On February 24, the World Health Organization declared that the world should prepare for a possible coronavirus pandemic. Outbreaks in South Korea, Iran and Italy have caused alarm. Clearly, the virus has traveled widely and rapidly. Authorities have canceled concerts, carnivals and football matches as well as closed schools, imposed curfews and restricted travel. Despite these measures, COVID-19 has now spread to about 30 countries and infected tens of thousands of people.
Stock markets from New York and London to Hong Kong and Mumbai have crashed. They are waking up to the fact that the Chinese economy is in big trouble. Zhu Min, a former official of the International Monetary Fund (IMF), estimates that the Chinese GDP might have lost $196 billion this year already.
Tourism has been hit badly. Consumer spending has decreased. Factories are struggling to keep up production. As a result, the global supply chain has been disrupted. Stores might run short of both clothes and iPhones, as well as face masks and essential pharmaceuticals.
The coronavirus outbreak has turned out to be what Nassim Nicholas Taleb calls a black swan event. It was unpredictable. Its effect on the global economy, however, might be a touch more predictable. In July 2019, Nouriel Roubini, an economist popularly known as Dr. Doom, foresaw “the trade and tech war and cold war” between the US and China leading to deglobalization, decoupling of the global economy and a global recession.
Roubini was not alone predicting doom and gloom. In October 2019, an article in Bloomberg reported that the global economy was wobbling. It worried that the first recession since 2009 might be nigh. After all, bond traders were bearish, and $14 trillion of bonds were yielding negative rates.
The main worry for the writers at Bloomberg was the trade war US President Donald Trump had unleashed on China. This war had led to a manufacturing malaise, with businesses cutting back investment. Brexit and other geopolitical issues also muddied waters. Central banks seemed to have run out of ammunition. After all, there are limits to pumping money into the economy.
The article went on to reassure readers that the risk of recession for the US economy was just 25%. So, even if the rest of the world went belly up, the US would be alright. Hiring sprees had boosted consumer confidence, and the Fed had cut rates twice in 2019. Other central banks were also flushing money into the global economy through more quantitative easing.
A month after the Bloomberg piece, Raghuram Rajan, the former governor of the Central Bank of India, argued that the biggest threat to the economy came from the White House. He saw uncertainty over trade dampening investment and growth. Rajan worried about geopolitical risk such as a crisis in the Middle East that could spike the price of oil, triggering inflationary pressures. In a wishy-washy end to an underwhelming article, he claimed that “If the world had fewer wannabe strongmen, the global economy would be much stronger.” Presumably, they were the villains who could bring bubonic plague and the death of the firstborn to an otherwise wonderful world.
On February 17, Roubini argued that white, not black, swans would cause predictable global crises before the US presidential election. A deeply divided US would face four horsemen of the apocalypse: China, Russia, Iran and North Korea. This would lead to chaos, conflict and financial collapse. Like astrologers’ tales, Dr. Doom’s prognostications must be taken with a healthy pinch of salt. Yet he does have a point even if the white swans to worry about are different to the ones he names.
The Straw That Breaks the Camel’s Back
There have been plenty of signs that all is not well with the global economy. Japan is teetering on the brink of recession. Prime Minister Shinzo Abe’s “three arrows” — monetary easing, fiscal stimulus and reforms to revive private investment — have not hit the target. After seven years, Abenomics is also looking at failure in the face. Japan’s lost decades after the bursting of the stock market bubble in 1990 look set to continue. The economy seems to be sinking because of two millstones around its neck — an aging population and gargantuan national debt.
Germany, another aging country and Japan’s former ally, is in trouble too. Its economy flatlined in the final quarter of 2019, growing at 0%. Exports and spending, both consumer and government, have declined. It is fair to say that this exporting economy was a victim of Donald Trump’s assault on global trade.
Even as populism, political polarization, trade wars and geopolitical tensions have continued to raise concerns, most Wall Street savants have been optimistic that the global economy will chug along. Continued consumer demand and low interest rates by central banks will avoid banana peels. Gita Gopinath, the chief economist of the IMF, has gone further. She sounded almost bullish when she said that, despite the coronavirus causing a global pandemic, China could have a V-shape recovery.
Gopinath is wrong. The post-World War II global rules-based order of which she is a high priest is dying before our eyes. It might have delivered great benefits to many millions in the past, but it has now lost its way. The debt-fueled orgy driving global trade cannot last forever. Trump has taken a sledgehammer to Gopinath’s idols and smashed them to smithereens.
Instead of singing paeans to free trade, both Democrats and Republicans worry about China. The Middle Kingdom is the new Soviet Union. Some find it even more dangerous than the “Evil Empire” given its population, technological progress and economic might. China’s grand projects such as the Belt and Road Initiative are causing unease all the way from New Delhi and Tokyo to Berlin and Washington, DC.
Machiavellian power politics and mercantilism are now back in fashion. The inequities of globalization, where a tiny elite has siphoned off most benefits, are causing anger around the world. So much so that a democratic socialist named Bernie Sanders is doing rather well in the US, the veritable Mecca of capitalism.
Furthermore, quantitative easing (QE) is reaching its limits. It did not quite work for Japan and is not really working elsewhere either. As the amount of money in the economy increases much faster than the amount of goods, services or assets, QE is causing asset bubbles. The likes of Jeff Bezos and Mark Zuckerberg might be fine, but the proverbial Tom, Dick and Harry are not. That is why they are voting to smash the status quo.
Now the coronavirus black swan has joined other white swans to put a clearly unsustainable global economy to the test. It adds to the rising paranoia of the Middle Kingdom. When the pandemic inevitably goes away, the fear will not. The structural imbalances have now been laid bare for everyone to see. The global economy will not go back to status quo ante whatever its high priests say.
Coronavirus is China’s Chernobyl. It is finishing what Trump’s trade wars started. Global supply chains will change. Trade will slowdown. The decoupling of China and the US will continue. Even as these tectonic changes unfold, a global recession has become more probable.
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.