Covid 19 coronavirus: Depression or inflation? Where will it end?

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Successful business leaders tend to be "can do" problem solvers. When an obstacle presents itself, they don't just throw their hands in the air, declare it to be all too difficult, and pack up shop; rather they work to find ways around the problem, or even to exploit it.

Yet the challenges of the coronavirus lockdown are testing the skills and resilience of even the most crisis hardened business executives and owners. Some firms will, of course, do very nicely out of the crisis - home delivery, food retailing, streaming services and so on.

But across great swathes of the economy there is already utter carnage, and very little companies can do to avoid it. If you deprive a company of its lifeblood - revenue - it's not going to survive long.

I'm not referring here to very large companies, the great bulk of which will survive the pandemic essentially intact. Nor am I talking about fast-growing, medium-sized enterprises with ambitions to get much bigger. These unicorns of the future will presumably be adequately supported through the economic close down.

But most firms are not like this. Rather they are small, subsistence, hand-to-mouth businesses that don't make significant profits but support multiple salaries and livelihoods.

Such companies are numbered in the millions, and they are hurting as never before. How long can they keep going? Two months, maybe; but much longer for many of them and all bets are off.

Headline predictions of the worst economic slump since the Great Depression - down by as much as 25 per cent in the second quarter according to the latest forecast from the UK's National Institute of Economic and Social Research - don't begin to describe the size of the problem. When little or no revenue is coming in, firms cannot afford to pay their creditors, and if they're not paid, they can't pay their creditors either. Payment default is already snowballing across the economy.

• Covid19.govt.nz: The Government's official Covid-19 advisory website

The lockdown has also highlighted a number of particularly pernicious class, social and workplace divides. Those able to work from home tend to be already relatively well paid professionals; their gardens, outdoor spaces and country residences make social distancing a tolerable experience.

Not so if you are stuck in a small flat with rebellious children. Minimum wage employment in distribution and social care is suddenly more valuable than even some of the most highly paid forms of work, yet also some of the most exposed to infection. While the private sector weathers the bulk of the pain, the public sector carries on regardless, jobs and pensions pretty much guaranteed.

Given that just about everything one writes on these matters is capable of wilfully malicious misinterpretation, I obviously don't include health workers in any implied privilege. What can be said with certainty is that the longer this carries on, the greater the chances of lasting damage to the economy, and the harder it will be to bounce back when the restrictions are lifted.

Analysis has tended to focus on the destruction of supply, but the demand side of the economy is beginning to look equally troubling. The British Government's jobs retention scheme should in theory support demand by ensuring that workers receive some pay. But at most, it's only going to be 80 per cent of previous earnings, which in itself is a massive reduction in spending power.

On top, there is a great surge in unemployment among those who don't qualify for the scheme and are now forced to subsist on universal credit, if they can get it. As a consequence, deeper forms of depression economics are beginning to emerge. People are not spending even what they have, but rather saving it if for no other reason that the usual channels of spending - shops, bars, restaurants, travel, holidays - no longer exist.

In such circumstances, fiscal and monetary policy become powerless to support demand. In any case, it would be wrong to regard the Government's various economic support initiatives as "fiscal stimulus" as such. At best, they merely substitute for the economic activity that has been repressed by social distancing.

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But even if the Government went further, with much bigger tax cuts and spending increases, it's not clear it would have a great deal of effect as long as the lockdown persists. Supply and demand are chasing each other down into economic oblivion. After a grim week in which the death toll climbed alarmingly, I nevertheless detect one or two glimmers of hope.

Disrespectful of the fatalities, equity markets have been climbing out of the doldrums, and Government bond yields have risen markedly from the full on depression they were signalling a month ago. These more positive signs have coincided with news from the frontline of the pandemic, with nations that were early adopters of lockdown beginning to lift the restrictions.

The symbolism of barriers being removed from around Wuhan, where the outbreak began, could not have been greater; there does indeed seem to be light at the end of the tunnel.

It could be that this is no more than a false dawn. With no vaccine or reliable antiviral drug in sight, high infection and fatality rates could quite quickly re-establish themselves, regardless of more effective testing and tracing. Any consequent rolling series of lockdowns would be poison to the economy, destroying all remaining hope of a rapid bounce back.

So that's one potential future. But the more positive way of looking at developments is that, like the British Prime Minister, we are indeed already through the worst, and that with the unproductive deadwood of the economy removed by the extreme nature of the lockdown shock, we'll eventually see a surge in activity, productivity, and indeed inflation as the restrictions are removed and pent-up demand comes roaring back.

Central banks, moreover, will be under enormous political pressure to maintain supportive money printing at least until the economy has unambiguously returned to health. Having crossed the Rubicon into direct financing of budget deficits, that's almost bound to be inflationary, never mind reassurance from the lords of finance that this time is different.

TO READ THE HERALD'S FULL CORONAVIRUS COVERAGE CLICK HERE

In any case, the shock of Covid-19 could finally lift us out of the economic malaise we've been in ever since the financial crisis 10 years ago.

Deflation or inflation? Pick your poison, but almost anything is going to be preferable to a deflationary depression. Which way it goes depends vitally on how quickly we can bring this bizarrely unsettling lockdown to an end.

TO READ THE HERALD'S FULL CORONAVIRUS COVERAGE CLICK HERE

Covid-19 in NZ — 18th December

2110

10

new

Total confirmed and probable cases

51

⬆︎8

Active cases

0

In Hospital

0

In ICU

2034

⬆︎2

Recovered

25

Deaths

427

⬆︎10

Border cases

Last updated: Fri 18th December at 12:17 am

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