Reflections on some Consequences of the COVID-19
Even if we are still in the midst of the crisis - possibly just at the beginning of the event out of China - it is never too early to think about the aftermath, beyond the health and medical consequences. As a start, we propose hereafter a basic overview of the possible outcome.
SHORT-TERM UNCERTAINTIES
The Risk of Systemic Crisis
For now, it is the situation in China that determines by its importance the consequences of COVID-19 on the world economy. If the epidemic were to spread, especially in the most industrialized countries (Japan, Korea, Europe, USA...), the crisis would increase considerably, keeping the same characteristics:
Disruption of manufacturing supply flows (e.g., China as producer)
Market slowdown (e.g., China as a consumer)
Traffic disruptions (e.g., China as a tourist)
Financial system increasingly weakened
The impact on local economies is already being felt:
Starting now, mainly cash flow problems, of a diverse nature:
Cash drain: if high fixed costs, no production (absent employees) or customers (SME type case).
Cash drying: if fixed costs lower, but no customers, no cash reserve (lots of small shops, tourism...)
Coming up soon, paralysis of parts of economic activity, unemployment, an untenable situation of debtors, cascades of bankruptcies...
The support of the banking system and the intervention of the states (Central banks, tax authorities, moratorium laws, etc.) can mitigate the effects, but this will increase systemic fragility, hence a possible deferred financial impact.
We are facing a risk of a global economic crisis of reverse mechanics compared to 2008: real -> financial -> real (instead of financial -> real). There is, therefore, an increased risk of recession in the real economy by a financial multiplier (Spanish flu in a very different context: -5% global GDP).
The Chinese Challenges
With this crisis and given what was already beginning before COVID-19, China faces a triple economic challenge:
Slowing growth drivers: Exports and Domestic Consumption
Questioning its role as the world's manufacturing heart
Fragility of its financial system
China's hopes are based on four ways to revive the economy in the short term:
The limitation of damage by state interventions (measures to protect debtors, suspend payments, etc.)
The bet on catch-up in H2 2020, which would partly compensate for the losses of H1
A massive public investment plan expected, especially in the most affected areas (Hubei)
The dynamics of a new “Teleconomy” which developed in an extraordinary and spontaneous way during the crisis and which can give China a significant advantage in this promising field.
Even if limited, a Chinese embellishment would benefit the entire global economy.
The Limits of the Rebound
The expected recovery is questionable:
A rebound effect would not affect all sectors:
For sectors sensitive to possible catch-up: stockable consumer goods, capital goods), the crisis will be primarily a revenue lag (will impact H1 on 2020 accounts, but H2 can be very good)
Nevertheless, the impact on investments 2020/2021 will inevitably be negative due to reduced self-financing, and project lags can weaken entire sectors.
For non-stockable production sectors (off-line services, hotels, restaurants,...), there is a risk of many players disappearing (cash limit reached).
The return to normal may be slower than expected.
Uncertainties about the ability to reorganize circuits, the resumption of consumption habits...
A vital sector, Tourism: a resumption of 2019 trends or the continuation of the effect of the epidemic?
Indirect consequences may occur:
Secondary impact on economies affected by lower commodity prices (oil-producing countries, etc.)
Increase in toxic assets on the balance sheets of the banking system leading to a financial crisis
STRUCTURAL IMPACTS
An Adjusted Economy
Longer-term changes are taking place:
Boom of the "Teleconomy" (all the "remote, online, by robots or drone interposed, etc. … ‘)
Adaptation of production chain strategies, with several assumptions:
Domestic relocation (but problem of competitiveness and access to third-party markets)
Distributed model (not all eggs in the same basket), but expensive (accessible only to major apple players, Automobile,...)
Strengthening automation, let's say “autonomy” from human beings!
Return to considerations of economic sovereignty and reduction of industrial and logistical vulnerability (protectionism, forced partnerships, etc.)
More Closed Society
The extent of social/societal movements will, of course, depend on the human toll and the economic consequences (unemployment). But changes are already predictable:
Increased acceptability of surveillance and monitoring/traceability measures (camera, facial recognition, etc.) of crowds and individuals (containment experience in China, search for “zero patients” in European countries, etc.).
Increased mistrust or rejection of "globalization," which is seen as responsible for spreading the epidemic.
Strengthening "localizing" tropisms, “local sourcing” behavior, and accusations of forms of international mobility, flight bashing, etc.
With two sides:
Positive:
Awareness of health risks and the importance of health systems (decrease in anti-vaccine attitudes...)
Increased individual hygiene measures, citizen behavior, local change in habits (e.g., consumption of wild animals in China)
Limiting the abuses of globalization (imports of fruit out of season...)
Negative:
Racism, environmental extremism ("Gaia takes revenge").
China’s Geopolitical Place
Beyond "what doesn't kill me makes me stronger"(1), what are the geopolitical consequences for China?
HARD POWER
Since the end of the Cold War, intrinsic economic power has been classified, the same as military power, as a Hard Power.
On this subject, the Chinese bet is simple:
Restoring the potential of the Chinese economy to its full capacity...
... strengthened by his experience and resilience demonstrated during this crisis...
... and accelerating its progress in innovative technologies and solutions...
... guarantees its place at the center of the global economy...
... without the threats and/or trade limits imposed by its competitors/adversaries being very effective,
... especially with the new horizons offered by its international development strategy (Belt & Road, Africa...)
Even if, at the margin, sourcing adjustments and investment diversifications will occur, a restructuring of the global economy that would greatly diminish China's role is not an option in the near future. In three areas, China remains a key player in an international business plan:
Market size
Productive capacity
Scientific power
SOFT POWER
Instead, it is in terms of image and influence (of Soft Power in the modern sense of the word) that the success of the Chinese bet will be played out: We can anticipate the contradictory effects of COVID-19, negative in public opinion, more mixed, even positive in the leading circles and among the multilateral organizations:
Negative effects
From the simple act of being the cradle of the epidemic, with the reinforcement of stereotypes (food)
Due to the initial management of local authorities and the response time in the early stages of the epidemic
The awareness of the world's dependence on China:
The problem of manufacturing concentration and the "single point of failure" of many supply or manufacturing chains through China
The crucial question of sovereignty in strategic areas (already envisaged for 5G), posed by this crisis in pharmaceutical and health (drugs, masks, etc.).
More positive effects
Demonstration of strength and effectiveness:
Capacity to deploy medical resources (despite failures and precariousness at the epicenter)
Effectivity of containment measures
Cohesion and civic sense of the population for the most part
Transparency efforts
Lesson learned from SARS (after a local phase) more open communication.
Collaboration with the WHO and congratulations received from this organization.
REPUTATION RECOVERY
A strategy to reclaim its image by China is needed. It will go through a few simple axes:
Highlighting its exceptional effort to combat COVID-19
Conciliatory diplomacy vs. disruptive diplomacy (D. Trump)
Proclamation of commitment to multilateralism and its organs (like WHO) but strengthening bilateral ties (judged more reliable in case of crises)
Deepening its strategic partnerships to make them irreversible (BIS, Africa)
Accelerating the diffusion of its model, an alternative to the Western model, based on the example of its control of the epidemic.
(Provisional) Conclusion on Geopolitics
“It is when the sea recedes that you see those who swim without a swimsuit.”
A major health crisis is a powerful indicator of the real strength of countries. Beyond the objective strengths and weaknesses of their health systems, it is the touchstone of their robustness: the capacity of their rulers, the degree of adherence of their citizens, the cohesion of their societies.
For many countries already facing major political problems (Iran), or with economies dependent on oil prices (Middle East), or fragile developing societies (Africa), or even for old nations that doubt themselves (Europe), the crisis of COVID-19 is an existential as well as a health challenge (think for example of the total lack of reaction of Europe as a political entity since the emergence of this outbreak).
One consequence is already likely of this crisis in Europe: it will, at least initially, reinforce protectionist tendencies (reaction/counter-reaction) and programs advocating greater independence and even isolation from "globalization".
China, on the other hand, will focus on using this crisis to demonstrate both the effectiveness of its unified system (mobilization of unprecedented magnitude) and its ability to learn from its mistakes (strategy different from the time of SARS and recognition of inadequacies at the beginning of the epidemic) to resume its march towards a (not "the") world leadership.
This is the Chinese hope of coming out of it on top!
Eric Gautier
The HIGHTIGER Group
(1) Concerning this phrase so quoted that it is devalued, we recommend reading Nassim Nicholas Taleb's "Anti Fragile," which has completely renewed the approach to "resilience" often put forward in the event of a crisis. Instead, Taleb emphasizes the importance of what he calls "anti-fragility," which is the ability to strengthen itself in the trial. Taleb has demonstrated in a masterful and erudite way, theoretical and practical, that the opposite of fragility is not robustness or resilience, but this ability to harden and that protection systems that merely prevent and repair damage are deficient. He was the one who had already theorized the concept of Black Swan. His book "Anti Fragile" is very rich and iconoclastic, and he is one of the few best-selling thinkers whose writings have genuinely changed the practices of the most complex organizations, from the US Army to Silicon Valley.