In the first Press Room podcast of 2021, Deloitte’s chief global economist Ira Kalish talks to Tanya Ott about robust economic recovery, COVID-19 vaccine implementation, China, and Brexit.
"What we know is that in order to have a robust economic recovery, we need actually to suppress the virus. It’s not an either/or. You have to have both. As long as people are fearful that the virus is out there and remains a threat, it will suppress their spending and that will suppress the ability of those consumer-facing businesses to get back to normal." —Ira Kalish, chief global economist, Deloitte Touche Tohmatsu Ltd.
Tanya Ott: 2020 was a year like no other in even not-so-recent history, so let’s just get right to it. This is the Press Room, I’m Tanya Ott and today we’re talking controlling COVID, growing income inequality, how China is thriving, and urban areas in the [United States] may get even more stressed. My guest is Deloitte’s chief global economist, Ira Kalish.
Ira Kalish: As we speak during the first week in January, there’s both positive and negative news for the coming year. On the positive side, the vaccine is being distributed. Hopefully it will be distributed widely so that perhaps by the second half of the year, at least in the affluent countries of the world, we will be getting closer to herd immunity. And once a large enough number of consumers believe that the virus is behind them, it will likely change their behavior and people will go out and spend more money on consumer-facing services, which they have been avoiding. Consumers have been hoarding cash. They’ve been saving quite a bit. When that happens, that should lead to faster economic growth and just simply better economic outcome. But until we get to that point, we’re now in the midst of another outbreak of the virus, especially in North America and Western Europe, that is already having a negative impact on economic activity. Although governments on both sides of the Atlantic have implemented new forms of fiscal stimulus, it’s likely that in both parts of the world economic growth will remain somewhat suppressed until the vaccine is fully implemented. So 2021 is looking somewhat bifurcated in the sense the first half of the year doesn’t look that great. The second half of the year could be pretty good.
Tanya: Could be pretty good based on what happens moving forward. We’ve got to dive into some of those things, in particular. As you alluded to, the number of infections has been increasing sharply here in the United States and some other parts in Europe as well, which is really putting a stress on the health care system. We’ve seen a growing shortage of ICU beds. We’ve seen number of deaths per capita at the highest level here in the United States. What specifically are the economic implications that these numbers hold for us?
Ira: What we have found during the past year is that when there are surges in infections, when there are new waves of the virus, it has a negative economic impact, regardless of whether governments impose lockdowns. Now, obviously, lockdowns can have particularly negative consequences. If you tell every retail store and every restaurant to shut down, then there are fewer opportunities for consumers to spend their money. But even when those businesses remain open, the surge in the virus convinces a sufficient number of people to stay home. Not everybody, but enough people stay home and avoid social interaction, avoid spending money at restaurants and retail stores and movie theaters, avoid getting on airplanes and go into hotels. It’s sufficient to slow economic growth or even lead to a decline in economic activity. So what we know is that in order to have a robust economic recovery, we need actually to suppress the virus. It’s not an either/or. You have to have both.
Tanya: So we’ve seen a sharp deceleration in consumer spending that you alluded to, and that’s combined with a deceleration in employment growth as well.
Ira: That’s right. So when we’ve had a reduction or a slowdown in consumer spending on services like restaurants and stores, those businesses tend to hire fewer people or maybe even dismiss people. What we saw early in 2020 was a huge increase in unemployment in those businesses here in the United States. In Europe, less so, because there governments provided subsidies to employers to keep people on the payroll even when they weren’t working. So the reported numbers on unemployment weren’t high, but we know that people were effectively unemployed.
But in any event, when the economy started to come back, businesses started to rehire, but they never fully rehired them. As we speak today, in January, we still have a very significant level of unemployment here in the United States, and that’s not likely to change until the vaccine is fully distributed, because as I said, until that happens and as long as people are fearful that the virus is out there and remains a threat, it will suppress their spending and that will suppress the ability of those consumer-facing businesses to get back to normal. So, yes, we have a high level of unemployment. The stimulus that was just passed by the Congress will provide some support to many of those unemployed people. So that’s one thing that will help to allay the consequences, but only for a while. The stimulus that was passed only takes us to March and it’s not clear whether the Congress will pass something beyond that. So if you assume that that money runs out in March and we don’t get the vaccine fully distributed until later in 2021, we will have a period where there could be significant financial stress for large numbers of households.
Tanya: So we have the stimulus money, but only until March. We have high unemployment right now. We’ve also got predictions of evictions, foreclosures, personal bankruptcies. All of this is all kind of tied up into a big knot.
Ira: Yes, and so that’s sort of why a lot of people are describing what we have as a K-shaped recovery in the sense that upper- and middle-upper-income households have not lost their jobs, they’ve not lost their income. They never got much government support, but they have seen many of their businesses do well. They’ve seen their wealth increase because their portfolios have increased in value and their houses have increased in value. And then you have lower income households, many of whom have suffered job losses, where they have had financial difficulty, where they’re facing the threat of eviction and foreclosure and personal bankruptcy. And that could become a much bigger problem going forward depending on what the Congress does. So you have these two strands of households. The end result is that we’ve seen an acceleration in income inequality, which was already a significant issue. If the financial stress for those lower-income households gets worse, that could potentially have a negative spillover effect into industries that haven’t been distressed by this pandemic. That, in turn, could presage a more traditional recession or slowdown. So we’re still at some risk, I would say.
Tanya: You mentioned retail, you mentioned the restaurant industry. Those obviously have been very seriously impacted. What others are you keeping an eye out for in 2021?
Ira: The industries that have been most affected and are likely to remain affected, at least for part of this year, are those that involve direct consumer interaction. So that means retail stores, restaurants, bars, movie theaters, entertainment venues, transportation. That means airlines and trains and hotels and related industries. So those are the ones that principally have been negatively affected and all the businesses that feed into those businesses. If the airlines are stressed, that means the aerospace industry is stressed. If hotels and restaurants are stressed, that means food wholesalers are stressed.
On the other hand, we’ve seen some businesses do extremely well. We’ve seen online retail do well. We’ve seen food retailing do well because people are buying food for the home rather than go into restaurants. We’ve seen technology do well. We’ve seen online entertainment, streaming services do extremely well. We’ve seen the automotive industry do well. People are still buying cars.
What’s been especially strong has been the US housing market. Of course, one reason is that mortgage interest rates are historically low, so affordability is good. But another reason is that many people have been working from home and expect that they will continue working from home even after this crisis is over. So a lot of people have chosen to leave their urban abodes and buy bigger suburban or rural homes, where they have bigger home offices and can more comfortably engage in social isolation. So we’ve seen a big surge in the housing market as a consequence of that. And that has spilled over into related industries like home improvement and furniture and home electronics and so on.
Tanya: That move to suburban or rural is an interesting trend, given that we’ve seen the opposite happening over the last decade or so, where people were really, in many communities ,moving back for the first time, sometimes, to downtown areas.
Ira: That’s right. Cities in the past two decades have been doing really well. As someone who grew up in New York City, I’ve been very pleased about that. I’m really happy because I grew up back in the last century at a time when the cities were really stressed and people who were leaving them. So I was pleased to see people return. Now suddenly this past year, it’s all gone out the window. And there’s a raging debate now about the future of cities, because there’s a widespread expectation that when this crisis is over, many companies will have found that it’s quite feasible, in fact, to work remotely. It’s cheaper in many instances. So it’s not that offices will disappear, but for many companies, many whom I’ve spoken to, expect that at least some of their workers will spend at least some of their time working remotely to a much greater extent than was true before the crisis. If that’s true, that will mean less traffic on the road. That’s a good thing. Less demand for energy. Lower energy prices. Less demand for office space. Potentially stress in the financial markets that have supported commercial mortgages. Maybe financial stress for urban centers and the businesses that support urban workers. Financial stress for urban governments.
Yet, as I said, there’s a raging debate. Will this persist permanently or will people return to the cities? After all, throughout most of human history, cities have been the center of human life and they’ve been the centers of innovation and management and finance. And human beings like to cluster. They like to be around other people. It’s not surprising that people like to go to crowded restaurants and bars and crowded theaters. They like to mingle with other people. So it’s hard to imagine that people will completely isolate after this. I think there will be a role for cities, but it might be a difficult transition figuring out what that role will actually be.
Tanya: I want to shift for a moment and let’s pan out to the global picture, because so much of what we talked about so far has been sort of U.S. centric. What about China? How is it faring right now economically and looking at 2021?
Ira: China has been perhaps the only major economy to experience what we’d call a V-shaped recovery. They had a catastrophic drop in economic activity in the first quarter of last year as they locked down and tried to suppress the virus. Then they were reasonably successful at suppressing the virus and were able to see a robust recovery of economic activity thereafter. As we speak now, economic activity is above where it was a year ago and the economy is growing at a healthy pace. In part, this stems from having engaged in a regime of testing and tracing and quarantining in order to keep the virus suppressed. So the outlook for China is pretty good. Now, China does have some issues. They have run up a lot of debt and the government is concerned about this and has actually started to allow state-owned companies to default on debts that are unserviceable, rather than forcing banks to roll them over. Evidently, the government is keen to create a more robust financial system. In the long run, that would not support unprofitable enterprises and that would encourage more productive investment. But in the interim, there is some potential for financial stress in China.
The big uncertainty going forward, I would say, is the economic relationship between China and the United States, which has seen a lot of stress in the past two years owing to the trade conflict between the two countries. We will have to wait and see what the new U.S. administration does in terms of policy toward China and what that might mean for trading relations.
Tanya: That’s China. What about the rest of Asia?
Ira: While China has seen a robust economic recovery, we haven’t seen that take place as much in the rest of Asia. But what we have seen in the rest of Asia is a fair degree of success at keeping the virus suppressed. So now as China is doing well, it is having a positive spillover effect on other countries. Japan, for example, was in recession most of 2020, but appears to be moving in a better direction, although as we speak, they’re now imposing new economic restrictions in order to stave off a new outbreak of the virus. But once they get that under control, Japan will be in a good place because they trade a lot with China and with the United States, and that should serve them well. Other countries in East Asia that are integrated into Chinese supply chains like Korea, Taiwan, and parts of Southeast Asia also should benefit in the coming year from a robust Chinese economic recovery.
One country in Asia that’s not as closely linked to China and that is very important is India. The Indian economy is recovering, but India still faces a substantial number of infections. So the virus still represents a threat to India’s economic recovery.
Tanya: Then, of course, you know, big headlines out of the Eurozone economy with Brexit and currency fluctuations and a lot going on there.
Ira: Yes, so Britain has exited the European Union. There was an 11th-hour deal between the [United Kingdom]. and the EU that enables the two sides to continue to have tariff- and quota-free trade, but where Britain does exit the single market and the [European Union] Customs Union of the. So they are now completely separate legally. Going forward, this will enable Britain to engage in its own trade relations with other countries outside of Europe.
That being said, the British government’s own Office for Budget Responsibility has estimated that in the long run, exiting the European Union will render Britain’s real GDP about 4% lower than would otherwise be the case. Which means that going forward, there’ll be slightly slower economic growth than would have been the case if the [United Kingdom] had remained in the EU.
Tanya: What about the implications outside of the [United Kingdom], the other members in Europe, you know, what are they seeing come of this move?
Ira: There are several countries in Western Europe where trade with the [United Kingdom] is very important. Those include Germany, the Benelux countries, the Nordic countries, and especially Ireland. I believe they were quite worried about the implications of a no-deal Brexit, which would have entailed the erection of tariff barriers. Now, that hasn’t happened so there’s relief. So there probably won’t be significant negative implications for those countries from Brexit. As for Europe as a whole, as we speak, there is once again another outbreak. So until this outbreak is under control, it’s likely that Europe’s economy will remain somewhat weak. On the other hand, as here in the [United States], the vaccine is being distributed and there’s hope that by the second half of the year, Europe could see a fairly robust economic recovery.
Tanya: We’ve covered North America, we’ve covered Asia, we’ve talked about Europe. We haven’t talked about the African continent. We haven’t talked about Central and South America, Australia—predictions on those fronts?
Ira: It’s a big world and it’s, I would say just in general, emerging markets are facing some challenges. They are mostly now recovering, after having seen a very sharp drop in activity during 2020. Many of them still face substantial risk from the virus. Data is not as good coming from emerging countries as it is from more affluent countries, so we know a little bit less about the danger of the virus, but we know it is a danger. But the major risks facing emerging countries come from the developed countries and come from things like what will be the demand for the commodities that they sell? Because if demand is weak, commodity prices will be low, and that will hurt emerging countries. What about demand for manufactured goods that are in part produced in many emerging countries? What about remittances of expat workers who live in affluent countries and send remittances home to their families in emerging countries? Many of those workers were unemployed during the pandemic, so the hope is that they will get reemployed and be able to send remittances home.
So these are some of the factors that will influence the path of emerging countries and the ability of those countries to service their external debt. Another factor will be currency values, because if the US dollar remains weak, that will be helpful in terms of servicing debts, but not necessarily helpful in terms of the competitiveness of emerging market exports. So currency values can be a mixed bag for emerging countries. But it’s going to be a mixed bag in terms of the performance of different countries, because different countries have different sets of circumstances. Some are commodity exporters, some are manufacturer exporters. Some rely heavily on remittances and some don’t. Some have their own financial houses in order and some don’t. So, there will be some successes and failures in the emerging world. But the hope is that these global factors that I mentioned will not move in a direction that creates a systemic risk to the emerging world in general, and that these emerging countries can effectively emerge from this crisis.
Tanya: Every year when we have this conversation and we talk about the year to come, there are always question marks. This one probably more than any others in recent or nonrecent years.
Ira: Indeed. When the vaccine is fully implemented and herd immunity is achieved and the virus ultimately dies, because all pandemics ultimately end and all pandemic viruses ultimately disappear, my suspicion is that we will see more working from home, more shopping remotely, maybe less business travel, more reliance on technology. And these factors are likely to affect the mix of industries that will do well or not do well, are likely to continue to disrupt labor markets in many parts of the world, probably add to income inequality and create social stress that will feature prominently in public policy debates. So it will be a different world and the degree to which it will be successful will depend in part on how policymakers respond to those disruptions.
In my view, what we will need will be more investment in human capital so that the labor force will have a skill level that is commensurate with the needs of the private sector going forward. That’s the long-term transition. And even if it’s done successfully, there will probably be some disruption in the process.
Tanya: Ira, thank you so much. And hopefully we’ll check in soon.
Ira: Yeah, that’d be great.
Tanya: Ira Kalish is Deloitte’s chief global economist. He puts out a weekly global economic update that you can find at deloitte.com/insights. We’ve also got a lot resources to help you navigate doing business in a COVID world.
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