As the world shuts down in an effort to choke off the coronavirus, you might well ask: what will economies look like when this is over?
First, be certain that the crisis will end, even though we can’t see that moment yet. As the crisis abates, you and I and our customers will probably begin buying again many of the everyday goods and services that we’re currently cutting back on.
Here’s a second certainty: the coronavirus’s economic effects won’t be over in 2021. We can’t be even remotely certain about the details at this stage – but even if commerce bounces back strongly in the next six months and we find a vaccine by early 2021, this outbreak will reshape economic behaviour. Some of the changes will last for years or decades.
And the economic bounce-back may be punctuated by further outbreaks that raise the spectre of a new economic shutdown.
If you thought the global financial crisis (GFC) changed our lives, expect coronavirus to change them far more.
Changes to expect
This will change as people worry about new outbreaks, and as the fragility of our economic lives sinks in. Consumers will seek to build up their reserves. The old advice to save for six months’ worth of expenses will sound wise again, not hopelessly old-fashioned. Savings rates rose briefly after the GFC; this time, the behaviour change will run deeper. A dollar saved cannot be spent, so consumer spending will take a long while to regain its pre-coronavirus heights.
Not all goods and services will fully bounce back
Demand for some consumption items will stay permanently lower than it was at the start of 2020. Luxury items will likely take the biggest hit; expect no new record prices anytime soon for sports cars, paintings, rare whisky or watches.
Investment spending slowdown
Investment spending seems likely to rebound less quickly than consumption, outside the government-fed sectors such as infrastructure. Who will commit to a new factory, when coronavirus II might arrive just as the factory opens?
Shift in work habits
We’ll learn from our sudden new global experiment in working from home. Some of our more productive coronavirus-era working patterns will survive the pandemic.
Government spending will drastically tighten
Governments will rein in post-coronavirus spending. They’ll have no choice: the public debt they’re now running up will take many years to repay, leaving less cash for new ideas. Governments’ first priority will be to blunt job losses; within months, and certainly by 2021, the heavy debt burden will start to eat revenues, especially if rates start pushing up. The post-virus austerity may make the post-GFC years look like an age of plenty, especially in debt-burdened economies like Italy, Japan and the US.
Purging of bad ideas
Some bad ideas will disappear in the post-virus austerity. Among the first to go may be Daniel Andrews’ planned A$50-billion Melbourne Suburban Rail Loop. That’s actually good news: the Loop is, in the words of planning consultant Alan Davies, a "careless and cynical commitment". Soon it will be careless, cynical and unaffordable.
The uncertain changes
Rising interest rates
Longer-term interest rates may rise quite soon. But bear in mind that we don’t really even know why short and long rates alike fell so low in recent years. After all, the borrowing that may have helped end the 2008-09 slowdown was expected to push up rates – but it didn’t. Businesses should plan for the possibility of higher post-coronavirus rates, without assuming that possibility will actually come true.
House price drop
Housing prices may fall as people grow more worried about long-term commitments that eat up all their spare cash. That could leave us with an overhang of people whose houses are underwater – that is, worth less than what was paid for them.
In some economies, such as Australia’s, that in turn could hold the economy down for years; in others, such as the US, it could impose another burden on the banks. Mind you, in many economies, house prices bounced straight back up after the GFC – so who knows.
Trump gets trumped
Trumpism may not survive. The combination of distrust in government and disregard for expertise seems ill-suited to a world where collective action is playing such a central role, and where the world is looking to science to eventually end the threat. Again, we’ve thought this before, only to be proved wrong.
The idea of compulsory prudential standards may spread from banks to other industries whose survival governments deem essential to the national good. One candidate: airlines.
Life beyond 2021
These are just a few of the foreseeable changes this episode will bring. Watch for post-virus growth to sprout in some unexpected places.
And, of course, invest in toilet paper manufacturers. Events of the past month have taught us this: in an uncertain world, the human race will value toilet paper above all else.