For several years, I have been making the case that the geopolitical headlines we’ve been seeing—U.S.-China trade and technology tensions, Brexit, U.S.-Iran conflict, to name a few—were part of a bigger story of a G-Zero world. The current coronavirus pandemic reflects this world; a sudden shock whose impact is being worsened by the lack of global leadership and cooperation.
In the past two weeks, coronavirus has swept away the bull market mentality that had previously been invulnerable to both economic weaknesses and geopolitical tensions. It has turned into a market rout on the scale of the 2008 Global Financial Crisis, and like 2008, the world is now heading into a global recession. The possible silver lining is that, unlike 2008, the current market rout was not generated by fundamental weaknesses in the financial system and the prospect for a much quicker recovery should not be discounted.
But the deepening of the G-Zero world has weakened global institutions and patterns of cooperation. That really matters during times of crisis. It’s becoming clear that the reaction (or lack thereof) of the World Health Organization (WHO) to the early signs of the spread of the virus was at least partly a function of not wanting to upset the Chinese authorities, who are an important financial and implementation partner for the WHO. In nearly all key areas relevant to global stability—public health (WHO), trade (World Trade Organization), and security (North Atlantic Treaty Organization)—global institutions are getting weaker and the fallout from inevitable global crises should be expected to be higher. In the meantime, the coronavirus crisis is shaking up global geopolitical relationships.
As recently as the end of February, the U.S. economy looked impervious to a serious downturn, with unemployment at half-century lows and consumer and business confidence flying high. But the market crash and the “social distancing” measures that governments are mandating or encouraging to break the spread of coronavirus look to tip the U.S. economy into a recession, despite ever-growing monetary easing and fiscal stimulus. The 25% drop in the S&P 500 index hammers this point home. But there remains time to show leadership over the coming months as the crisis evolves. In the face of extended market and economic pressures, we expect that President Trump will soon sign into law substantial fiscal expenditures and tax cuts—on the order of a $1 trillion or more in fiscal support.
As the number of new cases in China plummets, Beijing is moving to restart its economy, which was substantially shut down for nearly two months. For China, their handling of coronavirus could be seen as a big success if the outbreak does not reemerge. However, as the world’s largest exporter, China’s economic recovery will be substantially hindered by a global recession.
Their domestic impacts aside, it now appears that the fragile truce between the U.S. and China may well be a geopolitical victim of the coronavirus crisis. China is unlikely to be able to fulfill its promise of increased purchases of U.S. commodities that underpinned the deal. The economic knock from coronavirus essentially takes the chance of a further deal down to zero.
The geopolitical impact of coronavirus goes well beyond U.S.-China. Major European countries are in nationwide lockdown, the borders between the “common market” are closing, and Russia has sparked an oil price war by withdrawing from its agreement to coordinate oil production cuts with OPEC members. Moscow’s target in this is to eliminate competition from U.S. shale oil and gas producers. But it has infuriated Saudi Arabia, which has played the predominant role in restricting output in the past couple of years. Riyadh has vowed to challenge Russia in a fight for market share, especially in Asia. This episode threatens to strain what had been a healthy Russian diplomatic relationship with Saudi Arabia. The cratering oil price will also exacerbate tensions as winners and losers cope with the consequences.
Finally, the current crisis will fundamentally change the trajectory of many developing economies. Several key leaders, including Indian Prime Minister Narendra Modi and Brazilian President Jair Bolsonaro, have been pursuing ambitious social and economic re-engineering in their countries. Almost all such attempts rely on a strong global and national economy in order to work. In a severe risk-off environment, developing economies are going to find it increasingly difficult to attract capital or stimulate economic growth, and many leaders will likely be forced to abandon or change their policy agendas in very significant ways.
In short, there will be plenty of short-term economic fallout from the current crisis, but the longer-term implications for global politics and economics are also worth keeping in mind.
The next quarter is critical for the global spread of the virus, its economic and geopolitical impact, and for the shape of the future recovery. There are four key watchpoints:
First, the extent of global and domestic restrictions on travel and social contact. With major restrictions already in place, any further tightening—such as all-country lockdowns or a complete ban on international travel—will have higher economic impacts. Any economic or market rebound will depend on the reduction of uncertainties around the transmission, lethality, and cure of COVID-19.
Second, the extent of fiscal stimulus in key countries. With limited room for monetary policy and as the supply-side impacts become clearer, fiscal stimulus packages will be key for putting a floor under economic panic. Will these packages be big enough to work without further clarity on the outbreak’s outlook?
Third, possible signs of rapprochement in relations between Russia and Saudi Arabia on oil production. The next quarter will present opportunities for a new deal to halt or contain the price war, and any deal will have important repercussions for U.S. shale producers and the economies of oil-dependent countries.
Finally, any direct escalation between the U.S. and China, directly or indirectly connected to the virus outbreak. An abandonment of the Phase One trade deal, restrictions specifically targeting Chinese nationals in the U.S. or vice versa, or a move to restrict business dealings with each other’s companies would have particularly severe economic and geopolitical consequences.
Feel free to write to me, firstname.lastname@example.org, if you want to go deeper on any of this or talk about a topic I didn’t have space to cover.
Eurasia Group's 2020 Top Risks (Orignially published January 6, 2020)
Eurasia Group's 2020 Top Risks - Coroniavirus Edition (Updated March 19, 2020)
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG LLP.