This opinion essay was originally published on the EFI blog.
A globalized crisis
We have to pinch ourselves to make sure it is not just a bad dream: the coronavirus (COVID-19) pandemic crisis has turned the world upside down, as if in a time lapse. After stabilising in China and South Korea, we are entering an exponential growth phase of globally infected, with a takeoff in Europe and North America; and in the Mediterranean and Iran, with a markedly higher rate of crude mortality. This bodes ill for how developing countries will be able to cope, once they are plainly hit. With quarantine and confinement expanding across the Northern Hemisphere, economic activity is also widely being curbed: as The Economist put it, “Planet Earth is shutting down”. The purpose of this opinion essay is to give a bold personalized prediction of what interlinked societal scenarios might be waiting ahead of us for COVID-19, financial markets, the macroeconomy, and the environment including forests.
Crisis is, by one dictionary, defined as “a difficult or dangerous time in which a solution is needed — and quickly”. The Greek word krisis refers inter alia to “the turning point in a disease”: will the patient get better or die? Crisis thus always has the potential for lastingly positive change.
The coronavirus is arguably no exception. Our home confinement may let us swap futile materialist pleasures for the things that really matter: quality time with our family, solidarity with friends and exposed elderly neighbours, and a renewed spiritual consciousness about the possible finitude of our civilization. Can the coronavirus thus mark a new beginning, moving us closer together in a humbler society, reemphasizing basic human values?
Similar wake-up questions can be posed for the environment. Aerial pictures of China and Northern Italy before and after coronavirus show how air pollution has stunningly vanished. Climate scientists attempt to draw positive lessons from these images. Is it Mother Nature claiming a break from our relentless assaults? What if, perhaps, once we get back to normal, we were to schedule forced productivity breaks, e.g. to achieve global climate targets?
Societies at risk
Personally, I would not discourage anyone from drawing deep constructive lessons from the current pandemic. However, this economic fallout may become much more dramatic than the 2008 financial crisis, and the return to any kind of normality much more distant than we as environmentalists and responsible natural resource managers would bargain for. This is, as I will argue below, due to the size of the problem – health costs and particularly economic shutdown – but even more so due to its timing: our likely phase of economic cycle.
As for size, estimates for COVID-19 impacts on 2020 world economic growth are now being downgraded, from the IMF’s originally 3.3% to now around 1%. Many countries face recessionary forecasts. Of course, the world has before overcome deadly pandemics, warfare, or both (e.g. WWI Spanish flu outbreak). Surely today, with all our superior technologies, education and welfare, we’d be better equipped to meet the challenges?
Yes, and no. Yes, because our societal capabilities are indeed unprecedented. No, because of timing: we are arguably in an end-of-cycle stage, where we are already plagued by stark structural imbalances. World debt is at a dizzying US$244 trillion, or more than three times the size of the global economy. Many European and American pension schemes have become timebombs: with adverse demographics, insufficient savings, and zero interest rates, they are bound to fail. Income inequality in most OECD countries stands at a five-decade high. Conversely, weirdly excessive valuations also persist, as when soccer players fetch 100+ million EUR transfers.
All these features combined are common in economies about to crash, where liquid resources and productive opportunities have become ill-aligned. Rent-seeking and ‘easy money’ outperform reward for efforts; bad debts and poverty co-exist. But these indicators have persisted throughout this millennium. An over-leveraged global economy only survived the 2008 financial crisis on unprecedented steroids from continuous central bank liquidity injections. The so-called Bernanke put, Yellen put, and Draghi “whatever it takes” safety nets under OECD stock markets, the central bellwethers of our economies, have made them grow into sky-high valuations, without the back-up of corresponding economic growth. Stock price-sales and price-earnings ratios have catapulted into new stratospheres. Markets have not only factored in, but also borrowed against a bright and shiny future, certainly with no place for anything like COVID-19.
The crash potential
Usually, what comes up (too much) will sooner or later come back down. The coronavirus supply-side shock coincided with complacent stock markets ‘falling out of bed’ this March, losing 30-40% at an unprecedented speed. I am saying, “coincided” with COVID-19’s spread, since not everyone agrees on causality. Partisans of socionomics, the study of social mood, attitudes and actions, refer to the Elliott Wave theory of recurrent market patterns based on social psychology in arguing that a turnaround in sentiment was imminent anyhow. Broader cyclical theories describe long-term waves in capitalist development, such as the 45-60-year Kondratieff waves, classifying us currently in a phase of depression. Curiously, the alternative long W.D. Gann 90-year cycle predicted four years ago that “the US stock market is due for another crash in 2020” – roughly 90 years after the 1929 crash, and after an unprecedented period of continuous welfare growth since WWII.
Whether COVID-19 is weakly or strongly causal, I foresee bad debtors and fragile economies worldwide to lose income streams and default in a big way, setting off a general deflationary spiral. Gold, the alleged safe haven, counterintuitively declined abruptly (by 200+ US$) from its 1700 US$ spike high earlier this month. It may be the canary in the gold mine: investors are already scrambling for liquidity to unwind speculative positions and pay off debt. If so, the US$ would strengthen further, as the currency in which most financial transactions are denominated, and commodity prices would slump further. Emerging markets would suffer from reverse carry trades: capital originally seeking high interest abroad is repatriated to the developed world.
Current rock-bottom interest rates would eventually also reverse their historical decline since the 1970s, as governments need to sell bonds to cover larger fiscal deficits, and low-graded corporate (“junk”) bonds would lose value in a flight to safety. It is too early to tell, but we could well see a game-changing 1929 type of watershed moment for the world economy. The financial sector as a whole is still well-capitalised, but a default of troubled players like Deutsche Bank or some Italian banks could well set off shocks throughout the entire system – even worse than in 2008, since central banks have now already fired their bazookas, and run out of ammunition.
Even without such a gloomy financial scenario, assuming for a moment that we’d heroically make a full economic recovery in a swift V-shaped manner, the world would still not be the same after COVID-19. Notably, I’d expect an anti-globalisation response from corporations, where current profitability-optimized, highly trade-liberalized supply chains are being reorganized for greater resilience. Nation states will likely prioritize more self-sufficiency, giving more momentum to protectionist trade policies. Xenophobic popular attitudes might be boosted further. Whether or not this will become a 1929-like crash, our best historical guidance for what is to follow might thus still be the 1930s.
What would all this mean for forests and the environment?
Crisis-environment linkages were analysed by WWF in the 1990s, e.g. macroeconomic boom-bust adjustment effects on forests. The World Bank also contributed to examine these linkages, as did my own book, Oil Wealth and the Fate of the Forest. The COVID-19 supply-side shock may initially disrupt some agricultural and timber trades, lowering pressures also on tropical forests, other things being equal. However, the environmental spinoffs from economic crisis would likely dominate eventually. Some are positive, others negative for forests and the environment:
- Less carbon emissions as industrial activity slumps…
- …yet, also some substitution back to e.g. dirtier coal and fuelwood;
- Eventually, less commodity-led agricultural deforestation and timber-led forest degradation, as aggregate demand in export markets falls;
- Less mining/ oil projects expanding into forested areas;
- Some return migration to rural areas, and pickup in subsistence agriculture (which e.g. in Central Africa is a main deforestation driver);
- Consumer savings-led cutbacks on protein-rich meat and dairy products (e.g. in Latin America) alleviating deforestation pressures;
- Infrastructure projects (e.g. new roads through forests) being postponed for lack of investment funds and government budgets;
- Declining funds available for environmental GOs, NGOs, and BINGOs.
How can we respond?
In sum, the world has enjoyed growing prosperity throughout most of the post-WWII period: we have always managed to get the economy back on track. Hence, many will discard my “crying-wolf” outlook as opportunistic doomsday spelling. Actually, I’d be the first to hope that I’m wrong! But I believe the gloomy financial scenario needs serious consideration, for us to prepare and adapt. Less because the coronavirus poses an unmanageable problem per se, but more because a complacent end-of-cycle world economy arguably lacks the resilience to absorb this shock, and thus may be ripe for a major systemic washout.
Are our hands then completely tied to prevent us from actively mitigating the crisis? To the extent socionomic and structural cyclical dynamics were at play, their deterministic nature would confine us to crisis adaption mode. But of course, it matters greatly for our economies how we respond. Simulating pandemic management responses, large-scale early testing and tracking come out as key actions, as urgently recommended by the WHO to effectively curb infection rates and thus mitigate economic shutdown periods and income shortfalls. When comparing e.g. Italy’s and South Korea’s responses, differential trajectories become painstakingly clear. Western-style democracies have arguably failed en bloc in their early COVID-19 responses, with much to learn from South Korea, Singapore, and China. Notably, a course correction would still matter greatly to buy us precious time, and thus also curb global economic depression.
Finally, forest and environmental consequences will vary: deep economic crisis would mostly mean an environmental ‘passive global break’ for forests and climate. On the other hand, pro-environmental changes depending on our ‘active transformation’, such as the clean energy and bioeconomy transitions, might instead be delayed by resource scarcity. However, these transitions will eventually be necessary also to avoid predicable future environmental crises (climate, biodiversity, fires, etc.): how can we act preventively and precautiously to get ahead of the next calamity? Fiscal expansion is the one macroeconomic policy card that the economically more solid among OECD countries have not yet played. Large-scale investment programmes such as the EU’s Green Deal might thus now come to serve the double purpose of anti-depression economic stimulus and pro-environmental transition. At best, our crisis response would grab the opportunities to sow green shoots.