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by Brunello Rosa
1 March 2021
The Chancellor of the Exchequer will present its first budget since March 2020 this week, the first time it has done so since the pandemic fully started. On March 8, Rishi Sunak will present to Parliament the new set of measures that are designed to provide support to the UK economy, which has been severely hit by the pandemic.
In 2020, the UK real GDP fell by 9.8% over the previous year, one of the worst performances among G7 countries. The unemployment rate rose from 3.8% at the end of 2019 to 5.4% at the end of 2020, according to the latest IMF data. The collapse in economic activity has been contained by the fact that the government provided generous support through fiscal expansion. The rise in unemployment has been contained by a series of rounds of furlough schemes, which prevented many workers from being laid off. The latest scheme, which in November was extended until March 31, will most likely be further extended into June at the very least, and perhaps beyond it.
In the meantime, the UK has gone through two additional rounds of lockdown, which have further weighed on economic activity. At the same time, the government has launched a successful Covid vaccination campaign, which has resulted in more than 20 million people receiving the first dose of one of the various vaccines available, corresponding to around 30% of the population. For comparison, in the entire EU/EEA, only 22 million doses have been distributed on a population of around 500 million, i.e. around 4.5%. If the UK’s vaccination campaign continues at its current pace, the government estimates that it will be able to provide vaccination to the vast majority of the UK population by the end of H1 2021.
Given these estimates, Boris Johnson’s government has launched a 4-step plan for a cautious but irreversible reopening of the economy by the end of June 2021 This should hopefully provide some relief to the strained economy and public finances (it may include an anticipated GBP 5bn relief package for various categories of businesses that have been most hit by the pandemic), which have observed the public deficit rising to the astronomical level of 19%, while debt has soared well above the 100% threshold. Beyond this short-term fiscal expansion, Sunak will have to show a credible fiscal consolidation plan during the post-pandemic period.
Despite all this, this week Sunak will likely announce a plan of further fiscal expansion, considering that all major national and supranational policy organisations now agree that withdrawing policy stimulus too soon is much more dangerous than withdrawing it too late, even for the overall soundness of public finances. (In the 1990s-2000s, notably, Japan showed the detrimental impact to public finances of a premature tightening of fiscal policy). Among the most anticipated measures there is the so-called Future Fund: Breakthrough, a fund that will invest up to £375m of public money in fast-growing UK technology companies, with the result being an increased exposure of taxpayers to stakes in tech start-ups.
Through all of this, Sunak will have to take into account the impact that Brexit has had on the UK economy, even if this impact has been concealed behind Covid, so far. But the impact thus far on the cost of imports and exports has much more to do with Brexit than Covid, for example, at a time when most households and businesses relied on deliveries by post or courier to keep their economic activity going during repeated lockdowns. It won’t be easy for the Chancellor (who has the ambition of becoming PM himself one day) to navigate the UK economy between the Scylla of Covid and the Charybdis of Brexit.
by Brunello Rosa and Nouriel Roubini
25 February 2021
by Brunello Rosa and Fawaz Sulaiman Al Mughrabi
2 March 2021
by Peter Cecchini and Brunello Rosa
17 February 2021
by Alessandro Magnoli Bocchi and Fawaz Al Mughrabi
28 January 2021
by Brunello Rosa and Fawaz Al Mughrabi
10 February 2021
by Brunello Rosa and Karmen Meneses
24 February 2021
by John Hulsman and Brunello Rosa
23 February 2021
Introduction: The Dangers Of Over-Compensation
Of all the things we have studied in depth, the presently unfashionable discipline of classics has had the most profound impact on us. For at its base, it’s the study of humanity itself--our strengths and our weaknesses as humans, our frustrating mix of the best and the worst qualities, with every perplexing intellectual challenge thrown in for good measure. Far from being the preserve of elite white men, classics is nothing less than the study of western humankind, of all of us.
A case in point of classicism’s relevance is the present, perilous policy road that western developed countries have all traveled down in regards to the Covid-19 pandemic, the greatest political risk challenge of this generation. By willfully and fatally concentrating on the specific health aspects of the pandemic to the exclusion of all else, unwittingly western leaders have taken a terrible and real problem and made it infinitely worse in terms of shunning its devastating civil liberties, economic, and social aspects.
This the ancient Greeks would surely understand. In Homer’s Odyssey, one of the main impediments confronting Odysseus as he doggedly endured his decade-long sojourn home, was to confront the Scylla and the Charybdis, twin monsters guarding the Strait of Messina, separating Sicily from Calabria on the Italian mainland. According to the ancients, ships had to choose between veering toward six-headed Scylla, or maneuvering instead toward the whirlpool Charybdis. Thrillingly, we have visited the exact site in Sicily where the monsters were to have inhabited, and heard the wind howl in the dead of a black night, conjuring up the desperate choice ancient mariners felt forced to make.
From the Odyssey’s mythos came the modern English expression, being between Scylla and Charybdis, one of whose meanings is being forced to choose between two equally dangerous extremes; if a policy-maker concentrates too much on one, the other is sure to devour them. An expert decision-maker, like ancient mariners, must instead guide the ship of state between the two dangers as equidistantly as possible.
No one is doubting that the health dangers posed by the pandemic are real: the latest data show 111 million confirmed Covid-19 cases globally, and 2.5 million deaths; in the US alone, with 500,000 deaths this represents a number greater than the American death toll in World War II. However, there is equally no doubt that all signs of balance, and the need for policy trade-offs, have been lost. The health care aspects of the pandemic have totally eclipsed the civil liberty, economic, and social consequences of the crisis, a terrible lapse that will literally affect every single person living in the west for years to come.
Philosophical Confusions Have Fueled the Costs of the Pandemic
A series of philosophical confusions have led to this abandonment of policy balance. A utopian preoccupation with living in a zero-risk health bubble has directly led to massive social costs. Yet, in this irreligious age (and yes, we think that the abandonment of religion, where death is forthrightly seen as part of life, is part of the flawed thinking here) there is a dangerous, growing belief that death, like risk, can be abolished by government fiat. Politicians, rather than leading, have scurried to meet this completely unsupportable philosophical view, hiding behind medical experts, who have overly dominated the overall policy trajectory of most western states.
This is the reverse of how the great Franklin Roosevelt, politically the most successful president of the modern era, ran things. During the Great Depression, FDR would listen to various teams of experts – The Economists, Unions, Politicians, and Senior Staff—one after the other, and then weigh their various proposals, reaching a balanced policy output, as he knew that each, given their specific expertise, knew only one piece of the greater puzzle.
It was FDR, as the great generalist, who balanced these specific (and by design myopic) expert opinions to create a rounded, complete effective policy. This is disastrously the exact opposite of what has happened throughout much of the Covid-19 crisis, where in a number of countries, virologists have been listened to as gospel, despite the fact that they had no any training in macroeconomics, civil liberties or constitutional law, or in education and the development of children.
Let’s be clear on one point. We are not saying that medical experts should not have been listened to. We are not even saying that Covid does not represent a serious health threat, or that all the most relevant measures to contain the contagion (from social distancing to self-isolation, from quarantine to lockdowns, from treatment to mass vaccination) should not have been implemented. In fact, we believe that all of the above, with the limitations discussed below, have been extremely useful in reducing the impact, including the death toll, of the pandemic.
The point we are making is the policymaking now is far too much the exclusive preserve of experts in one field, making decisions that directly impact many. To listen to any one expert, to any one point of the view, to the exclusion of all else is to avoid Scylla, but to sail directly into the policy whirlpool that is Charybdis. And that is precisely what has happened.
Beyond these confusions, in an effort to decrease inter-generational tensions, western politicians have been peddling the absurd philosophical notion that everyone is at equal risk from Covid-19, a statement that is simply not true, off the bat negating a number of effective policy alternatives that might have localized lockdowns, sparing the vast majority of the public the trials of the past year. But the public at large has shown itself to be shockingly ignorant of what statistics mean, the result of which made it almost impossible to separate the very real dangers emanating from the pandemic from more unsubstantiated fears. The result has been a draconian lockdown that has led to a serious diminution in civil liberties, economic disaster, and social peril for all.
The facts are plain; there is a 997 out of 1000 survival rate from Covid-19. It is primarily a disease which kills the elderly. Only 1% of Covid deaths are among people under 45, those over 65 account for 90% of total fatalities. The average age of a person dying from the virus in the US is 78. As of July 2020 in the US, only one person in 7000 under the age of 65 and in good health is in danger of dying from the virus. In America, for the 80% of the people under the age of 60 without compromised immune systems, the fatality rate is one in every 22,000.
From this absolutely irrefutable data, it is clear that Covid-19 poses a significant health problem for one-fifth of our people, while looming governmental, economic, and social costs are going to be a massive problem for absolutely everyone. This does not mean we should not protect the elderly or heartlessly leave them to their fate. It does mean that policies should have and should now be devised with this statistical reality in mind, to protect the elderly but also the whole of society.
Intellectually stranger still is the notion that the world should stop because of a pandemic. In western government circles, there was no thought or much discussion of what would happen after lockdowns led to a ‘flattening of the curve.’ Forgotten in all this is that draconian lockdowns—for all the civil liberty, economic, and social damage they have done—are not designed to do anything more than delay the inevitable; they do not do away with the virus, they just slow the rate at which people get sick, to shield overworked public health systems. Lockdowns, at great cost, are not a policy solution for the Covid crisis; at best, it amounts to throwing a plate in the air in policy terms. It is a solution to nothing.
What is perhaps most intellectually striking about the past year’s western response to Covid-19 is how different it has been to earlier, roughly equal, pandemics. In the US, during the Asian Flu (which also emanated from China) in 1956-57, killed around 116,000 Americans, with 25% of the overall population infected. Yet life went on much as before. The Hong Kong flu of 1968-69 killed 100,000; at the same time the open-air festival at Woodstock was held.
Ignoring recent pandemic history, western governments have overestimated the health dangers in aggregate (which is how policymakers must look at the world) just as they have underestimated the economic and social costs that have sprung by their myopic responses. We guarantee you that within our lifetimes there will be an Advanced Placement History Test question which will amount to saying, ‘Given the clearly known pandemic versus social and economic risks, what in the world were western leaders and their publics thinking as they shut down their societies for the better of part of two years?’ .
(This is an excerpt of Dr. Hulsman's latest article, which you can read here)
Dr. John C. Hulsman is the widely-read Senior Columnist for City AM, the newspaper of the city of London. Dr. Hulsman is also a Life Member of the US Council on Foreign Relations. His most recent work, the best-selling, To Dare More Boldly; The Audacious Story of Political Risk, was published by Princeton University Press in April 2018 and is available for order on Amazon. He can be reached for corporate speaking and private briefings at https://www.chartwellspeakers.com.
Week: 1 - 7 March 2021
The Unemployment Rate Is Expected To Rise In the US While Remaining Unchanged in the Eurozone
In the US, February’s labor market data is expected to show: i) non-farm payrolls rising to 110k (p: 49k); average hourly earnings falling to 5.1% y-o-y (p:5.4%); and iii) the unemployment rate rising to 6.4% (p: 6.3%).
In EZ, in January: i) retail sales are likely to fall by -1.3% y-o-y (p:0.6%); and ii) the unemployment rate is projected to stay unchanged at 8.3%.
COVID-19 Vaccines Reach 103 Countries; Geopolitical Tensions Rise; Central Banks to Stay Accommodative
Optimism around a global expansion rekindled concerns about a spike in inflation, and the prospect that central banks may have to rein-in their expansionary policies.
More than 231m COVID-19 jabs have been given across 103 countries, i.e.: around 6.2m doses per day.
Biden takes first military action, with Syria strike on Iran-backed militias. The Pentagon said the strike: i) was ordered in response to attacks against US and coalition personnel in Iraq; ii) destroyed multiple facilities near the Iraqi border in eastern Syria; and iii) was a "proportionate military response", taken "together with diplomatic measures", including consulting coalition partners.
After a cyber-espionage campaign, where hackers “used a dozen different ways to infiltrate government and corporate networks”, the US is readying “sanctions and other measures to secure commercial networks and improve third-party services with Russia” – with around 18k companies and agencies potentially exposed.
As China seeks to become an advanced nation, Chinese President Xi Jinping highlighted that it was “possible to double the country’s GDP and per capita income by 2035”, implying an average annual growth of 4.7% for the next 15 years.
In the US, Fed Chairman Powell stated that inflation and employment remain well below the Fed’s goals, and – despite “a sharp rise in bond yields accompanying heightened concern over inflation” – price pressures remain mostly muted and the economic outlook is still “highly uncertain” – requiring easy monetary policy to stay in place.
Real Economy: Economic Recovery In DMs Remains Fragile; Vaccine Rollout Continues
In the US, January’s durable goods climbed by 3.4% m-o-m (c: 1.1%; p:1.2%), the ninth consecutive gain in ‘durable goods orders’ - and the biggest since July 2020, mainly driven by a 7.8% rise in ‘transportation orders’.
In the EZ, in February, ‘economic sentiment’ increased by 1.9 pts to 93.4 (c: 92; p: 91.5) - the highest reading since March last year, driven by improving confidence in: i) industry (a: -3.3; p: -6.1); ii)services (a: -17.1; p: -17.7); and iii) consumers (a:-14.8; p: -15.5).
In Japan, January’s retail sales declined by -2.4% (c: -2.6%; p:-0.2%), and IP declined further by -5.3% y-o-y (p: -2.6%).
In US, February’s ‘PCE Price Index’ rose above-consensus to 1.5% y-o-y (c: 1.1%; p: 1.3%), and ‘core PCE price index’ rose to 1.5% y-o-y (c: 1.4%; p: 1.4%).
In New Zealand, the RBNZ held its: i) official cash rate at a record low of 0.25%; ii) the Large-Scale Asset Purchase (LSAP) Program “up to USD 100bn”; and iii) the Funding for Lending Program (FLP) operation unchanged.
Financial Markets: Stocks Fell On Interest Rate And Inflation Fears; Bond Yields And USD Up
Market drivers: most major benchmarks pulled back sharply in response to a steep rise in longer-term US Treasury interest rates, and rinsing inflation.
As a result, global equities closed lower w-o-w (MSCI ACWI, -3.3%, to 657). In the US, the S&P 500 Index recorded its biggest weekly decline in a month (-2.4%, to 3,811), as: i)‘consumer discretionary’ shares were dragged lower, in part by a steep decline in automaker Tesla; while ii) a drop in Apple shares weighed on the IT sector. In the EZ, shares fell (Eurostoxx 50, -2.1%, to 3,636), as trading remained volatile on concerns that CBs might have to act sooner-than-expected to quell inflationary pressures that could accompany an economic recovery.
Fixed Income: w-o-w global bonds fell (BAML Global, -0.7% to 292.4), as a dovish rhetoric from Fed Chair Powell triggered a sharp bond sell-off across most DMs, pushing 10-year UST yield to its highest level in over a year (+11 bps, to 1.46%).
FX: w-o-w, the USD traded higher against other currencies (DXY, +0.6%, to 90.879; EUR/USD -0.4%, to 1.207).
Commodities: Oil prices surged to their highest level in more than a year (Brent, +5.1% to 66.1 USD/b) as investors looked ahead, toward an accelerating decline in global inventories and a comeback in demand. Gold fell (-2.7% to 1,733 USD/Oz) due to rising US bond yields, and a stronger USD.
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