Noted U.S. economist shares his outlook on the impact of the COVID-19 crisis

“The Economy Goes Out on Sick Leave: the COVID-19 Challenge” was the subject of one of the Virginia-based Adhesive & Sealant Council’s (ASC) latest webinars for its members. The webinar’s presenter, Ken Mayland, a former chief bank economist, president of ClearView Economics and a graduate of MIT and Penn, shared his views on the public health/medical, business and economic problems posed by the coronavirus crisis and what the after-effects will be.

What he revealed during the Q&A session in particular was a relatively optimistic outlook for the U.S. economy once it emerges from lockdown. Afera Secretary General Astrid Lejeune shares some of the most important takeaways for the interconnected businesses of the European adhesive tape supply chain in the 10 questions put to Mr. Mayland by ASC members:

1. How will this end?

I think in the financial world, you are going to see some respected investors like Warren Buffet and David Tepper signal that things are cheap and start buying big. As a result of these signals, we could even see a buying panic ensue.

We went into this situation with inventories already in good shape, and then on top of that, there has been a drastic drawdown during the crisis. So when we get to the other side, there is going to be a tremendous ordering-restocking snapback. I think there is a chance that we will see by late this year, just as the GDP came off in double-digit terms, it is going to rebound in double-digit returns. Perhaps in Q4 of 2020, we will see GDP increase at a 15% quarterly change at an annual rate. To the economist, that sounds good, but to the business person, you might say, Oh, but business still stinks! But you have at least made the turn.

2. What are your expectations on inflation versus stagflation?

Right now, because demand is low for lots of things, like petrol, there is no inflation problem. Prices for things in short supply will be largely offset by declines in prices for things for which demand has fallen off. When you net the positives and negatives, we will come out with no inflation. But you have all the monetary quantitative easing—all the liquidity put into the system—and the huge federal government deficits that are accruing. In the distant future, you have to worry that we are going to have to pay a price inflation-wise for the aggressive monetary and fiscal policies that are being undertaken now.

3. How do you see the prolonged virus, as it crops up in other parts of the world such as Africa, affecting the U.S. economy?

Unlike the European, Japanese and Chinese economies, imports and exports play a much smaller role in the U.S. economy. Most important to our economy are its recovery, the consumer, and getting our people back to work. That is the first order effect, and what happens in the rest of the world will be more of a second order effect.

Another dynamic that I think is going to come out of this in future years is that a lot of companies in the U.S. are going to re-evaluate their supply chains, pulling them out of China and bringing them much closer to home.

4. When do you think we think we will see the recovery of the stock market, as it seems like some of the demand loss is already reflected in the aggressive price declines?

I have already mentioned that out of a total fear of the unknown, there was an irrational decline in stock prices. Not that stock prices should not decline because of the pandemic, but they dropped way in excess of what they should have done in view of this being “a transient problem”.

The stock market has had a few good days now, and we are hearing that some major hedge fund investors are starting to cover their shorts and buy some of these stocks on the cheap. I wish I knew this were the case. I think the low might have been on 23 March, and we are already several percentage points above that low point. I think before the end of the year, the stock market will come back substantially. It may not hit previous highs, but it will rebound significantly.

5. What is the outlook for 2020-2021?

I think we get past this. The same arithmetic works in reverse: If you hit a low point of let’s say 85% of what the economy previously produced, and in Q4 of 2020, the employees of all the major retailers and airline manufacturers return to work and you increase to producing 90%. You haven’t fully recovered, but you have gained back 5% in Q4—annualised, that is +20%.

And I think the economy continues to rebound throughout 2021, so I would expect to see an extraordinary year of growth. I am going out on a limb, on the understanding of how this arithmetic of recovery works: 2021 might show the strongest year of GDP growth of the post-World War II era.

6. Do you think major retailers will bounce back?

I would expect them to come back, but many of the smaller brands and franchises will not. There will be a significant bankruptcy problem when we get to the other side. Many restaurants may not reopen.

It is important to keep in mind that companies may go bankrupt, but the hard assets do not go away. They are re-priced lower, and someone can then step in with the capital to buy those assets at a cheaper price and repurpose them or rebuild those businesses. Financially, the owners may change, but the hard assets do not disappear, they just change hands.

7. Since it appears the virus cases are peaking at different rates in different states, do you predict a recovery will be seen by year end?

Yes, I do, because the differences in peaks will only be a matter of weeks or maybe a month. I think within about 2 months, we will be on the backside of the curve. Going further down the backside, perhaps after another month, you will go back to work.

The models of China, Singapore and Korea are pretty clear. China may have minor flare-ups of infected people here and there, but they are largely back to work, and that is only after a couple of months. Their peak period was probably February/early March. I think even though the period of peak virus will vary geographically across the U.S., the differences will not be marked enough so that everybody will hit some rate of recovery in Q4 of this year.

8. How do you see the increased strength of the U.S. dollar in the recovery process? Will it help or hinder the recovery?

That depends on whether you are a consumer or producer. If you are a consumer, that means everything in the world is now cheaper, and the dollars in your pocket have a greater command over goods. If you are a producer, this just means your competition is that much tougher—that the competitive environment is an even tougher one. So it cuts both ways.

The dollar has been stronger mostly because this is the biggest, most risk-free market in the world, and so this is where the investment money wants to find a safe home. Changes in foreign exchange rates take as long as 3 years to unfold fully—they have a long tail to them. And so this is not just a problem for 2020; this will affect competitiveness as far as 2022 and even 2023.

9. Do you forecast any permanent structural changes in the U.S. economy following the crisis, and do you think there are sectors of the economy that are not likely to return to full employment?

I suspect there will be changes in the way we do things. Restaurants may not be as tightly packed. Business travel will bounce back more quickly than consumer travel, which will take some time. People may not be as enthusiastic about taking cruises and visiting casinos.... There will be structural changes, but some may be for the better though: It would be a good thing if companies start to rethink their supply chains and bring them back to the U.S. This will certainly be done in the healthcare sector for strategic and defence reasons.

10. Do you think the market was overvalued before COVID-19, and if so, does this change the financial model?

This is a good question, because how far it declines also depends upon if, at the outset when it started to drop, it was fairly- or over-priced. I would say it was priced for perfection, on the heels of a good economy in 2019 and a pretty good economy in 2020 with increasing corporate profits. So things were either fully- or perfectly priced, and obviously perfection has not occurred, so that probably made the falling-off steeper.

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