Heard on the street


Western frontrunners (such as Pfizer/BioNTech, AstraZeneca-Oxford and Moderna) have already completed phase three trails and publicly released data that has been reviewed by regulators in Europe, the UK and the United States

I started writing this column during the last financial crises in 2008 – so far, close to 250 columns! Published like clockwork; didn’t miss any: started with once every fortnight and lately, once a month. Each piece took-on an event, occurrence, issue of current public interest.

The columns were well received. Readers wanted more diversity – they hoped for views on wide-ranging political-economic issues that matter.

In response, this column will now be restructured to appear once in three weeks – giving a brief running commentary on what’s going on in the political-economic situation worldwide, and other matters of current interest.

Wherever there is an important matter at hand, I will devote my entire column to analysing it so that readers may better understand the underlying issues – as I have done over the past 12 years.

Here’s my take:

Covid-19

Last year has been so-so. Dominated by the emergence of the pandemic Covid-19 and its adverse impact on the world at large. So much so, Covid-19 became the most used word of the year.

Once thing is certain: the pandemic shows us that there are no borders – the virus doesn’t care about country or class or race. It bought the world to a stand-still, and remembered today, as a crucial turning point.

The disease has had a huge human and economic cost since it was publicly, named in February 2019. To date, the official toll stands at 74 million Covid-19 cases, with 1.65 millions deaths worldwide; and an economic cost running into tens of trillions of US dollars.

Against all odds, vaccines have been quickly found. As part of a diplomatic offensive, China has pledged deliveries of its four vaccines to nations across the developing world.

Pfizer Covid-19 vaccine vialsPfizer Covid-19 vaccine vials

Western frontrunners (such as Pfizer/BioNTech, AstraZeneca-Oxford and Moderna) have already completed phase three trails and publicly released data that has been reviewed by regulators in Europe, the UK and the United States.

For sure, many of China’s low or middle-income customers will struggle to secure the western vaccines. Basically, production capacity of European and US companies has already been sold-out.

This simply means that Asian, African and Latin American countries will have to place orders with China. Its success in largely eradicating the virus at home has given its developers greater leeway to export a sizeable portion of their vaccines.

Nations are already stocking up: Indonesia received 1.2 million doses of Sinovac’s vaccine, while the Philippines has said it is close to finalising a deal to buy 25 million doses from the group.

As far as I know, the World Health Organisation (WHO) and experts have advised that accelerated approval can be appropriate during a pandemic; and argue that the risks of China’s approach are acceptable if the companies’ initial phase three trial results meet basic standards for safety and efficacy. To allay concerns, I would suggest Chinese vaccines submit to a review by WHO or a joint panel of experts from more demanding regulatory regimes.

Pandemic changes all

The sheer scale of the disruption from Covid-19, the injustices and dangers the pandemic has revealed, and the promise of innovation mean that 2020 will be remembered as one when everything changed.

World economic output is at least 7% lower than it would otherwise have been, the biggest slump since WWII. The reason to expect change is that the pandemic has highlighted injustice.

Children have fallen behind in learning – and too many gone hungry. School leavers have once again seen their prospects recede. People of all ages have endured loneliness or violence at home.

Migrant workers have been cast adrift, taking the disease with them. The suffering has been skewed by race. Hispanic-Americans are 12 times more likely to die from the pandemic than white Americans.

Studies suggest that about 60% of US jobs paying over US$100,000 can be done from home, compared with 10% of jobs paying under US$40,000.

As unemployment soared world stock markets has risen by 11%. In the worst case, the pandemic could force over 200 million people into extreme poverty.

Fortunately, Covid-19 also points a way forward, partly because it has served as an engine of innovation. Under lockdown, e-commerce as a share of US retail sales increased as much in eight weeks as it had in the previous five years.

As people worked from home, transmission to work fell by over 90%. Almost overnight, many businesses began to run from spare rooms and kitchen tables – an experiment that would otherwise have been unthinkable.

As I see it, this disruption is still in its infancy. Something good can come from the misery of the plague year. It should include a new social approach fit for the 21st century.

High savings

One consequence of Covid-19 is that household saving rates – the proportion of after-tax income that families do not spend – reached record highs across the OECD rich this year. Restrictions on spending meant that up to a quarter of what families earned was not spent in Canada, France, the United States, theUK and Germany in the second quarter of 2020.

This is not unusual: saving rates often rise during recessions. The desire to hoard cash is a barometer of fear Lord Keynes wrote in 1937. This gave rise to his paradox of thrift: saving might be good for the individual but if everyone tries to save at once the result is a fall in economic activity; one person’s spending is another’s income.

When an entire society tries to cut back, incomes fall and the saving fall far short of expectations. Vaccines could lead to a sharp unwinding of savings and a consumer spending boom. A recovery driven by consumer spending could be very unequal.

In areas where lockdowns have been lifted, spending has been led by the rich: sales in China have buoyed European luxury brands. For longer-term recovery, a shift from spending to business investment will be needed.

Human Development Index

UNDP’s 2020 HDI report takes count of nations’ impact on the planet – reflects how humans use raw materials by factoring in carbon emissions and the economy’s material footprint (i.e. raw materials used divided by population). No question, all economies do some damage to the environment.

This report updates national accounting to capture a broader concept of well-being. So, most of the richest nations (led by Luxembourg Norway, Australia, Singapore, Canada and the United States) fell significantly in their ranking.

However, France, the UK and Italy jumped ahead: Malaysia improved one spot to 62 (out of 189). Frankly, working out who belongs where is tricky at best.

Risks in 2021

Throughout this pandemic year, we have experienced a further sharp widening of an already remarkable gap between financial markets and the real economy. The rapid recovery in asset prices from its March 23 lows took major US indices to record levels, even before Covid-19 vaccines.

Combined with even more accommodative central bank policies, this enabled record debt issuance at historically low interest rates. Meanwhile, the global economic situation remains uncertain. Another coronavirus wave is sending parts of Europe back into recession.

That is sapping energy out of the US recovery, and limiting the extent to which better performing east Asia can be a powerful locomotive of global growth. The longer this continues, the greater the risk of “scarring” that erodes longer term growth.

Based on what we know today, the challenges facing investors in 2021 are likely to get trickier as we get further into 2021. Already, this great disconnect has continued much longer than most expected.

This illustrates, yet again, the unintended consequences of a policy approach that places an excessive burden on central banks. The hope for 2021 is that, with a vaccine-enabled economic recovery, better corporate fundamentals will resurface; but will it be sustainable?

What then are we to do

Trump leaves the presidency on Jan 20. The change brings in Joe Biden – with some useful takeaways, despite Trump’s awful four years. Still, he did show big fiscal stimulus doesn’t have to be inflationary.

The evidence: The United States grew just over 2% in 2017, and unemployment fell to 4.1%. Worried about inflation, the Fed hiked interest rates three times that year. But then, in 2018, the economy got a huge tax-cut led spending boost.

Growth picked up to almost 3% in 2018 before slowing to 2.3% in 2019. But inflation gradually slowed to 1.6% by end 2019. Standard economic theory wasn’t totally wrong, but the pick-up in inflation was mild and temporary.

If a massive fiscal stimulus hardly generated inflation with the economy at full speed, it is unlikely to do so now – although some investors are starting to fret. Still, this is not the time to go on a diet.

The large deficits created by Trump turned out not to be immediately dangerous for borrowing costs, either. The United States spent US$665bil more than it took-in during 2017. By end 2019, that had grown to US$985bil; by 2020, it reached US$3.1 trillion.

Yet the yield on benchmark 10-year bonds has fallen to 0.92%. Corporate bond issuance also hit a record in 2020, as spreads on investment-grade and high yield debt touched record lows.

A rapid rise in interest rates always remains a danger. But with inflation apparently quiescent, and the Fed’s new commitment to let the economy run hot to boost prices, economists are getting concerned. With rates so low, government will likely keep on borrowing to maintain a strong safety net, and finance a rebound. So, it’s ok.

Kuala Lumpur, Dec 28,2020

Former banker, Harvard educated economist and British chartered scientist, Prof Lin of Sunway University is the author of ‘Trying Troubled Times Amid Trauma & Tumult, 2017-2019’ (Pearson, 2019). Feedback is most welcome. The views expressed here are the writer’s own.

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