by Damon de Laszlo, ERC Chairman
At the end of February, we were looking at a new phenomenon, the Corona Virus, though it had not yet appeared with a vengeance outside China. In fact the rest of the world was still being relatively complacent about the economic impact of the supply chain dislocations and medical impact of the virus. Today everything has changed. Italy, with a demographically older population, was slow to act until the disease had broken out from its original point of entry to the country. The effect of the virus on the population is now clear to see and the way it has overwhelmed the medical services in Italy is a stark lesson to the rest of the world.
Europe in general is now locking down the movement of people and the British government is following suit quite effectively with a rolling programme of shutting down facilities. The difficulty for all governments in the west is, quite frankly, the staggering stupidity of a very large percentage of the population, which doesn’t think advice applies to them unless it hits them between the eyes with the proverbial piece of four by two! There is still a large number, particularly of the young, who do not think that it’s going to be a problem for them. Experience seen in China, Italy and now America clearly demonstrates that the fit 25- 35-year-old males, while at less risk than 70+ year olds, are nevertheless seriously vulnerable.
Everyone can look at the Internet and listen to the news as the crisis develops. The issue really, from an economic point of view, is what next? Here I think the economic damage is underestimated, and it is unlikely that the economy will recover before the fourth quarter. Well over 50% of the western economic system is related to the service industries, and the disruption is total as the economy shuts down. It is also very difficult to see how major chunks of the industry can re-start. On top of this, the aircraft and motor-car industries are both going to be dependent on government life-support and the fragmentation of supply chains as factories close down means that re-starting presents extraordinary problems as you can’t turn them on again at the flick of a switch. It took many years to build the super-efficient global supply chains that service modern manufacturing. Bigger companies rely on thousands of sub-suppliers. For example, a motor-car manufacturer is literally an assembler of thousands of sub-components, from nuts and bolts to name but two, to the complex electronics that go into a modern car, whether it be electric or petrol, which themselves contain many hundreds of miniature components from all over the world.
To further review the rather depressing economic outlook, it has been forgotten in the welter of news about Corona virus, that there was a problem at the beginning of the year with Swine Flu, which has had a major impact on pork production, along with a serious plague of locusts in North Africa. China is facing a potential major food supply problem as the farming industry planting season has been heavily curtailed by the restrictions on the movement of labour, along with seed and fertiliser supplies. While American farming is hugely automated and far less dependent on labour for basic products, the impact on the fruit and vegetable industry could also be serious.
I am sorry to say my usual optimistic outlook is also severely dented by the dislocation in the oil supply industry. Here great swathes of the industry are in terminal financial difficulties which may, with some justification, please the Green lobby, but oil and gas is still a critical part of the modern economy. The problems in the oil industry are replicated across the rest of the commodity producing companies. The major drop in commodity prices and the unpopularity of mining is causing exploration to stop and mines to be shutting down. The economic crisis that is affecting raw materials, when the global economy starts to recover, is likely to cause rapid price increases. Inflation, which has been dormant now for many years, will probably be a hot topic two to three years out.
To paint a slightly brighter picture, the huge stimulus and support now being provided by governments around the world will probably stabilise markets, however they are likely to remain weak – no v-shaped bounces for at least the next 7-8 months. By then, hopefully, there will be some clarity of the human effects of the Corona virus and the lifting of movement restrictions will enable businesses to start anticipating some form of normality.
Damon de Laszlo
23rd March 2020