The Incoming Greatest Depression Since World War II – Analysis

By Chan Kung*

With the spread of the novel coronavirus (Covid-19), extreme locking down measures have been ongoing in various countries. Poland, previously eager towards the European Union, has now taken drastic measures to shut down its roads and cut off its frequently used highway network connecting to Europe. The United States and European countries, and most of the Asian countries as well, have all imposed locking down measures and closed their borders, refusing the entry of foreign nationals. These measures are all unprecedented. Such closure and isolation actions have paralyzed the entire world and caused the global economic situation to change dramatically, and every day we see new development of the situation. 

In the United States, many are frightened by the turmoil in the Wall Street. At first, it was thought that the market would return to normal the next day after the crash. This was especially true after many seeing the Federal Reserve’s intervention, people became even more optimistic that this would not be a financial crisis. It wasn’t until after seeing successive slumps that people realized things were turning to the ugly side. Almost suddenly, the U.S. stock market had fallen by one-third, and global liquidity had suddenly become tightened, while the U.S. dollar exchange rate has been continuously hitting new heights.

In the United States, as the pandemic has just entered the outbreak phase, and the number of cases is still breaking records, causing widespread tension and crashes in Wall Street. As the Covid-19 outbreaks in the U.S. territories and states become worsen, many American politicians are basically in the condition of mental breakdown. To curb the spread of COvid-19, the US government has ordered millions of workers, students, and consumers to stay behind closed doors, resulting in a surge in unemployment claims across the United States.

In Ohio, more than 48,000 people applied for jobless benefits in the first two days of the week. In the same period last week, there were only 1,825 people. In Pennsylvania, about 70,000 people sought unemployment assistance in one single day, which is six times the total of the previous week. As more people apply for jobless benefits checks, a new problem arises. Treasuries in the U.S. states are in a state of collapse. Whether the different states have enough funds for the government to weather this unemployment wave until the end of the crisis is very worrying. Many people are wary that the demand for aid will exceed the ability of the states.

 “Our unemployment insurance fund is getting hit pretty hard right now,” said Gov. Gina Raimondo of Rhode Island. In Rhode Island, 18,000 jobless claims related to Covid-19 have been received in a week. Raimondo, a Democrat, said that Rhode Island needs funding and wants the federal government to help. Just as Pennsylvania finally repaid the last payment of the multi-billion-dollar bond issued in 2012 in January this year, settling the unemployment fund debts from the last recession, now new troubles are rising. In Tennessee, the number of new unemployed applicants has doubled in the past week. Michigan’s unemployment insurance agency said on March 18 that they received more than five times as many unemployment applications as normal; Minnesota said it received more than 2,000 unemployment applications per hour, compared with usually only 40 or 50.

The actual situation may be even more serious because the current order to avoid gathering has made the application of benefits more complicated. Some states’ unemployment offices have been closed to the public. Each state has transferred a large part of unemployment application processing from the office to online, or through phone. New Jersey Gov. Phil Murphy said the state ’s Department of Labor and Workforce Development website had crashed because there were simply too many applications for unemployment earlier this week. Governors and lawmakers in many states have moved swiftly this week to make it easier for citizens to get unemployment benefits. Kansas lawmakers quickly passed legislation on March 17 that removed the time limit for benefits to begin to be paid after a week of unemployment and extended the benefit period from 16 to 26 weeks.

The economic stimulus package proposed by the Trump administration may be close to US$ 1 trillion, including issuing checks to Americans within weeks to help them pay for food, bills, mortgages and rent. The Senate approved another bill on March 18 that will inject US$ 1 billion into the state unemployment insurance plan. However, efforts of this size may not be able to solve the problem. The last recession caused the unemployment trust funds of 35 states to go bankrupt. In order to pay the wages of unemployed workers, these states had to bear more than US$ 40 billion in debt. Many states have increased taxes on employers in order to pay their debts, and some states have reduced the amount and duration of benefits for future unemployed to make it difficult.

Goldman Sachs estimated that to initially resolve the current problems in the United States, trillions of dollars will be needed. As of now, the U.S. federal government ’s assistance will almost certainly exceed the “Great Recession” of 2008. As for the future U.S. economy, more and more economists believe that the U,S, may enter or has already entered the first recession since 2008. .

The actual deterioration of the global economy will not be solely felt by the United State. China too, will not be exempted 

China, like the United States, is the world’s largest economy, and also faces the impact of the viral outbreak. The number of cases in China is almost four times that of the United States, and the number of deaths is twelve times that of the United States. The impact of the Covid-19 outbreak has been far more severe in China than in the United States.

Despite China and the United States having different economic structures, industries, levels of wealth and living standards, the macro scale of the impact on the American economy can still be compared with that of China. If the U.S. needs trillions of dollars to put its economy on a sounder footing, China’s needs shouldn’t be much different. If anything, perhaps the biggest difference is that the U.S. can still “print the notes and let the world paying the bill”, while China can only pay its own bill, thanks to a delayed internationalization of the renminbi and an imperfect bond market.

In fact, China’s economic and financial situation was facing huge difficulties even before the outbreak began.

China’s economy as a whole is still on a downward trajectory. From 2013 to 2019, China’s economic growth rate over the years were 7.7%, 7.3%, 6.9%, 6.7%, 6.5% and 6.1%, respectively. Even under “new normal” circumstances, the economy has continued to slide. Such a situation is far from comparable to the economic resilience during the SARS outbreak in 2003. Although the Chinese economy was greatly affected by the SARS outbreak, the Chinese economy was taking off at that time, and the investment, consumption, and export were doing well. There was no big problem in the world market. With the support of external demand and the continuous transfusion of foreign funds, China was able to recover quickly, and the economic growth rate of the whole year still reached 10% in the end.

In the field of government finance, the central government has already had a budget deficit, and now it is even worse. The finances of local governments are also very difficult. In 2019, the fiscal deficit of first-tier cities like Beijing and Shanghai were respectively RMB 102.3 billion and RMB 40.8 billion. Even in the golden period from 2007 to 2016, the local budget balances were also negative. In 2019, many of China’s so-called economically strong provinces have fiscal deficits; Guangdong’s fiscal deficit was RMB 341.8 billion, Sichuan’s was RMB 535.3 billion, Jiangsu’s was RMB 236.7 billion, Shandong’s was RMB 302.1 billion, Zhejiang’s was RMB 190.9 billion, and that of Hubei, which was greatly affected by the epidemic, was RMB 348.7 billion.

With tight budget in these strong provinces, let alone the other provinces. Now many local governments are relying on the mixed-ownership reform, i.e. the purchase and sale of shares in state-owned enterprises, in fact, it is supported by spending local governments’ entire assets, with non-tax revenues in support. In short, the local financial burden is already heavy to the point of despair.

On the other hand, the business and household sectors are also facing a similar issue. A euphemism for S&P Global Ratings is that Chinese companies have little room to grow their debt, but will be less profitable than in the past few years. In other words, the pressure facing the business sector is greater. So far, the debt-to-GDP ratio of the Chinese government, enterprises, and households as a whole have exceeded 300% and reached 303%. China’s manufacturing purchasing managers’ index (PMI) plummeted to 35.7% in February 2020 due to the epidemic, down 14.3 percentage points from the previous month, according to the National Bureau of Statistics.

In fact, China’s economy is already teetering on the edge because of the restrictions on land and real estate transactions, which are tantamount to a limited source of capital. China made concessions in its trade war with the United States to preserve its overseas markets and maintain its current economic growth, but now that the outbreak has occurred, even without a trade war, its overseas markets have fallen. The Chinese overseas export of currently much-needed products, such as masks and ventilators, cannot solve the problem at all, let alone China needs them for its own use. Therefore, such products cannot be effectively exported and maintain China’s export market share.

Just like the situation in China, Asian European countries have no little rooms for optimism. The number of the outbreak cases in Europe has been on the rise rapidly and death toll similar to that is experienced by Italy is increasing. Forced by the situation and facing condemnation from many, the blockades between European countries have basically been fully implemented. The tide of unemployment and bankruptcy is emerging, the economy and markets are also on the verge of collapse.

Therefore, considering the continuation of the current global pandemic, the results are quite pessimistic. Facing the epidemic situation, under the tremendous pressure of public opinions, every country has implemented extreme measures despite knowing it is impossible, and even if it can hold up until the end of this summer, it will still lose half a year. In these 6 months, the population of 1 billion people in the developed markets will stay at home; 850 million students suspended from school, and the world economy will be essentially stalled. Obviously, countries around the world currently have greatly underestimated the impact of the epidemic. Imagine that in these six months, everyone in the world will not be working, or will be having “holidays”, many value-generating industries like tourism and service industries will be still ongoing, and there would still be consumptions, but not during the lockdown worldwide.

If this situation can still produce good results and the world economic order returns to normal, it will simply be a miracle. Of course, we do hope that miracles will happen, and the virus might gradually disappear when summer comes, but it is very likely that miracles will not happen on the economic level and the loss will still be certain, which means that the greatest depression after the World War II will likely occur.

For China, what needs to be warned is that, just a few days ago, China might still blame countries around the world for not taking drastic measures and failing to do a good job to prevent and control the outbreak of the virus. However, it may not take long, and soon it will be forced to change to require these countries to open their boundaries and restore and stabilize economic order. No one can afford to drag on like this, and all economies would start to collapse. This is certainly the consequences of globalization, but at the same time is also an objective reality. What is more terrible is that the authorities in the global medical community do not dare to guarantee that this virus will not make a comeback at some point in the future. This alone means that the entire world is in a deep environmental crisis.

All these have exposed the fragility of the world economy, and it is difficult for any country in the world to survive alone. Some people may have witnessed the Wall Street stock disaster in 1987, some have seen the Asian financial crisis, and some have experienced the subprime crisis in 2008. These moments of crisis cannot be compared with the global depression that is about to occur. This is the biggest post-war depression, and now is the time for us to pray.

*Founder of Anbound Think Tank in 1993, Chan Kung is now ANBOUND Chief Researcher. Chan Kung is one of China’s renowned experts in information analysis. Most of Chan Kung‘s outstanding academic research activities are in economic information analysis, particularly in the area of public policy.