Next Wave, New Risks? Impact of Covid-19 on economies
It’s been more than a year since the phrase “Covid-19” entered everyday use. Standard operating procedures have been put in place; awareness and education of the novel Coronavirus is ongoing. Everyone is waiting with bated breath for a vaccine that will hopefully help things revert to normal. But after a pandemic, “Normal” cannot be expected. What we will see is a New Normal, and with it, new risks. It may be more realistic to try and anticipate what challenges will confront businesses. Going forward, mutations of the virus have made future waves of infections a distinct possibility; a Next Normal may be a necessary contemplation.
The recent IERP Global Conference 2020 discussed what businesses can expect post Covid-19. What will the risk environment look like? How bad can the economic impact possibly be? Who will be affected? In the midst of uncertainty and disruption, how should businesses be strategising? These were some questions addressed by speakers Nicholas Khaw, Khazanah Nasional’s Head of Research, Dr Donald Hanna of the University of California at Berkeley, and Chief Economist of Affin Hwang, Alan Tan. Front and centre was the question of how fiscal measures could be financed amid worldwide economic uncertainty and commercial disruption.
Dr Hanna pointed out that any assumptions made now were tied firstly to the very real possibility of future waves of Covid-19 infections which would require lockdowns or movement control orders. This is likely to be the scenario until a vaccine is available. Meanwhile, lockdowns will become increasingly more targeted and better managed because of improved testing and facilities. However, economic support already shows signs of decline, and a disconnect is imminent. Government response and initial containment is also declining from earlier levels but will rise again if there is a resurgence of infections.
“In emerging markets, the pandemic disrupted economies,” Dr Hanna said. “What was put out (by governments) was not balanced by what was derived through revenue because of the pandemic. There was no work, no labour, no market.”
He added that the focus of most measures taken so far had been on debt – mainly to contain expansion of financial debt. But a major portion of this debt is actually held by the government itself. This will have an effect on GDPs of most countries. Most ASEAN countries, in particular, cannot expect to see recovery until the middle of 2021 or early 2022 at the earliest.
Indonesia and the Philippines, which have been experiencing growth, may recover faster if they can successfully contain infections. Although oil prices have generally not recovered (in Malaysia at least), a number of commodity prices have improved, which is good news for other countries as these have been able to cushion them to a certain extent from economic battering. However, questions remain about whether these reflect a resurgence in demand or are debt-financed. “Debt levels are an issue,” Dr Hanna cautioned. “Recovery is leading to higher imports, which is good, but trade across ASEAN has generally been negative.”
What is of more concern is that economies will slide even more if numbers do not improve in the third and fourth quarters of 2020. More countries will deteriorate into recession. As many of them have only just started to show growth, this will be a major setback. Even in Malaysia, where growth has been fairly steady, there has been only about 80%-90% recovery. People have been consuming less. The Google Mobility Index (GMI), an indicator of economic growth, shows how the different parts of the economy move about. It has shown a significant reduction in capital expenditure because of the uncertainty of movement control orders.
“Everywhere, people are saving more because they don’t know how things will turn out,” said Nicholas Khaw. “They don’t know how or when the virus will end. Even with their consumption patterns, people are “moving down” with what they buy, and consuming less. For instance, they used to buy higher-end groceries, pre-pandemic, but are opting for cheaper ones now. With jobs and pay cuts, people are saving; there have been more deposits.”
He added that aggregate supply and demand will be weak. The government will have to step in if this market depression continues, but may not have the capacity to do so.
It isn’t just the general level of spending that needs to be considered; the change in budget deficit is a potent indicator as well. The government spends but it taxes as well, so both federal and state budgets will have to shrink accordingly. Government revenue has to cover expenditure but operations expenditure has been growing in the past few years. “Revenue growth has not been keeping pace,” remarked Alan Tan. “There will be fiscal constraints if the Covid-19 situation drags on. There will be less flexibility for the government, and it will have to look for new ways to be cost-efficient in its operations.”
Economic sustainability for all countries hinges on both internal and external factors. While internal factors can be managed to a certain extent, external factors may be more challenging. Issues like the ongoing China-US trade war and climate change may create long-term ripple effects that are felt beyond their immediate environments. Even the recent presidential elections in the US, although it may impact on the economic power struggle between the US and China, may have far-reaching consequences for the rest of the world. For Southeast Asia, trying to deal with this may result in more investment and duplication costs, Dr Hanna said.
Globalisation and protectionism are simultaneously becoming more obvious, with countries pushing for other markets to open up while erecting barriers around their own. Globalisation is better for growth; the recent signing of the Regional Comprehensive Economic Partnership (RCEP) by 15 countries in the Asia Pacific region is expected to benefit almost 30% of the world’s economy. Measures are falling into place to enable economies to move forward. Businesses must recognise changing consumption patterns, and keep them at the forefront when strategising for the Next Normal.