen in East Melbourne

There are obviously some serious topics up for discussion when we get through this pandemic. Quite apart from making the right economic call (“printing money” in the form of Quantitative Easing seems the main option at the moment…), governments and central banks are going to have to come to grips with:

  • Universal Basic Income – even before Covid-19, the UBI was seen as a way to deal with reduced employment due to automation, robotics and AI – the pandemic has accelerated that debate.
  • Nationalisation – bringing essential services and infrastructure back into public ownership would suggest governments would have the resources they need at their disposal in times of crisis – but at the likely cost of economic waste and productivity inefficiencies that were the hallmark of the 1970s.
  • Inflation – as business productivity and industrial output comes back on-line, the costs of goods and services will likely increase sharply, to overcome the pandemic-induced inertia.
  • Credit Squeeze – banks were already raising lending standards under tighter prudential standards, and post-pandemic defaults will make it even harder for businesses to borrow – so whatever the central cash rates, commercial lenders will have to charge higher lending rates to maintain their minimum risk-adjusted regulatory capital and to cover possible bad debts.
  • Retooling Industry – a lot of legacy systems might not come out of the pandemic in good shape. If we have managed to survive for weeks/months on end without using certain services, or by reducing our consumption of some goods, or by finding workarounds to incumbent solutions, then unless those legacy systems and their capacity can be retooled or redeployed, we may get used to living without their products all together.
  • Communications Technology – government policy and commercial settings on internet access, mobile network capacity and general telco infrastructure will need to be reviewed in light of the work from home and remote-working experience.
  • The Surveillance State – I’m not going to buy into the whole “China-virus” narrative, but you can see how China’s deployment of facial recognition and related technology, along with their social credit system, is a tailor-made solution for enforcing individual and collective quarantine orders.

Another policy concern relates to the rate at which governments decide to relax social-distancing and other measures, ahead of either a reliable cure or a vaccine for Covid-19. Go too early, and risk a surge or second wave of infections and deaths; go too late, and economic recovery will be even further away. Plus, as soon as the lock-downs start to end, what’s the likelihood of people over-compensating after weeks and months of self-isolation, and end up going overboard with post-quarantine celebrations and social gatherings?

Next week: The lighter side of #Rona19

 

Why don’t we feel well off?

The past month has seen a number of reports on the current state of the Australian economy and global financial systems, 10 years after the GFC. The main thesis appears to be: if another crash is coming, can local markets cope, as an extended period of cheap credit and low inflation inevitably comes to an end. Combined with US-Sino trade wars, a softening housing market, and a sense of economic inertia, there is a feeling that Australians see themselves as worse off, despite some very strong economic data in recent weeks.*

Picture Source: Max Pixel

First, the positive news:

The unemployment rate continues to remain comparatively low, and overall job participation is high. This is reflected in higher tax receipts from both corporate profits and personal income. The RBA has kept interest rates low, and inflation remains relatively benign.

Recent data from Roy Morgan Research suggests that personal assets are growing faster than personal debt. Significantly, “average per capita net wealth, adjusted for inflation, is 30.5% higher than it was before the onset of the global financial crisis”.

So, if more people are in work, credit is still cheap, our assets have grown, and prices are stable, we should feel well off compared to the GFC, when interest rates and unemployment rates initially both went up.

Even higher energy bills (a major bone of contention with consumers) need to be assessed against lower costs of clothing, communications and many grocery items.

Second, the less positive news:

A combination of higher US interest rates, more expensive wholesale credit, and more stringent lending rules means that Australian borrowers are already being squeezed by higher mortgage rates and tougher loan to value thresholds. This could only get worse if there is a full-scale credit crunch.

Wage growth has stagnated, despite lower unemployment and higher participation rates. There is also a sense that we are working longer hours, although this is not as clear cut as there is also evidence we are also working fewer hours.

Regardless, Australian productivity output is considered to be sluggish, adding to the overall downward pressure on wages. (More on the productivity debate next week.)

More significantly, Roy Morgan Research has identified a growing wealth disparity based on asset distribution – but this may be a combination of changing earning, saving, investing and spending patterns. For example, if younger, would-be first-time home buyers feel priced out of the housing market, they may choose to invest in other assets, which may take longer to appreciate in value, but may not require as much upfront borrowing.

Third, preparing for a fall….

If a new market crash or a credit crunch comes along, how resilient is the economy, and how will people cope? Worryingly, fewer people are able to cope with unexpected expenses due to lower saving rates and maxed out credit cards. Over-leveraged companies and individuals will be hard pressed to meet their repayments or refinance their loans if interest rates rise steeply or lending standards tighten further.

Then there is the ageing population transitioning into retirement – baby-boomers who are “asset rich, but cash poor”. If they expected the equity in their homes and/or the balance in their superannuation accounts to fund their old age, they may be in for a shock if the housing bubble bursts and stock markets decline, especially if they are expected to live longer.

Finally, the RBA may have few options left in terms of interest rate settings, and a future government may be less wiling to spend its way out of a crisis (more Pink Batts and LCD TVs, anyone?). And while Australian companies may have strengthened their balance sheets since the GFC, overall levels of debt (here and overseas) could trigger increased rates of default.

*Postscript: if there was any further evidence required of the disconnect between the value of household assets (net worth) and a lack of feeling wealthy, this recently published Credit Suisse Global Wealth Report 2018 makes for some interesting analysis.

Next week: The Ongoing Productivity Debate