🦠 What Dr Doom told me about the coming recession
Buckle up. Pandemic economics are turbulent.
|Azeem Azhar||Apr 1, 2020|| 176||13|
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On Tuesday night (31st March), I was at a private briefing with Nouriel Roubini, the economist nicknamed Dr Doom for his pessimistic (and prescient) predictions.
I’d been very wary of the optimistic economic forecasts coming from the investment banks. Take Goldman Sachs. The firm posited that US GDP would finish the year 6.2% down as a result of the economic havoc wrought by the pandemic. My hunch—and it was just that—was that the most accurate thing about their forecast was that they had revised it downwards (from a 3.7% decline in their previous forecast).
Hearing Professor Roubini talk was a dose of reality. Bear in mind that his reputation is for pessimism, but I felt he was clear enough that I wanted to share the insights with all of you. I’ve focused more on the insights as pertain to building the future, the Exponential View-lens, than on his macro- and commodity predictions.
The shock to the global economy from Covid-19 has been faster, and more severe than the 2007/2009 global crisis, and even the beginning of the Great Depression. It took about three years for financial shocks previously. But this has happened in three weeks. The bottom of the market has fallen 35 to 40%.
Photo by Bryan Goff on Unsplash
As Roubini puts it:
People initially said ‘Is this going to be a V-shaped recovery or is it going to be a U with a gradual recovery or is it going to be an L with stagnation or a W, a double dip?’ It is not a V. It is not a U. It is not an L. It is not a W. It is an I. A straight line down. Output is down. Consumption is down. Capex is down. Residential investment is down. Exports are down. Imports are down.
In fact, it is “as real as if an asteroid and hit the planet Earth and economic activity shut down.”
The silver lining has a cloud
China is slowly getting back to work. And the lesson seems to be that a hard suppression gets the economy back on track more quickly than what Roubini calls America’s “mitigation light.” Italy might follow suit.
However, the good news that China and the Asian economies may start to power up may not help Western economies, particularly the US. It might, in fact, exacerbate some of the global tensions I outlined in my essay, The Three Cleavages:
China is moving swiftly to position itself as a leader amidst the chaos, especially with the US likely to be mired in the crisis at home for weeks or months to come.
It is even possible that China becomes the global economic and financial safe haven. The government has plenty of dry powder, consumer demand is healthy (buffered by deep household savings) and odds are they have domestic Covid-19 infections under control.
And so in this environment, of China getting back to work and the US struggling with an accelerating pandemic, I want to highlight three, of many, observations from Roubini:
This pandemic is causing a global supply chain shock. (I touched on this eight weeks ago in my essay, Six ways coronavirus will change the world.) Roubini agrees this is happening and that we will likely see a reshoring of production. But reshoring will become expensive, as firms allocate labour and capital not to places where they are cheapest, but to places which best serve the needs of national self-sufficiency (something I also discuss in my conversation with analyst Pierre Ferragu). And to avoid the higher costs being passed on, firms will need to reduce labour costs. So one consequence will be the US firms “going even further in the direction of AI, robotics and automation to create economic efficiency. Of course, this hurts labour.”
For tech firms, there will be a mixed picture. As Roubini points out, data suggests Amazon and Microsoft are doing well. But Google and Facebook face headwinds because of their advertising business model: “with the collapse of economic activity, as spending is going to be sharply cut […] and even when the economy recovers, the dynamic recovery is going to imply that firms are going to be very cautious in their ad spending. You don’t want to really spend tonnes of money on ads in the future.”
Even under optimistic conditions, this recession is going to last two to three quarters, says Roubini. By the end of the year, there will be some light at the end of the tunnel.
You need a plan for the future
I asked Roubini a specific question, which I share in full here:
What is the right kind of investment program for the US government to promote in order to both restart the economy and restructure its economy for a deglobalising world? Is stimulus enough, or does it require some kind of direction: a major top-down vision, like Great Society, or a specific industrial policy?
He believes that the response needs to emphasise at least four types of infrastructure.
First, human capital infrastructure: “We don’t have the right human capital. And unless we invest in people, people will be left behind or replaced by technology. The industries of the future are based on innovation, on knowledge, and on human capital,” rather than on natural resources.”
Second, physical infrastructure, including tech infrastructure: “The physical infrastructure of the US is crumbling, but the digital and tech infrastructure is as well. There must be a basic industrial policy wherein the key industries, there is enough basic research and basic incentives that the US won’t be left behind, starting with AI.”
Third, environmental infrastructure. “We have to deal with climate change – extreme weather events, natural disasters – and we have to invest in the green economy. We don’t have social or community capital, and unless we invest in these things, we’re going to lose the battle.”
Four, institutional infrastructure. “We have to invest into our institutional capital. Look at the chaos politically in Washington. In other countries, you tell people to stay at home and they have enough social capital that they obey and stay at home. In the US, we are the Land of the Free and we don’t care, we go out. So unless we invest in these the social and community capital, we’re going to lose the battle with China and with the rest of the world.” (I touch on the issue of institutional capital and trust in my essay, Coronavirus on the Latin Bridge.)
In other words, money alone won’t do. A directed plan, a vision about what comes next, is needed to drive through this shock.
Elastic bands have their limits. They behave in a nice linear manner as you put them under tension and gently release. They go back to the way there were before. But they have their limits, the point at which they snap.
So do our economies, and our societies. The forces of exponential technologies were already driving them to permanent deformation. This shock, the asteroid-scale impact of this tiny virus, only serves to sever the connection with the past.
My hunch, strongly alluded to in the previous essays, is that as amazing as our modern economies are, this shock will not be easy to absorb and the path to future sustainable prosperity will require the kind of active, incentivised investments Roubini alludes to above.
Happy to hear your comments below,
P.S. Thanks to Heidi Messer of Collective [I] for organising the briefing. Please hit like above to thank Heidi. Sanjana Varghese assisted with research.