Ramón Tamames, Professor of Economic Structure, Jean Monnet Chair of the European Union and member of the Royal Academy of Moral and Political Sciences, sets out his vision of the effects of the coronavirus on world economies, in a series of three articles summarised below for the Proa Comunicación Blog.
Black swan
When assessing the impact of the pandemic, we must take into account the high doses of uncertainty surrounding this disease. For neither the final effect on economic activity nor the counter-cyclical measures to be implemented by the government, slow in its initial reaction, are known.
For the moment, we can only compare what has happened with other pandemics in history. The Spanish flu of 1918, with 260,000 deaths, or the AIDS epidemics in the 1980s, or SARS in China in 1983, with a much smaller number of deaths. The current one is the biggest pandemic of modern times, for which we do not have enough data because the country of origin, China, is a dictatorship and probably does not share the full information.
Economist Nouriel Roubini, who was the first to predict the Lehman Brothers crisis in 2008, warned of white swans (unexpected events with an impact on the economy) such as China-US tensions, Brexit, or tensions in Iran. Margaret Frankin, President and CEO of CFA Institute, goes further: "The coronavirus is a vivid and dramatic example of the unpredictable things that can happen in the world and their impact on the markets.
Therefore, the coronavirus can be considered as a a black swan. Because the effects of mass confinement for months at a time can be unpredictable in a world of 7.8 billion people,
China as a reference
Taking into account what happened in China, the focus of the virus, the case fatality rate of the pandemic is higher as the age of the sick people increases: 9.6% septuagenarians, 16.6% octogenarians, 19% nonagenarians.
And from the macroeconomic point of view, China was coming from a phase of deceleration that placed GDP growth forecasts at just under 61 Q3GDP. The OECD forecasts point to a half-point drop in global growth, to 2.41 Q3GDP.
China's prominence in the intensity of the crisis has prompted the OECD to revise its own estimate. It now puts the impact at four times the impact of SARS in 2003. Since 2003, China's share of global GDP has risen from 5 per cent to almost 20 per cent.
Other impacts on the economy
Professor Tamames reviews other effects of the coronavirus from an economic point of view. Firstly, the price of gold, which rose from a level of 1,200 euros in 2016, per troy ounce of gold (31.1 grams), to 1,518 euros on 15 March 2020, a rise of 26.5%. The lack of confidence in the future, and the fall in stock markets, turned gold into a safe haven, as the economist J.M. Keynes predicted.
The second is a more intense decline in the Spanish economy. Since 2018, the level of household savings measured in volume of deposits in banks, went from 2.14 trillion euros in 2016 to 2.29 trillion euros in 2019. 150,000 million more, which reflects one fact: the lower consumption and investment responds to citizens' fear of rising unemployment due to the economic downturn, so they are hoarding monetary resources.
And finally, the drop in crude oil prices of more than 50% since January 2020, from a price of around 65 euros/barrel, to barely 33 dollars for a barrel of Brent. This fall is partly due to Russia's conflict with OPEC, and Saudi Arabia's increase in cheap production to eliminate competitors.
Tamames' conclusion is that "the figures for the fall in GDP as a result of the pandemic, globally, could be staggering, difficult to imagine". One example is what has happened in Japan, which has seen its GDP fall in the first quarter of 2020 by 2.7%, a rate that is difficult to recover in the remainder of the year.
Reactions
In view of the scale of the problem, Tamames lists the reactions of political and economic leaders. Thus, he values positively the meeting between Pedro Sánchez and the president of the OECD, Ángel Gurría, in favour of measures to protect employment, facilitate liquidity for SMEs, and for Brussels to be more flexible with deficit targets.
ECB president Christine Lagarde has moved on from initial doubts ("let EU national governments spend their ammunition first") to realising the ECB's real role as a driver of recovery, in her case by launching trillion-dollar liquidity injections. Something already perceived by Mario Draghi in 2010, who did "everything necessary to save the euro", as he declared at the time, and delivered.
The International Monetary Fund (IMF), led by Kristalina Giorgeva, announced on 16.III.2020 its readiness to mobilise one trillion dollars to combat the pandemic. This money represents its full lending capacity. The Eurogroup (the 19 European countries with the Euro currency) showed its determination: "We will take any necessary coordinated and decisive policy action, including fiscal measures, to support growth and employment".
The G7 has promised forcefulness but no specifics: "We are committed to do whatever is necessary to ensure a strong global response through close cooperation and strong coordination of our efforts". That is, fiscal and monetary stimulus, but without specifying how much. The markets are demanding less words and more action, according to Tamames.
Ramón Tamames
Professor of Economic Structure
Jean Monnet EU Chair
From the Royal Academy of Moral and Political Sciences