I’m not prone to making directive calls in columns like this one or to using capital letters in my social media posts. Rather than telling people what to think, I strongly prefer to try to help them reach their own conclusions by providing analysis and insights.
In the last few weeks, however, I’ve made two notable exceptions: in repeatedly urging policymakers, companies and individuals to realise that the coronavirus shock was fundamentally different in that it would trigger unprecedented economic sudden stops, a phenomenon that is extremely unfamiliar outside of fragile or failed states and communities hit by big natural disasters; and, as I anticipated a much bigger and generalised market correction, by urging investors not to keep on buying the dip, an investment strategy that had performed extremely well in recent years.
During the weekend, I used capital letters again in a social media post — this time to warn that the cascading sudden stops were reaching CRITICAL MASS. I reached this conclusion through multiple consultations over many weeks with doctors, economists and behavioural scientists and also by drawing on my experience decades ago working at the International Monetary Fund on crises in developing countries, including failing states.
Think of what is happening as a huge paradigm shift for economies, institutions and social norms and practices that, critically, are not wired for such a phenomenon. It requires us to understand the dynamics, not only to navigate them well but also to avoid behaviours that make the situation a lot worse.
The bottom line is that the economic disruptions immediately ahead will be more severe and widespread than the ones experienced by the bulk of the population in advanced countries.
We live in a global economy wired for ever deepening interconnectivity; and we are living through a period in which the current phase of health policy — emphasising social distancing, separation and isolation — runs counter to what drives economic growth, prosperity and financial stability. The effects of these two basic factors will be amplified by the economics of fear and uncertainty that tempt everyone not just to clear out supermarket shelves, but sadly also reignite terrible conscious and unconscious biases.
All this will have stressful and immediate negative effects on institutions. Policies will be designed under “fog of war” conditions, including that awful trade-off between the critical need for urgency and both imperfect information and the absence of a playbook. The effectiveness of traditional measures will wane at a time of repeated need for streamlined and yet highly co-ordinated decision-making at the local, regional, national and international levels. And, if we are not careful, our own behaviours could compound this considerable list of challenges.
Wherever you look, economic activity is shutting down through a combination of government directives and social behaviours. US travel bans, European border closings, nationwide shutdowns and office and school shutdowns have become normal.
The phenomenon is accelerating also at the level of local communities — a popular restaurant’s Friday reservations fell by two-thirds compared with those just a week earlier, and its walk-in traffic declined even more — and it is now reaching critical mass when even isolated and less-fear prone segments of the population will be forced to disengage (after joining the panic buying of supplies). With that, economic damage will be even more immediate and even more widespread. And because it will also be unprecedented for many, it will turbocharge the type of uncertainty, fear and feeling of powerlessness that results in either total paralysis or massive overreactions.
I worry that this combination, by yanking so many out of their comfort zones, will also make us lose sight that this shock can be contained and reversed. And when the economic turnaround comes, and it will come, the economic snapback will be sharp. However, as I will detail in the future, there will also be longer-term implications, including a further impetus for deglobalisation.
The most important turnaround catalyst will come from the effective deployment of medical tests, early treatment and, eventually, a combination of self-immunity and vaccine. Everyone can facilitate this process by following medical advice that seeks to protect both individuals and communities.
As to what to do now (and, with apologies, because this will sound like another directive): government, corporate and household leaders should communicate transparently about the unusual dynamics in play, stressing the unprecedented nature for most, along with the highly unsettling uncertainty and fear that inevitably results from this.
They should help draw the path ahead that acknowledges the inconvenient reality of further economic damage before the bottom is reached. Supplement this by advice on how, through a combination of defence and offence, one can navigate the downturn, shorten its duration and accentuate the upturn. And do all this in the context of regular and professional communications, capital letters and all.
Mohamed El-Erian is the chief economic adviser at Allianz and the author of The Only Game in Town and When Markets Collide
* Bloomberg
