Winners & Losers of a Global Recession: Why the COVID-19 Crisis May Accelerate China's Rise

The International Monetary Fund (IMF) has made it official: in 2020 the world is facing a recession at least as bad as in 2008 or even worse due to the coronavirus outbreak; however, in 2021 things may change for the better.

​While governments are proposing various stimulus measures to help both businesses and people cope with the economic difficulties caused by the pandemic, financial experts agree that the faster the virus stops, the quicker the recovery will be.

There is no vaccine or drug so far to stop the virus from spreading, although dozens of pharmaceutical companies and institutions are working against the clock to develop a cure. 

Manufacture, Service & Trade are Badly Hit

"The current crisis is quite unique", says Eric Kraus, an independent political risk analyst and financial expert. "Usually, one sees either an economic crisis which threatens to drag the financial sector down with it, or – like in 2008 – a crisis beginning in the financial sector which threatens to infect the real economy. In both cases, monetary creation by central banks coupled with fiscal stimulus can prevent a meltdown which would entail severe and long-lasting economic destruction".

Unfortunately, the current crisis is a combination of the two, the finance expert elaborates, drawing attention to the fact that all major economic sectors: manufacturing, service and trade are all being badly damaged by the social isolation required to control the epidemic, with catastrophic damage being wreaked upon aviation, hospitality, tourism etc.

"Demand will not be restored by any conceivable action which central banks can take", Kraus highlights. "At the same time, the global financial system was already primed for a crisis. It was awaiting only the spark – instead, the COVID-19 virus was a Molotov cocktail."

The timing of the current crisis is yet another factor which is adding insult to injury, according the political risk analyst, "given that budget deficits were already gaping and monetary policy already exhausted, with negative/near negative interest rates prevalent in all G7 countries, meaning that the potential for monetary stimulus is painfully limited."

"This is all a hangover of the 2008 American financial crisis," he opines.

How QE Policies Laid the Groundwork for the 2020 Crisis

The investment bank Lehman Brothers' bankruptcy is largely regarded as the event which triggered the 2008 crisis. On 18 September 2008, Secretary of the Treasury Hank Paulson and Chairman of the Federal Reserve Ben Bernanke called upon US congressmen to authorise a $700 billion bank bailout for the country's financial institutions, warning the lawmakers that otherwise, the financial system would crumble. Central banks and governments across the world rushed to follow the US' suit.

"In the wake of the collapse of Lehman Brothers, the central banks were totally justified in providing massive monetary stimulus to prevent a meltdown following the collapse of the wildly speculative US mortgage derivatives market, which threatened to drag down the entire global financial system," Kraus remarks.

"Unfortunately, this financial crisis would have normally been followed by an economic recession, clearing out the excesses and imbalances in the system and allowing for a touch of creative destruction," he continues. "Instead, given the appallingly short-term mindset and political cowardice characterising modern G7 governance, the pain of a short recession was considered intolerable, and stimulus was applied when nature should have been left to take its course."

In August 2016, Quartz's Eshe Nelson noticed that central banks around the world continued to implement emergency stimulus measures and inject billions into their economies by buying bonds, even at a greater pace than during the financial crisis in 2009. And still, the global economy is not in great shape, she warned.

According to Kraus, "the US was, as usual, the worst offender – with wave after wave of quantitative easing (QE) pushing equity markets to ever- higher peaks, despite the decline in underlying profit growth and trade". "Europe was not far behind in the kick-the-can-down-the-road derby, given the imperative of keeping Italy within the Eurozone", the risk analyst remarks.

"As a result, the only ammunition now available to Western governments is massive fiscal stimulus, blowing out budget deficits to unprecedented levels," he stresses. "This will not end remotely well."

Some Sectors May Never Fully Recover From the Crisis

"There is no reason to expect a V-shaped recession – we will be lucky to escape a depression," the financial expert notes, offering a dire prognosis:

·         first, "the tourism, hospitality and aviation sectors may never fully recover";

·         second, "wealth destruction has already been quite spectacular and the markets have still not found a floor";

·         third, "the fragile political systems in much of the West – the US in particular (which is already seeing something of a low-intensity civil war) may not survive the shock", the risk analyst says, not ruling out Italy's eventual pull-out from the Eurozone, which would obviously create "a huge financial shock for the remaining members";

·         finally, the secular rise of China has been greatly accelerated, Kraus emphasises.

The People's Republic is now treading carefully while taking steps to revive its economy as the pandemic has been seemingly taken under control. Following the sharp surge in coronavirus cases in the country China ceased its business activity in January and now is slowly returning to normal.

​Hubei's Wuhan – the former epicentre of the COVID-19 outbreak – is easing its travel ban. In addition, Beijing is stretching a helping hand to the countries of the Middle East, Europe and Africa which are struggling with the pandemic.

​"While many of us were expecting to see China finally become the world’s predominant economic and political power in the middle of the next decade, the time span has been radically compressed - as the Chinese proved able to successfully control the epidemic and are now recovering well, while offering generous help to numerous foreign countries. How the broken US healthcare delivery system will deal with the crisis is still an open question. The far better systems in Southern Europe are already collapsing," Kraus observes.

"We are living in a period of accelerated historical change. Hold on tight!" he says.