The total decline in stock wealth I foresee will knock 2.8% off consumer spending. This pandemic is likely to be the most disruptive financial and social event since World War II with equally long-lasting consequences. Many will no doubt restrain spending in future years to rebuild savings, especially since the crisis caught them at a time of high debts and short financial reserves. A Fed study found that 40% don’t have enough cash on hand to cover an unexpected $400 expense. Also, the $600 extra unemployment checks on top of state unemployment benefits may induce some never to return to work, especially since those payments will probably be continued into 2021. The labor participation rate for working-age men has been falling steadily since World War II and from the late 1990s for women.
A widespread economic revival is unlikely until a vaccine and widespread testing are available. Re-establishing supply chains will also be a slow process. And, as seen now with China reopening, a lack of demand from domestic and foreign customers slows the revival. Plus, the lack of international coordination to fight the coronavirus suggests a long recession.
In the world we foresee of slow economic growth and massive debt overhang, every country wants to export more to promote its local economy and none are zealous for imports. So global supply will continue to exceed worldwide demand, resulting in even a bigger savings glut and making chronic deflation a serious probability. In the last two decades, consumer prices in Japan have fallen in most years and, as a result, real GDP growth has averaged just 1.1%.
This article was provided by Bloomberg News.