While the world balks at America’s failed response to a coronavirus pandemic that’s infected more than 12 million Americans and left 260,000 dead, their economic management may yet prove to be superior. Other countries have done a reasonably solid job in containing the virus but that doesn’t mean they are better placed for the future.
Unemployment raged much higher in the US, peaking at 14.7 percent in April, the highest level since the Great Depression. A more flexible labor market allowed companies to shed workers to survive and to be more agile in re-organizing for the recovery. The government softened the blow for workers by topping up unemployment benefits.
America has bounced back from a historic contraction in both GDP and employment more quickly than anyone imagined. Out of the 22.2 million jobs lost due to the pandemic, 12 million have been recovered despite a record wave of corporate bankruptcies. The unemployment rate has sunk to 6.9 percent. Hiring plans of small businesses are back to all-time highs.
Gains in jobs and hours worked is supporting incomes and consumption, helping the economy grow without more fiscal support. Personal consumption expenditures are just 2 percent below the pre-pandemic level. Consumer spending on goods is already at a new record high. Housing is booming.
Europe took a different approach. Governments across the continent prioritized job protection and helped companies put workers on shorter hours instead of firing them by paying a portion of their salaries. The euro area unemployment rate rose from 7.2 percent in February to only 7.8 percent in July, roughly what it was last year.
But Europe’s short-time work population (what may count as at-risk jobs) represented as much as 17 percent of the labor force in Germany, 45 percent in France, 28 percent in Italy and 13 percent in Spain. Employment subsidy programs still cover 45 million jobs, or a third of the workforce, in the four largest European economies plus the United Kingdom.
More jobs and businesses have been saved in Europe, but what if they no longer make sense in a post-pandemic economy?
Some major corporates say remote working has revealed that between 10 and 20 percent of staff are surplus to requirements. Harvard economists have found that, on average, workers are now spending 48 minutes more per day actually working.
According to researchers at the Brookings Institution, automation happens in bursts, usually after economic shocks. The pandemic may eventually taper, but it will boost the incentive for automating low-skilled jobs.
An Allianz study found that 9 million workers—or 20 percent of those enrolled in short-time work schemes across Europe—risk becoming unemployed next year. The UK had the highest level of “zombie” employment at 7.6 percent, or 2.5 million jobs. Germany and France each had 1.8 million “zombie” jobs.
Former ECB chief Mario Draghi and Andy Haldane, the Bank of England’s chief economist, warn that job-retention schemes could be a barrier to recovery because they slow firms down in adapting to the new economy.
Given the huge cost in extra public debt, governments cannot afford to indefinitely replace household incomes either. France has extended wage subsidies for another two years but is asking employers to pay a greater share of the cost.
If the economy is not allowed to adjust, European countries will face a much more protracted struggle to regain pre-pandemic levels of output once the outbreak is over. Europe is lagging behind the US and Asia in its recovery from the crisis.
China is the only major economy expected to grow this year, expanding 1.9 percent. Beijing ramped up credit growth to address the economic fallout of Covid-19. But, anxious about the potential risks to financial stability, the government is already reapplying its deleveraging measures.
Bank lending has started to slow as loan quotas are now being tightened. Beijing is responding to excessive leverage in the property sector and cracking down on shadow banking and unlicensed internet-based financing. Bond defaults by state-owned firms have jumped this year, underscoring China’s debt problem.
We expect more stress in the credit market next year. Economic growth could disappoint on the downside.
Source: S&P Global Ratings
Emerging economies are projected to incur a greater loss of output over 2020-21 when compared to advanced economies. IMF growth projections imply wide negative output gaps and elevated unemployment rates. Small states as well as tourism-dependent and commodities-based economies are in a particularly difficult spot.
The global recovery is advancing at different speeds, shaped by the pandemic and the effectiveness of policy support. These uneven recoveries—with America leading, Europe lagging, China slowing, and emerging economies suffering—significantly worsen the prospects of global reflation next year.
The vaccine is no panacea. With aggregate demand expected to be relatively weak and economies projected to operate with considerable slack into 2022, price pressures in the cyclically sensitive sectors are expected to stay mute. Gold, the classic inflation hedge, is already breaking down, perhaps offering a sign of things to come. Will bonds rally next?
The downward pressure on the dollar should abate as US real yields are no longer falling. The dollar index peaked on March 19 when 10-year real interest rates spiked to 0.62 percent. Then slipped 11 percent as the real yield fell to minus 1.08 percent by September 1. It is minus 0.86 percent now. We see the dollar bottoming.
All of this is to say that the days of American exceptionalism are not over. People love a comeback story.