by Damon de Laszlo, ERC Chairman

Damon de Laszlo

Damon de Laszlo

Since the end of March really nothing has changed, and everything has changed.  At the end of March, the Prime Minister caught the Corona Virus (CV), disappeared into Intensive Care and now seems to be coming back with impeccable timing.

In the meantime, the government and its ministers have I feel dealt relatively well in an exceptional situation in spite of the failures of Public Health England..  Dealing with the virus is novel and while sensibly trying to take scientific advice, this has proved incredibly difficult as there are endless streams of advice from every quarter, compounded by the fact that there is very little reliable data from anywhere in the world.  Analysis of the numbers of people catching CV is scant and the reliability of the numbers of deaths is in doubt.  China is heavily criticised for under-reporting, which is a bit unfair as no other country has as yet produced reliable numbers; the UK in particular has only been reporting deaths in hospitals, and not in nursing homes, etc.  The data on the mortality rate from CV will not be fully understood for some time, particularly as it needs to be analysed by age and underlying health problems to compare with ordinary flu.  What we do know, however, is that it is exceptionally contagious.

In the UK the problem is being compounded by our main TV channels and general  journalistic sensationalism.  People’s fear has been greatly increased by reporters focussing on anyone who has a story to tell and the pundits who have an axe to grind, particularly if their story differs from government policy.  The other degrading habit of our journalists is to use an interview technique starting with a critical preamble and then a question designed to trap the minister, rather than elicit information, called “gotcha” interviewing.  This is going to make it exceedingly difficult for the government to roll back on the lockdown.  We can be almost certain that any announcement to reduce the level of lockdown will be met by howls from pundits that our journalists will seek out, who will claim that the government is playing fast and loose with people’s lives etc.

The difficulty that the government faces today is the economic damage being done by the shutdown of the economy which gets more and more difficult to repair, literally day by day.  The collateral damage to people’s health is also becoming more severe as diseases such as cancers go undiagnosed and untreated, among others.  There is also the issue of the psychological stress on people who are business owners and entrepreneurs who are seeing their life’s work destroyed.  This is not to say that CV does not kill, but some of the consequences of the economic shutdown are also lethal.

At the beginning of 2020, investment managers as well as corporate decision makers were balancing economic risk that grows with the length of a period of economic expansion and not making investments decisions when markets seemed to be on an endless upward track.  Central Banks were pouring liquidity into the world’s economies, pushing up markets.  Since then CV has turned markets on their heads and we face a major economic crisis.  The magnitude of the crisis will depend on the time that the global lockdown goes on.  At the moment it doesn’t seem that the Cities of London and New York really appreciate how difficult it is to re-start a shut down business.  Companies during the shutdown continue to add debt, at its simplest rent arrears, interest roll-ups, and additional government loans.  When a business re-starts it is going to need more working capital and will have to add to its present borrowing.  Even something as apparently simple as a restaurant is an expensive thing to re-open.  Before the first dish is served, staff has to be hired, equipment will have to be cleaned, supplies bought in and there will be several weeks of high expenditure before the first customer, if there is one, buys a meal.

In the case of manufacturing businesses, it can take several months to restart and will then have to wait months more before the cash starts to come in.  When you look at the primary extraction industries oil and other raw materials, this period extends into many, many months.  So, it is difficult to contemplate how much more debt will pile up while government’s political ability to continue pouring money into the economy will be heavily circumscribed by political opinion.

The debate and the analysis of the amount of debt being run up by Government and businesses, not to mention individuals, has still to take place, but will turn into a major headwind when the pandemic subsides, particularly as the panic is likely to continue for a while longer.

Economically, if you are looking for things to worry about, the scourge of inflation will possibly return.  The world’s economic shutdown is also shutting down exploration for raw materials – copper, iron, oil, not to mention the more exotic materials and rare earths required to feed the electrification of our economies.  To this concern, you can add food supplies which are being heavily disrupted from both in the East and West.  Planting is late, cropping is difficult, leading to a potential increases this autumn for food and raw materials as economies pick up.

The light on the horizon is China’s economy which seems to be recovering and America which seems either to be ignoring the lockdown or in some parts lifting restrictions.  Here, however, there may be some nasty health consequences.  Europe’s recovery is likely to be much slower as there is little cohesion within the EU and each country “does its own thing”.

All in all, we can only hope that the virus recedes with warmer weather and that, in fact, it has mildly infected a large majority of the population and that the general panic subsides.   Until, however, a vaccine is developed there will still be a high risk to the more elderly and unfit segment of the population.

For those who keep demanding that the government do this or that, they need to be reminded that we are in completely uncharted waters and the surprise is that in these circumstances people need to take risks and take responsibility for their own actions, not keep asking for directions from the ‘nanny state’.    There is an old adage that “no plan of battle survives the first contact with the enemy”.  We are in reality blinded by the fog of war.  At least I hope people are enjoying the sunny weather, even if they can only see it through a window!

 

Damon de Laszlo
21st  April  2020

Posted by Aimée Allam