COVID-19 Macro-economic / global outlook

"The coronavirus will change the way we do things for years."

The coronavirus will change the way we do things for years.

This article aims to provide benchmarks of the macroeconomic situation in connection with the COVID-19 pandemic. Companies here will be able to have this information as a background for their strategic decisions. The current environment The pandemic is globalizing. Supply chains are falling apart. Closures are multiplying on all continents. India, among others, announces a “total lockdown”. Unprecedented aid programs are announced by governments and monetary authorities. COVID-19 is causing sweeping disruptions on both the demand and supply side and, worse still, there is no telling how long it will be around and, therefore, how harmful it will be. The big banks are still operating normally despite the rush for short-term corporate credit. However, this could change in the event of a cascading fault. A global recession is setting in, will we go to depression? Business Supply chains are disrupted or even completely shut down by imposed quarantines, factory closures and restrictions in the transportation of goods and people. Goods are no longer produced and exported. Revenues are not generated. Invoices are unpaid. Cash is scarce. Most organizations are in crisis management. For how long? That’s the question.

It is very likely that market shares in a given sector pre and post COVID-19 will be very different. Customers who do not get delivery of their products will turn to other suppliers. The invocation of force majeure clauses, modification of price, quantity or refusal to take delivery can protect one to the detriment of the other within a supply chain. Better to be the one with these clauses.

The company must analyze and predict the impact of COVID-19 on customer demand and its ability to deliver in the future. Maintaining communication with its partners becomes essential for the company. The focus will now be on resilience, risk exposure and business continuity plans within supply chains.

Investors and companies, in the face of all this uncertainty, are clearly expressing their preference for liquidity. Investors are massively selling their stocks and bonds to favor liquidity, more specifically the American currency. Companies are in liquidity preservation mode.

The resulting rapid strengthening of the US dollar is painful for countries and companies with US dollar debt. They will now have to deal with a stronger greenback and, at the same time, a severe recession.

For example, companies and sovereign entities in developing countries that are exposed to vulnerable sectors such as energy, tourism, commodities, etc. simultaneously suffer a drop in demand, a fall in prices and a more expensive debt repayment than anticipated.

Credit rating agencies lower the credit ratings of companies which decreases their access to liquidity. 2020 and 2021 being big years for corporate refinancing, a wave of defaults could occur in 2020, thus significantly limiting risk appetite.

The effectiveness of the monetarist approach questioned

Many governments (regardless of level) will face reduced tax revenues and an explosion in spending reeling from the shock of the COVID-19 pandemic.

The more the economic damage continues to mount, the more we will see the impact of monetary policy diminishing.

In fact, since 2008, we have been in an ultra-accommodative monetary policy framework, with unconventional tools such as endless quantitative easing and negative interest rates.

These tools, although successful in averting catastrophe in 2008-9, have continued to be used time and time again since the 2008 crisis in order to avoid any too severe economic downturn.

The use of these tools over the past decade has produced an abundance of cheap money (read: debt) and ever-higher asset prices, be it real estate, stocks or bonds and an undervaluation of the risks inherent in these assets.

We are in the era of the over-financialization of the economy and of a

aggregate demand that is disintegrating as a result of COVID-19. This plummeting global demand may no longer respond to the tools of central banks.

In any case, an aggressive loosening of monetary policies whose

result is more than uncertain, as for the recovery of aggregate demand, will exacerbate the systemic risks linked to the over-financialization of the economy (over-indebtedness and under-assessment of the risk of the assets financed)

In other words, the pandemic is creating a demand-side shock that will not be easily undone by “any huge amount of money”.

In this context, the fiscal tools of governments will be required to try to lift global economies.

Keynes is back (note 1).

We are still at the beginning of the COVID-19 pandemic and the economic impact is not yet clear except that it will be huge.

Closures and social distancing measures are likely to remain for months, not weeks.

It will take an unprecedented level of government assistance to help those affected make ends meet. Few people have the kind of savings needed to absorb these kinds of unexpected expenses. Unfortunately, the same is true for our governments.

The priority for everyone is to save lives. The budgetary positions of several countries suggest serious difficulties in meeting these needs even if it is clear that disposable income must be preserved to avoid collapse.

The euro zone

Eurozone governments have tried to engineer a response

continent to the virus but with little success. The disparities in the budgetary positions of the Member States are already in question.

Germany and Holland being the only ones to have strong budgetary margins (debt/GNP ratio (note 2) below 70%) whereas the debt/GNP ratio for several large European countries is already above 100% (France and Spain – around 100%, Portugal – around 120% and Italy – around 130%).

The potential response of several governments in the Eurozone (and many others elsewhere) to deal with the magnitude of the COVID-19 shock remains compromised on the fiscal side. Contraction of the denominator (GNP) and explosion of the numerator (Debt).

Moreover, when it is time to rebuild the devastated economies, post-pandemic, European countries with more fragile fiscal positions will have one less important tool: they will not be able to devalue their currencies to stimulate their recovery. For the euro area, the lack of a strong reaction to monetary stimuli is therefore a serious challenge.

In addition, another significant risk is added; a massive sale of bonds from certain states such as Italy and/or Greece could make it impossible to finance the needs of peripheral states under their sole signature. These countries will still have to spend massively in their economy in direct assistance to their population and their businesses and will have to find the resources (taxation and/or debt) to do so.

In other words, the economic shock that adds to Brexit and resurgent state nationalism could spell the end of the euro sooner or later.

Let us remember Greece 10 years ago. Bankrupt but unable to default. Trying to trade but without the ability to devalue his currency.

We must remember the debate of the time – can the benefits of the budgetary rigor of certain members be granted to another member in budgetary difficulty, the tax revenues of one being used to stabilize the faltering economy of the other – in short, how far does the union go?

If there were several crises (of the Greek debt type) taking place at the same time? And it is very likely that COVID-19 will lead us to this Gordian knot. The response of countries in a strong budgetary position will be decisive for the continuity of the euro.

In sum, one can imagine, let’s say Italy, noticing that vague support intentions are not enough, and therefore pondering the dilemma: is it better for me to default and exit the euro, or to accept debt bondage (Greek type) for a long time? Dare to think that Europe will have another answer; a different answer to offer.

Le Canada

Canada has a strong fiscal position. The Debt to GNP ratio is below 35% (pre-COVID-19) at the federal government level and even if the indebtedness of the provinces is added to it, this ratio remains well below 70%.

The provinces have sufficiently strong budgetary positions with the exception of Newfoundland. They should be able to withstand the shock. Admittedly, Alberta and Saskatchewan are struggling with the oil price crash but their pre-COVID-19 debt position is reasonable.

Provincial Debt to GNP ratios pre-COVID-19 fluctuate between less than 20% (BC, Alta, Sask) and between 30 and 40% (Man, NB, NE, PEI) and remain below 45% for Ontario, Quebec and Newfoundland. The level of tax levies varies from one province to another but overall there is some leeway.

The federal government has implemented support programs for individuals and businesses on an unprecedented scale. Its programs can be enhanced by certain provincial programs.

The Bank of Canada intervened three times in March (rate cut) to ease market tensions and improve liquidity. The number of bankruptcies increases the more the economy breaks down to give way to the fight against COVID-19.

In the first days of April, the Bank of Canada implemented a program to ensure liquidity and efficiency in the financing of the provinces. Implicitly, the federal government ensures that all provinces will find the necessary funding to get through the crisis.

United States

The US debt-to-GNP ratio exceeds 105%. The budget deficit is about 4% of GNP (before COVID-19). A high deficit, yes, but tax levies are not yet as overburdened as all European countries (or Canada). The fiscal space remains, to a certain extent, via an increase in tax levies.

The need for aid is also enormous in the United States. The financial repercussions on the fiscal health in the short and medium term (contraction of GNP and sharp increase in debt) will be pronounced. It is easy to imagine, following the aid programs deployed, a US debt / GNP ratio moving towards 120%. Level often presented as a significant warning and a risk that is difficult to sustain over time.

The American Federal Reserve intervened strongly and quickly to ensure the availability of the greenback in the world economy and it reintroduced a program of repurchase of title – ”quantitative easing (QE)” – repurchase program practically without limit.

Regardless of the country, the authorities must put these aid programs in place. The priority remains: saving lives. However, the consequences will be there for a long time. These programs will put more and more pressure on the American public finances by increasing an already expensive interest expenditure and we will not always be in a low interest rate environment.

The United States, like any other government, must issue its debt securities to the market. Admittedly, they have the advantage of the size of their economy and the reserve value status of their currency (and their debt securities) but a significant increase in their indebtedness with a severe contraction of GNP (long recession) following the COVID-19 could also cause a rude awakening in the markets.


As the United States falters in its efforts to fight COVID-19, China is positioning itself as the world leader in the pandemic response. However, even if the medical equipment planes are real, many doubt that the COVID -19 ”disappeared” so quickly from Chinese soil.

The Chinese economy of 2003 (SARS), and in particular its banking system, cannot be compared to what they are today. In 2003, there was a sharp decline followed quickly by a strong economic recovery.

At that time, China was experiencing growth rates of over 10%, whereas nowadays that rate is less than 6% and its banking system was not as heavily burdened with bad debts as it is today.

Chinese regulators even had to bail out a few banks, for the first time in decades in the spring of 2019. In early summer 2019, the Chinese government was forced to call an emergency meeting with the banking world. It is therefore not surprising that the solvency of the Chinese banking system is on the decline. And now, the impact of COVID-19 will weigh heavily on weakened balance sheets.

Moreover, not a year ago, apart from the trade conflict with the United States, the Chinese economy was weakening. Credit had dried up for the private sector, an important source of growth, and consumers were cutting back their spending drastically. COVID-19 will intensify this trend.

It is clear that the recovery in China will not be as rapid as hoped. This recovery will not happen without increasing demand from other countries and they are currently facing the virus. Admittedly, a strong recovery in Chinese domestic demand is possible, but the Chinese consumer alone cannot become the engine of global growth.


The longer it takes to bring the pandemic under control and, subsequently, the longer it will take for the economy to come back, the more indebtedness will become unsustainable whether we are countries, banks, companies or individuals .

The big economic question, after the control of the pandemic, is whether it will be a V-shaped recession or a prolonged recession.

With the scale of the aid programs, the will of governments to maintain disposable income is clear. The speed with which these amounts will reach the pockets of individuals and businesses will be the key factor for success. You have to start paying the bills again… For the other to make an income and in turn pay the bills (or salaries)…

Some sectors will likely recover quickly, when workers can return and trade paths are restored. But no one knows whether SMEs will be able to survive an extended period of enforced shutdown.

A rapid recovery scenario to be functional therefore implies that aid programs protect companies from bankruptcy due to lack of income and, also, some international coordination. There is no point in starting a supplier if the buyer is still sick….

The economy as a whole will have to accept to shed some productivity, to regain sufficient solidity within its supply chains.

More sadly. It is reasonable to think that a second wave of infections will be felt in 2021. And if, at that time, it was engaged, the recovery risks being slowed down or worse a “double dip”. However, scientists’ efforts may have had time to generate an effective treatment for the disease and its spread.

Let’s hope that our governments, our economic leaders and ourselves will not be taken by surprise by this second wave.


1. The Keynesian approach proposes that the (optimal) economic health of a country can be achieved — and recessions lessened or even avoided — by influencing aggregate demand through policies of government economic intervention.

2. For reference, this ratio of a country’s Debt to its Gross National Product for the Canadian federal government is just under 35% (before COVID-19).

3. SARS: Severe Acute Respiratory Syndrome


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