By ENRIQUE QUEMADA, Chairman of ONEtoONE Corporate Finance
The sudden collapse of activity (a lockdown decided by the States) in all the countries of the Planet is producing a double impact on demand and supply that will have non-reversible effects.
The magnitude will generate changes in the economy, our behavior, our companies, and our way of understanding politics and society. Here are some of them.
20 changes the world will embrace after the Covid19
1. The European economy will become like the Japanese, as a result of a substantial financial effort to sustain the countries of Southern Europe, which will suffer tremendous rates of unemployment, deficit, and public debt. Deflation will be the risk that Europe’s rulers will have to fight. Germany will seize this great opportunity to tackle the situation with a pan-European vision. They will take the lead and help with strong public spending, mutualization of debts, and authorization of liquidity injections so that the architecture of the Union can reverse its decline. Europe will be hurt but more united after this crisis.
2. The United States will embrace Keynesian policies, with colossal public debt and strong creation of money that will end up causing high inflation. The crisis will accelerate the decline of the American empire.
As there is more and more creation of dollars, people begin to change their behavior, establishing inflationary psychology, creating a feedback loop of depreciation, inflation, and money printing.
The US creates money by printing Treasury bonds, and only have to pay the cost of the paper. For these little pieces of paper produced from nothing, the rest of the world pays real money, earned with sweat and effort.
Other countries buy these bonds because most international trade is in dollars, making them indispensable to the global economy. In essence, 7.2 billion people depend on the US dollar to finance their international trade. It allows the 330 million Americans to run deficits far higher than any other country comfortably.
Other countries will get fed up with financing the US deficit by buying their government bonds while losing value with the likely depreciation of the dollar. The current monetary system will be broken, and the dollar will lose its role as a reserve currency.
For eighty years, the US, having the reserve currency, has been able to finance a lifestyle beyond its means. But, clumsily, it is turning the dollar into a weapon fining those who trade with its enemies (Iran, Russia, Venezuela), and thereby losing trust and respect of the rest of the world.
Its allies (France, Germany, and the United Kingdom) have created an alternative to paying in dollars: INSTEX, so they can trade with Iran while avoiding American sanctions. China and Russia will join in to create an alternative channel of international payments that will diminish the global role of the dollar.
3. Three large blocks will be consolidated in the world: China, the United States, and Europe. Both production and trade will be regionalized, returning to the places of consumption, with the help of robotics, 3D printing, and 4.0 productivity. The fear of further breaks in supply chains after the trade war and the Covid-19 will act as a catalyst.We entered in 2020 with 81% of the assembly and 64% of the components in the Technology sector worldwide made in China. Europe and the United States will transfer some of the manufacturing to their regions. China will react by strengthening its advantages of artificial intelligence in sectors such as health, purchasing, transport, payments, etc.
4. China will increase the weight of private consumption and services in its GDP, with higher local production of consumer goods that will compete with Europeans and Americans.The gap between the United States and China will widen. There will be a decoupling in the supply chains that will end the Chinese economic miracle, and their growth will stabilize around 3.5% of GDP.
5. OPEC’s members and developing countries will be the big losers, because of the fall in the price of raw materials and the flight of capital to developed countries. As the graph shows, the fall in the GDP of countries linked to raw materials is brutal.
The war for market share between Saudi Arabia and Russia will cause irreparable damage to the shale gas business in the United States.
6. New ways of international collaboration between countries will emerge in the face of the failure of global coordination that we have witnessed and to react to future crises. The United States will lose its world leadership; Europe and China will gain prominence.
7. Investment in public goods and services will grow. Even so, the gap between rich and poor will widen further, fuelling populism.
Less-educated workers will be disadvantaged in the new wave of digitalization and teleworking.
8. Religiousness will increase in the world. People have seen their tremendous fragility. Many will come down from their deification and understand that they are only temporary creatures.
9. Less office space will be rented, and the price of rent will go down. Professionals have become accustomed to communication via video conferencing, and remote work with flexible schedules will grow.
10. Citizens will have learned to consume less. Online shopping will become natural in a new, much more digital society. The losers will be the chain stores, and shopping centers will become leisure platforms.
11. Online university education and masters will grow in popularity, boosted by augmented reality and 5G. Education will reconfigure towards skills.
12. Companies will hire fewer employees and outsource more FreeLancers. The number of freelancers will grow because professionals will be wary of job security and will have discovered the value of flexibility.
13. Private Equity will redirect its investment towards health, food, and technology-related companies. The shared economy will lose strength.
14. Companies will sell foreign subsidiaries and non-strategic holdings to capture liquidity. Proximity suppliers will be sought, and just-in-time supply models will be renounced.
Companies with strong balance sheets and multi-channel distribution capacity will take advantage of the distress of competitors to drive intense business concentration and become regional champions. Investors will invest in these companies boosting their market capitalization.
15. Following the bubble of IPOs of loss-making companies at ludicrous prices, investors will bet on companies that generate profits. Many of the Unicorns will deflate and go bankrupt.
As the graph shows, 77% of the companies that went public in 2019 were losing money:
16. Political leaders have used the pandemic to increase their power. Politicians will lose face, and experts will gain importance. Citizens will be frustrated by the inability and demagoguery of their leaders and will demand more expertise from governments. Almost all current leaders will lose the next election. Politics will polarise towards the extremes.
17. The world will become more socialist. There will be a reversal of capitalism and individualism that have dominated our society in recent decades. Governments will take a more significant role in the economy, increasing regulation, and intervention. The limitation of freedoms will increase.
18. Professionals will seek to enjoy themselves more, work less, and savor life’s little pleasures.
19. There will be a resurgence of start-ups because lockdown and boredom encourage creativity, and because many of their employers will go bankrupt. Workers will have discovered that there is less security in their jobs than they thought.
20. We are entering the 2020 crisis with debts that are considerably higher than the 2007 debt bubble. It will be the last rush of the super debt cycle that began after the Second World War.
The massive liquidity injections by governments will exacerbate the over-leveraging of already heavily indebted economies, culminating in an inevitable major recession within a few years with the bursting of the burgeoning debt bubble.
As in all crises, there will be winners and losers, but this pandemic will increase global solidarity, individual religiosity, and flexibility in the professional world. It will make us better people within a world that will create new supranational bodies and will again seek collaboration between countries.