Anthony Rowley

TOKYO: Setting aside the unlikely possibility that a vaccine against COVID 19 can be perfected and mass-produced this side of 2021, and barring the discovery of a remedy that can do more than suppress symptoms of the disease, what shape is the global economy likely to be in by the end of this year?

This is a critical question as we contemplate on the one hand the awful prospect of a plunge into a 1930s style economic Depression and on the other hand the bounding optimism in stock markets that the worst is over and that share prices can start anticipating a return to strong profits.

Perhaps never has the dichotomy between the “real” economy” and the financial economy been as great as it is at present. The chief reason for this is that never has monetary and fiscal stimulus been applied to the global economy on such a scale and so quickly as in recent weeks.

Which perspective should we believe in – the bleak and grey reality of what macro and micro economic data is telling us, or the rose-tinted view that financial markets are displaying? Let’s look at the two widely (and wildly) different scenarios separately.

As Kristalina Georgieva, managing director of the IMF is fond of saying, “this is a crisis like no other” – one which (if IMF estimates are to be believed) will bring about a 6 percentage point swing from earlier-expected 3 percent growth to 3 percent contraction in the global economy this year.

The numbers are truly shocking. The US economy is forecast to contract by 5.9 percent in 2020 and has already shrunk by a sharper than expected 4.8 percent in the first quarter of this year.

The Euro area economy is meanwhile set to contract by 7.5 percent in 2020, Japan by 5.2 per cent, the UK by 6.5 percent and Canada by 6.2 per cent. All are projected to bounce back to growth in 2021 but it will be recovery from a very low base – a factor that stockmarkets seem to be overlooking.

Emerging market economies too are foreast to contract by 1 percent overall this year and were it not for the fact that China’s economy is actually projected to expand by 1.2 per cent in 2020 and India’s by 1.9 per cent the picture would look much worse.

This blasted landscape looks equally bad moving from the macro (GDP) level to the micro (sectoral) level. The World Trade Organisation predict a 2020 contraction of 13 and 32 per cent in the value of global trade – the wide variation reflecting uncertainties about how the pandemic evolves.

The impact on trade is likely to exceed that caused by the global financial crisis, says the WTO. Its more pessimistic scenario implies a global trade decline similar to that during the Great Depression – a prospect which WTO director general Roberto Azevedo rightly describes as“ugly”.

Meawhile in the US, the world’s largest economy, more than 26 million jobs have been lost over the last five weeks and even a White House official was reported a hinting that the unepmployment rate could hit Great Depression levels of 16 per cent.

Unemployment rates across  the Asia-Pacific region could rise by well over 3 percentage points, twice as large as in the average recession, S&P  Asia Pacific Chief Economist Shaun Roache said in a report. Job losses are mounting too,everywhere from Europe and Japan and South Korea to Australia.

Manufacturing and mining output almost universally is taking a hammering while service industry activities, which were the fastest growing element of trade and output in many economies (China especially) pre-coronavirus, have been badly hit. Retail sales have slumped virtually worldwide.

This litany of woes goes on but enough has been said to suggest that even if a cure for coronavirus were found and made universally available tomorrow the global economy has suffered sufficient damage to keep it on the ropes for months at least.

Yet financioal markets are telling a very different story. Wall Street for one has reportedly re-entered “bull market” territory after seeming to head for one of the biggest bear markets of all time, although this gain is being measured against immediate post crash lows.

The return (almost overnight) to “bull market ” conditions is principally because some 6 trillion  dollars has already been injected into their economies by the world’s leading central banks – plus a further $8 trllion of fiscal stimulus, according to the IMF’s Georgieva.

The impact of repeated central bank liquidity injections on asset values virtually guarantees a disconnect between what is happening in the real economy and trends in financial markets. Junk stocks and junk bonds all get hoovered up in the frantic rush to keep the music going.

Paul Sheard, former chief global economist at S&P Global and now Senior Fellow, Mossavar-Rahmani Centre for Business and Government at the Harvard Kennedy School of Government cites several factors behind the “apparent disconnect” between stock price behaviour and that of the US economy,

As he says, the fact that the S&P 500 index was (as of one week ago) only 16 per cent below its peak after falling initially by 34 per cent while the US economy seemed set to fall into a bottomless pit was due in large part to an “enormous” and rapid injection of fiscal and monetary stimulus.

This liquidity, says Sheard,” is a huge support for the market, even if it doesn’t show up in economic data yet and may not do so for a few months.” It is indeed and yet stocks are being driven up just when corporate profits are crashing, which is not what is supposed to happen in market economies.

For central banks and governments alike, controlling stock prices has become a tool competing with interest rate engineering. It has become more potent in fact in an era of low rates. Stock price manipulation has moved from marginal to mainstream policy.

If you control the price of financial assets, by virtue of being a major buyer of stocks or by monetary stimulus designed to prop up the market, you are in a position to create spending power which then ramifies throughout a nation’s economy.

But the trick is unlikely to work this time. To quote Georgieva again, the coronavirus “struck the global economy in an already fragile state, weighed down by trade disputes, policy uncertainty, and geopolitical tensions.” Quick financial fixes will not have it back on its feet anytime soon.

Anthony Rowley is a veteran Tokyo based journalist who specializes in East Asian affairs