Post – Coronavirus “new normal” – Restructuring Global Economic Order - Part-2

The United States of America [USA] has been seen as the new epicenter of the Covid-19 pandemic. But, as US officials are rushing to contain the spread of this virus, their federal government is grappling with the unprecedented toll on the economy. 36 million Americans have filed for unemployment benefits by mid-May 2020; as pandemic led closures have devastated industries and the timeline to re-open businesses remain uncertain. Large scale layoffs have become a daily occurrence, and many Americans feel that this may be just the tip of the iceberg.

 

Technical malfunctions have prevented millions of people from receiving their stimulus package from the US Treasury, while the SBA (Small Business Administration) which supports American entrepreneurs with loans and business funding has run out of money for its (PPA) Paycheck Protection Program. The U.S. started very strongly with a "preemptive strike"-style intervention, announcing a rate cut outside of the usual standard monthly meeting. For bankers, words often matter more than the actual available funds and the real focus is not about the money that the Federal Reserve would release, but about how credible it can be to function as an anchor against financial uncertainty.

 

 

The Covid-19 pandemic is a supply–shock event. Before this, everything was functioning as normal. But as the pandemic intensified, bringing thousands upon thousands of professionals into hospitals and clinics; it lead to the shutdown of the economy. The sudden contraction of labor supply and the resulting loss of confidence lead to a demand – shock; an indirect effect due to the contraction in the production of goods or delivery of services. The US Treasury department is estimating that unemployment could reach 20%. The consequences of unemployment will be long-term, with negative effect on income, health, skill-set and educational imbalance.

 

Across the border in the North, Canada’s economy was already spiraling into recession in early May 2020, as the country recorded its unprecedented drop in GDP with a 2.6% fall. It has been reported by Statistics Canada that Canada’s GDP took a 9% hit in March, as the impact of the Corona pandemic resulted in several sectors of the economy being shut down, resulting in a 5.3% drop in employment in that nation.

 

Already, over seven million Canadians (approximately a fifth of the population) have availed of an emergency fund established by the Canadian Govt. to counter the adverse economic impact of the pandemic. The Parliamentary Budget Officer has estimated that about 8.5 million people would be using the Canada Emergency Response Benefit which is scheduled to last till June 2020. The subsidy program introduced to support industry in retaining employees is expected to push the budget deficit to over Canadian $ 250 Billion.

 

South of the border, Mexico had declared a national health emergency on 30 March. Since that day, all non-essential activities were suspended and social distancing actions were reinforced. Inevitably, this put a halt to most economic activities. The IPC Mexican Stock Exchange Index has suffered a 20% loss in value since February 2020. Since the pandemic, Mexico’s forecasted GDP for 2020 fell by almost 3 percentage points in comparison to 2019 estimates.

 

The restrictions enforced by the government to control the spread of the virus have had a direct impact on Mexicans’ everyday life. A significant part of the labor force has now adopted home office practices, which was not so common in the country in previous years. With more time to spend at home, an increased demand for news in social media has been detected. Consumer behavior among Mexicans has been affected as well, with an increase in sales of personal care products such as antibacterial gel, soap, and toilet paper. Visits to shopping malls and stores have sharply decreased and most people with plans to travel in Easter have put their holiday trips on halt.

 

President Andres Obrador announced economic and fiscal remedies to the Corona virus pandemic, but it was seen as largely disappointing; with a rescue package for Pemex Oil Company, some aid for financially unviable infrastructure projects and cash handout’s to the poorest. Capital is flowing out of the country, the Peso is constantly being devalued and investment is slowing down. Most experts agree that Mexico is not in a position to fight the pandemic. Medical infrastructure is rudimentary, medicines are in short supply, and insurance arrangements for the people have either been disbanded or are being mismanaged. The government has drastically cut spending on health care, to less than 3% of GDP. Key indicators point to a dramatic drop in economy. The car manufacturing sector which contributes to about 4% GDP has suspended production.

 

Tourism, which accounts for 8.7% of GDP has been curtailed. Remittances from USA have been a major source of strength for the Mexican economy, as approximately 1.7 million households depend on the US$ 36 billion flow of incoming cash as recorded in 2019. However, due to the contraction of the US economy, remittances are expected to drop by 17% in 2020. While many countries are injecting money in their markets (on average, 20% of their GDP), Mexico refuses to do so. The outlook for Mexico’s economy is bleak for the coming months. Unemployment rate reached 3.7% in February and is expected to rise dramatically. The Peso exchange rate against the US dollar has depreciated 25%; as a consequence Mexico’s credit ratings have deteriorated, driving away investments and making future borrowings expensive.