DUBAI: Unusual or harrowing would probably be good terms to describe 2020. As the coronavirus pandemic took hold of the world, it was a harbinger of economic troubles on one hand. On the other hand, there were companies and stock markets benefiting from new ways of doing business, such as working from home and ordering goods and services on the internet.
The K-shaped recovery, where some benefited and others lost due to the pandemic, probably best describes what happened. We saw bifurcation, with East of Suez recovering more quickly from the pandemic and even growing, while stock markets in North America, China and some selected other markets reached new highs despite growing unemployment.
Let us start at the beginning. When the pandemic took the world in its grip, global stock markets reacted strongly. The S&P 500 fell some 28 percent and the Nasdaq 23.5 percent. This development was repeated the world over. Borders closed and the world pretty much went into lockdown.
This was bad enough in member states of the Organisation for Economic Co-operation and Development (OECD), but it caused incredible hardship in many emerging or developing economies such as India, where day laborers lost their income, forcing them to travel back to their villages far away — and helping the spread of the virus.
What followed were massive stimulus programs at levels never seen before. The financial crisis taught us that billion was the new million. COVID-19 took the arithmetic up a notch: Trillion is now the new billion.
The Federal Reserve’s balance sheet grew from $3.9 trillion to nearly $7 trillion, with the help of no less than eight separate programs. The US Congress approved $2.2 trillion in the first half of the year, and a further $900 million that was signed into law by President Donald Trump on Dec. 27.
The European Central Bank approved €750 billion ($917 billion) in March, €600 billion in June and €500 billion in December in the form of a Pandemic Emergency Purchase Programme. At the same time, the EU was permitted for the first time in history to raise debt worth €750 billion on its books in order to dampen the economic blow of the pandemic.
Japan raised altogether more than $3 trillion between fiscal measures and the Bank of Japan. China, where the virus originated, raised around $500 billion due to its economy emerging relatively unscathed from the pandemic by the year-end. In the US, interest rates fell by 1.5 percent, now hovering between 0.25 percent and 0 percent, while holding firm in negative territory in Europe and Japan.
This massive infusion of liquidity allowed stock markets to soar. The S&P 500, the Nasdaq and even the Dow Jones eventually broke all-time highs — the first appreciating by 58.4 percent since March and the second by 85.5 percent. The Shanghai composite and the Nikkei 225 also recovered from the March lows by leaps and bounds — only the Europeans lagged behind. We saw a “financialization” of the economy, where the stock market performance was seemingly decoupled from negative economic growth rates in the major OECD economies.
The name of the game in stock market performance were the FAANGs (Facebook, Amazon, Apple, Netflix and Google), which supported the lockdown economy. Other winners were Alibaba, Ant Group, Tencent, Nividia and PayPal. Toward the end of the year, as vaccines appeared on the horizon, we saw a tentative rotation out of these growth stocks into value stocks and cyclicals.
Toward the end of the year, big tech came under increased regulatory scrutiny on both sides of the Atlantic and Pacific oceans. The biggest dent for the sector was probably when the dual-listing initial public offering of Ant Group on the stock exchanges of Hong Kong and Shanghai was halted by Chinese authorities.
Oil was the commodity reflecting the drama of lockdowns and hope more vividly than any other asset. West Texas Intermediate (WTI) fell to minus $40.32 per barrel in mid-April. OPEC+ — a consortium of the member states of the Organization of the Petroleum Exporting Economies and their 10 non-OPEC allies — countered the development by imposing historic production cuts of 9.7 million barrels per day (bpd), which over time were reduced to the current 7.2 million bpd.
While the oil price has moved up to a more comfortable range of $48-$52 per barrel for Brent and $45-$49 for WTI, this would not be possible without the close scrutiny and quick reaction of OPEC+. In that sense, the group’s decision to schedule ministerial meetings on a monthly basis to adjust to market developments in real time has to be seen as a big positive. Things have improved in oil markets, but we are far from being out of the woods.
Oil prices had a big impact on Gulf Cooperation Council budgets. Saudi Arabia decided to go the counter-cyclical route by tripling value-added tax from 5 percent to 15 percent. That being said, the government supported wages for Saudi citizens in order to soften the COVID-19 blow.
The Kingdom’s relief package was 6.1 percent of gross domestic product, compared to 29.9 percent in Bahrain, 27.2 percent in Oman and 17.2 percent in the UAE. If anything, this reflects the Saudi government’s focus on conservative macro-prudential management.
The worst-hit sectors globally were aviation, travel, hospitality and retail, which are all high-contact service industries. These sectors also lost millions of jobs globally. The International Air Transport Association expects that air travel will not return to pre-pandemic levels until 2024.
It was the weak who were disproportionately affected, both within countries and internationally. Queues at food banks in the US, Europe and further afield grew, and the newly unemployed needed to provide for their families.
Developing economies did not have the economic wherewithal to weather the storm of the pandemic. The International Monetary Fund (IMF), the World Bank and the G20 issued a Debt Service Suspension Initiative for the 73 poorest countries in the world, 46 of which have availed themselves of the opportunity so far. While this may be welcome relief, the moratorium does in part stretch to bilateral debt.
However, it does not go as far as the London Club, which looks at liabilities between private sector lenders and debtor nations. This is crucially important because many countries in Africa, Asia and Latin America are deeply indebted to China’s “policy banks,” which are classified as purely private sector institutions.
The pandemic has caused havoc in the global economy. By the year-end, the IMF forecasted for the global economy to contract by 4.4 percent in 2020. China stands out as the only major economy to have grown — by a small 2.1 percent — this year. Indeed, the UK-based Centre for Economics and Business Research has announced that due to the pandemic, China will overtake the US as the world’s largest economy by 2028 — earlier than previously expected.
By the end of next year, advanced economies are projected to be 4.7 percent smaller than expected before the pandemic, while emerging economies will be hit by 8.1 percent. In the long run, this translates to a reduction in growth of 3.5 percent in developed economies and 5.5 percent in developing economies.
As vaccines arrive, we can look forward to the end of lockdowns and restrictions at some stage in the future, but not just yet, because we are far away from reaching herd immunity. In the meantime, the pandemic has left an indelible imprint on the global economy. As always, there have been winners and losers. Sadly, the weakest of the weak are among the losers — as always.
