More thoughts on the post-Covid world
News about Covid-19 vaccine development in Russia and other countries offers a ray of hope the pandemic could be ending soon and the world economy may return to normal.
The Bank of Thailand said Thai GDP could attain its pre-Covid level as early as the end of next year but I certainly have a different opinion. But instead of writing a long essay on the subject, let me do it in a question and answer format as it might be easier to follow and digest.
What would the world economy be like after Covid-19?
It will be a totally different world as everyone from all economic classes will adjust both their economic and social behaviour. In the New Normal world, consumers will consume less and businesses will invest less and save more for two reasons. First, they have exhausted much of their savings and many have incurred debts during the outbreak.
After Covid-19, it will be time to replenish saving accounts and repay debts. Second, people will want to save more than pre-Covid levels to shield themselves from future crises. At the end of 2018, the World Bank estimates global savings were about 25.1% of GDP which is equivalent to three months of income. Experts suggest people ought to have savings enough to cover six months of expenses or about four months of income. The world will need to save much more -- about 33% of GDP -- to achieve such a level.
In light of these two points, people will cut expenses on luxury goods and durable goods. They are brand name products, holiday-travel products, vehicles, real estate, and electronics. I am not making this up; this is a prediction of an iconic Dutch trend forecaster but her prediction goes along well with economic theories.
With the need to save more and the conservative behaviour of consumers and businesses, the world will enter five years of economic slowdown after the end of Covid-19 outbreak. To think the economy will resume its pre-Covid position right after the outbreak is a wish that will never come true.
Will the Thai economy have bottomed out in the second quarter?
Hope is good but reality is more important. This might be possible if you do a quarter-to-quarter comparison as the lockdown has been eased and economic activities have resumed. More consumption is possible in the 3rd quarter. But one has to be aware there is much less government financial support in this quarter -- about 300 billion baht less.
If the 3rd quarter GDP is better than the previous quarter, it will not be by a wide margin as lower income will offset non-lockdown effects and pent-up demand. However, the year-on-year GDP comparison (Q3 this year compared with Q3 last year) would show a serious contraction as the country still does not have foreign tourist income. Thailand will report quarterly GDP growth on a year-on-year basis.
The concern is the 4th quarter and beyond as there is no announcement of a new fiscal stimulus package and the loan payment holiday is over. I will not be surprised to see a 20%-plus economic contraction in the last quarter of the year. Things are not expected to improve next year as long as there is no regular influx of foreign tourists.
Can we rely on government assistance to pull us through the Covid-19 crisis?
Governments have limits. Those which are brave enough to break the limits will risk economic disaster like Venezuela, Argentina and Greece. The limit is on the financing the deficits. In the old days, governments made a fatal mistake by borrowing from abroad to fund their spending. Nowadays, they ask their central banks to print money to fund their operation. Clean and easy? I do not think so. World major economies might be able to avoid the disaster based on trust in their economies and currencies. Smaller economies like Thailand will not have such a luxury.
Remember an old Thai proverb. When one sees an elephant poop, do not poop like an elephant.
Despite the lack of demand for new loans, the country's liquidity position is pretty tight right now as we no longer have foreign tourist money which was about 1.8 trillion baht in 2019.
The warning signs of a tight liquidity situation can be seen from recent current account deficits. If there is to be another round of a Covid-19 stimulus package. It will be a much smaller one, too small to be useful.
The Thai government, like any government in the world, has two choices. Make a fatal mistake of borrowing from abroad or ask its central bank to print money and accept the risk of inflation and capital outflow.
Neither is theoretically acceptable. In conclusion, one should not rely on the government to further stimulate the economy. Just trying to balance its coffers from dwindling tax income is already hard enough.
Are there any risks I should be aware of?
A once-in-a-century crisis naturally comes with many risks. Banks might not collapse (as governments will try to support them) but a credit crunch is certainty such as after the Japan financial crisis of 1990. Even the Japanese banking system was still intact and liquidity was ample; no banks lent money out of fear of capital inadequacy and the credit standing of borrowers. Technically, economists call this situation a "liquidity crunch".
The Thai baht would be at risk from current account deficits. Thailand had an average $3.2 billion monthly current account surplus in 2019. The current account in th second quarter was $837 million owing to the lack of foreign tourist income. The future does not look promising.
The unemployment situation will be severe. According to the Ministry of Tourism and Sports, the industry employs 4.45 million people or 11.6 % of total workforce.
If you add workers related to the tourism industry such as taxi, van, and bus drivers, restaurant workers, curb-side food sellers, retail store employees and so on, the numbers could double. What would happen to these jobless workers? The first thing that comes to my mind is crime.
Would the bad economy lead to a political crisis?
Hush, hush. We do not discuss such issues here.
Chartchai Parasuk, PhD, is a freelance economist.
Chartchai Parasuk, PhD, is a freelance economist.