THE PANDEMIC’S REALITY CHECK
The longer-term lessons from the Covid-19 pandemic will only emerge with time, but it has already exposed in sometimes brutal fashion, an array of weaknesses in the global economic framework, which had been accumulating long before the pandemic. As much as Covid-19’s impact can be construed as a series of exogenous shocks, the issues that it raises will have to be addressed, one way or another.
In broad terms, it has exposed complacency about supply chains (as discussed in the Q2 2021 edition of The Ghost In The Machine, see here), health security, free movement of people (within and across borders), and the demographics of the workforce, as well as concentration risks (notably semiconductors), capital misallocation and market failures, above all in utilising and capitalising on the benefits of the technological revolution in terms of critical infrastructure.
Chart 1: S&P 500 Futures - Weekly
Nevertheless, as much as these weaknesses have been exposed, and present many challenges, they should also be seen as opportunities, which in theory at least, should be enormously beneficial to the global economy as it gradually recovers from the shock, even if the geo-political landscape is adverse and so radically different from the spirit of co-operation and coordination that was manifest during the Global Financial Crisis (GFC).
To be sure, supply has not recovered nearly as quickly as many had expected. But as much as the pandemic itself via way of activity restrictions and production displacement, extreme weather events and indeed drought account for some of the headwinds to supply, it has been pre-existing productive capacity constraints, and the way that globalisation and ‘just in time’ supply management have created a very fragile operating framework, which have been just as significant. There will be those that argue that stress testing and planning for a similar colossal shock to the global economy would be prohibitively expensive. But that effectively glosses over some key antecedents which have exacerbated the current headwinds.
Source: Charles Schwab, Bureau of Economic Alalysis (BEA), as of 2020. Chart 2: IEA: Oil & Gas Upstream Investment, % y/y
There are numerous charts that could be as examples of ‘what ails us’. But these two on a) the average age of the US Capital Stock (via BEA/Charles Schwab) and b) Annual growth in Oil & Gas Upstream investment (via IEA), which look very similar to broader mining capital expenditure trends, speak for themselves.
Source: IEA = International Energy Agency,
www.iea.org 18 | ADMISI - The Ghost In The Machine | Q4 Edition 2021
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