The future after COVID-19: the collapse of the world economy.

July 2020 — Dr. Alma Pineda - CEO PPI.

The COVID-19 pandemic is an extraordinary situation that changed the rhythm of life of all people in many countries, but rather, worldwide, and that it will prevail until at least 2022 with possibilities of a reactivation for the 2024 (2). This makes us reflect on exactly what we call “Life after COVID-19”, or “The new normality”.

Due to critical situations in the world economy, it has not been possible to completely rethink what life will be like after COVID-19, since the different industrial and business sectors have been reincorporated in stages, despite the fact that many countries are not in a position to lift the quarantine.

Contrary to popular belief, the situation is not fully controlled and for various reasons, either because the reaction came too late, severe measures were not taken, or due to the lack of capacity for timely medical attention and detection and prevention strategies for the virus, the real situation in which the world is facing the pandemic has not been reached.

The future could then be divided into 3 phases, which would be the immediate future, the medium and long term, to be able to analyze in practical facts what the outlook will be like in business, the economy and in the society.

A) What awaits us in the short term?

Although the perception of the majority at the beginning of the pandemic was that China was taking a huge advantage to revive its economy since it became one of the most important providers to face the pandemic with medical supplies and equipment, in reality, the USA and China are facing economic difficulties since they are also wholesale suppliers of other industries that are not operating 100% in Latin America and in other parts of the world. The aforementioned generates a chain effect, which, since it does not have massive industrial production as usual, Mexico and other Latin American countries will have to implement severe measures such as immediate personnel cuts.

It must be taken into account that China is also one of the main buyers of raw materials in Mexico and the rest of Latin America, and as it does not have the usual liquidity or demand for these inputs, the fall in the prices of raw materials and the factories closings will be something that will happen in the coming weeks, if not already happening.

On the other hand, sectors that depended on the oil industry are being affected and this has caused the hydrocarbon market to be impacted, as well as the fall in the prices of minerals such as copper and iron, plus the decrease in the price of food products such as soybeans, corn, meats and cereals (3).

Likewise, capital flight is taking place because investors do not want to take risks, generating an outflow of dollars that is pushing a huge devaluation of currencies such as the Brazilian real, the Mexican peso and the Colombian peso. And, since most of the public debt of Latin American countries is in dollars, the effect is very negative (2).

B) What awaits us in the medium term?

Very difficult times will come for emerging markets, as the pandemic will continue to cause the withdrawal of investments in these markets at a high volume and speed, until they completely freeze (4). In recent months, the withdrawal of investment has been approximately 100,000 million dollars, which is why as there is less liquidity in countries like the United States, the markets most affected by this phenomenon will always be the emerging ones and industry 4.0.

The measures that the International Monetary Fund is applying only benefit a few countries aiming to save emerging markets, and that is the reason why main central banks that have extended reciprocal bilateral swap lines and the support of the New York Federal Reserve, they cannot provide liquidity to all countries and jeopardize the global financial safety net for the supply of capital. Although the IMF has created the Short-Term Liquidity Line (STLL), something new in the last 10 years, this new flexible credit financial service also only applies to those member countries with a solid political and economic framework, where in an ideal world if the IMF approves to provide this liquidity to a country, this is an excellent letter of introduction for that nation front of the world markets. The total demand for STLL resources by various countries is estimated to be as high as $ 50 billion (4). In other words, when regions of the world face strong financing needs, the problem must be addressed as soon as possible so as not to affect other countries.

On the other hand, an effect in the short and medium term is the global bank losses occurred in the corporate credit markets, however they are more manageable than the losses that non-bank financial institutions will face, since their role has been much more protagonist in the last ten years for the world economy, and if these entities do not recover soon, their impact would harm the supply of credit and would push a very serious effect, which is the prolongation and exacerbation of the world economic recession (5). Against this background, the authorities should push credit to companies and should determine whether it is appropriate to include non-banking institutions within the perimeter of regulation and supervision, taking into account that they play a greater role in risky credit markets. Likewise, these authorities must bet on the investment of foreign exchange markets, in order to prepare themselves to face longer-term financing disorders, and so sovereign debt managers must institute plans to deal with limited access to external financing, so as not to over-indebt the country.

C) What awaits us in the long term?

In April, the International Monetary Fund (IMF) predicted a very dark and negative outlook for the world economy, and the IMF's director Kristalina Georgieva assured that the consequences will be worse than what was experienced during the Great Depression (3). It will not be until 2021 when there will be a partial and gradual recovery. During the year of 2019 economic growth was projected for 160 countries in the world during 2020, however, after the pandemic, negative growth is expected for 170 countries, where emerging markets and developing countries will be the most affected , and even more so those that are commercial partners of China, which is peculiarly the Latin American region. In the case of Mexico and Central America, they will be notably affected by the economic decline in the United States, and this in turn will affect the issue of remittances.

Regarding global finances, it is important to mention that, if banks do not stay healthy, this could put the entire dynamic economy at risk, which is why it is crucial that they remain stable in their finances. If banks cannot make a profit, they are less likely to extend loans and other financial services to households and businesses, depriving the economy of much-needed credit. A simulation with nine advanced economies indicates that a high proportion of banks will possibly not generate benefits above the cost of capital in 2025. (5)

Finally, in summary, it could be said that the economic effect in the short term thanks to the COVID-19 crisis is acute, but in the long term the outlook is even more critical if the necessary measures are not taken to reduce the risks and consequences of a global economic collapse (recession that will last at least ten years).

As already mentioned, the reality after the pandemic changed the way of seeing and living life. Just to mention other immediate effects of the new reality, we could mention:

  • Cultural changes in the use of technology, where digital and remote communication platforms acquire an important role in the labor, social and educational sectors, and even in the entertainment niche. The most important challenges in this regard will be taking advantage of this trend so that many companies migrate towards digitization and can reactivate their economies, as well as the opportunity for technology companies to provide consulting services, platform development and computer security (6).

  • Retail will disappear and only the most innovative and technological will survive. Small and medium-sized companies will have to use e-commerce tools, and explore better inventory, logistics, traceability and delivery systems to avoid being out of the market, which will become more competitive every day.

  • The drop in sales will generate an unprecedented trade war in the next 18 months, and this will increase unemployment and poverty in Latin America, in such a way that only people with higher professional skills and companies that bet on markets related to the demand for health, digital platforms, and basic necessities, will survive.

  • Definitely, the most affected sectors in the short and medium term will be: automotive, tourism, hospitality, locations of entertainment and sports, airlines, investors, real estate, insurance, fashion and footwear industry. The Latin American countries most affected by the interruption of these industries are Mexico and Brazil, whose manufacturing sectors are the largest in the region (2).

  • Businesses that are a short-term opportunity in the face of this new reality will be: digital platforms (streaming, webinars, remote education systems, e-commerce, artificial intelligence, data mining), video games and mobile applications for socialization or to generate community, computer security, general domiciled services, inventory and logistics systems for better control of the supply chain, health and sanitation sector, purchase and sale of gold, services and products to improve the lifestyle at home, maintenance services and interior decoration for the adaptation of spaces, platforms and products to remotely improve work (online), beauty products and personal care.

  • By reducing vehicular traffic, coworking spaces, houses or apartments near offices that are in urban areas of high added value, will not be vital. Therefore, this will affect the prices of the properties. Employees will also demand more from employers in terms of flexibility, facilities and safety at work.(6)

  • Given the challenges posed by COVID-19 and the doubtful effectiveness of the response of international organizations, the IMF, the WHO and the European Union could disappear if they do not improve their performance.

  • Travel by plane, train or ship will have to reinvent itself and adopt new protection, safety and sanitation measures before COVID-19. Many of these companies will disappear, and it will be more expensive to acquire any of these services in the medium term. Likewise, many people will adopt independent and ecological modes of transportation. As an advantage among all this chaos of the pandemic, is the decrease in carbon dioxide levels, however, this same phenomenon has already been seen in financial crises in previous decades, where as soon as people had liquidity again, the economy was restarted with an uncontrolled consumption of fossil fuels, which could mean in the long term a significant setback in terms of energy, environment and climate.

  • According to UNESCO, more than 90% of the children of the world are not attending face-to-face classes, so this fact will have negative consequences for years if countries do not migrate quickly and effectively to the online mode. But, given the digital poverty that exists in many countries, there will be much marginalization for millions of children who will not have the advantages that nations with developed economies have (6). An interesting exercise that the UK did was an investigation that revealed that the desire to study away from family will not be a priority for students, and this will cost institutions around $ 3.13 billion dollars and the loss of 30,000 jobs (6).

  • The industry of massive events, entertainment and sports as already mentioned, will be greatly affected. An example of this is that athletes have received salary cuts and the sports media have already reported losses of hundreds of millions of dollars.

  • Art centers and institutions offering artistic content are likely to disappear, as much of this content was offered for free during confinement, and people will never want to pay for this kind of entertainment again. Likewise, the purchase of art will be an unnecessary luxury in the face of the economic crisis and austere budgets.

  • The weapons and tactical equipment industry will also suffer because investing in these devices will not be a national priority since the resources will be used for the provision of medical supplies and equipment around COVID-19.

  • One of the consequences of the pandemic will be extreme hunger, since at the end of 2019, 135 million people were suffering this situation, but currently the United Nations (UN) warned that the COVID-19 crisis can increase the amount to 265 million people by the end of 2020 (7).


Referencias:

  1. Mary Van Beusekom. May 13, 2020. Physical distancing may extend to 2022, COVID-19 study finds. News Writer, CIDRAP News. - CIDRAP  
  2. Cecilia Barría BBC News Mundo. 13 abril 2020. Coronavirus: 5 efectos devastadores que la pandemia tendrá en las economías de América Latina (y 1 motivo para la esperanza). - BBC News Mundo  
  3. Coronavirus: las oscuras proyecciones del FMI sobre la economía mundial por los efectos del coronavirus. 9 abril 2020. BBC News Mundo. - BBC News Mundo  
  4. Geoffrey Okamoto. Abril 22, 2020. La Línea de Liquidez a Corto Plazo: Una nueva herramienta del FMI para proporcionar ayuda en la crisis. - Diálogo a fondo  
  5. Tobias Adrian, Fabio Natalicci. El COVID-19 empeora vulnerabilidades financieras. Mayo 22, 2020. - Diálogo a fondo  
  6. Coronavirus: 12 aspectos en los que cambiará radicalmente nuestras vidas. BBC News Mundo. - BBC News Mundo  
  7. Alonso Tania. Hambre extrema, otra consecuencia del nuevo coronavirus. Junio 4, 2020. - Tomorrow.MAG  
Dr. Alma Pineda.

C.E.O. Ping Pong Innovation

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