The Economy Under COVID-19: Notes From the Trenches

There are currently two crises underway simultaneously. The advance of the novel coronavirus is taking a terrible toll in terms of physical and emotional well-being. At the same time, job losses resulting from ‘social distancing’ are sending the economy into a tailspin. To fight on both fronts, governments are advancing rescue packages of never-seen-before dimensions. Every day, the tremendous number of factors in play reconfigure in a new way. These ‘from the trenches’ notes attempt to shed some light along a murky pathway.

Since the turn of this century in 2000, and excepting the latest six months of slower activity due to COVID-19 shutdowns, China has managed exceptional year-over-year gross domestic product growth (i.e., of +6% recently, but +10% or more earlier) due, in large part, to a string of major infrastructure spending programs. To make up for the nation’s Q1 2020 downturn in output, the government in Beijing is launching another wave of massive public investment. This time, though, the trillions of yuan will go into other areas of the economy. Instead of road, bridge, railway, train station, rapid transit and airport projects, the emphasis will be on securing China’s lead in such hot-prospect and high-tech sectors as telecommunications and biotechnology.

In the past, when China embarked on an infrastructure building binge, the huge increase in demand for raw materials necessitated sourcing from multiple resource sites around the world, with extraction firms in Australia, Canada, South America and Africa all benefitting. Commodity prices soared and the owners of raw materials had a field day. A commonly quoted statistic is that nearly 50% of base metals, fossil fuels, steel and aluminum consumption worldwide has been in the People’s Republic. If there is to be an emphasis on different kinds of infrastructure works this time, though, the impacts for resource producers will be harder to assess, until the specs appear.

The Spring issue of the International Monetary Fund’s World Economic Outlook includes a -10.2% forecast decline, 2020 over 2019, in the organization’s base metals price index, to be followed by another retreat of -4.2% in 2021. The cause will be the pandemic-induced sharp contraction in global industrial production.

There’s some upside potential for agricultural prices, however. Bottlenecks (or as they’re often being called nowadays, ‘choke points’) have appeared in meat processing operations, threatening supply. Too many workers, engaged in chores cheek to jowl with each other, have been contracting the COVD-19 bug. President Trump has invoked the Defense Production Act to ensure conveyor belts keep rolling.

Also, excessive consumer purchases of orange juice, coffee, rice and wheat have raised prices for those grocery items. It seems everyone with an oven is baking at home these days. The Pillsbury Doughboy is said to be ecstatic. His dance moves seemed a little slower after his company was sold by J.M. Smucker Co. to a by-the-numbers private equity firm, but having parents, grandparents and the kids all locked in proximity to the family kitchen has been just what he’s needed to get his mojo back.

Read the previous article here: The Economy Under COVID-19: Notes from the Trenches – May 11, 2020.