The Coronavirus Crisis Within the Economy Is Far From Over – Because Reopening Creates a Whole New Type of Risk

Yves here. Richard Murphy is writing from a UK vantage, where the lockdowns have been harder and longer-lived than in the US, stimulus has been less lavish, but the UK is also further along in getting citizens vaccinated (although the US ranks better on the proportion fully vaccinated, at 26%, versus 19% for the UK):

Another factor in the UK’s favor is as far as I can tell, vaccine hesitancy and anti-vax sentiment is lower than the US, so they don’t appear to be approaching vaccination stall speed, as we are here. So in the UK, it might be true that managing the reopening id the trickier problem now than managing Covid, particularly with Brexit and poor conditions in Europe as additional headwinds (both their Covid surges and their insufficient support spending). But the proximity to Europe also increases the odds of yet another contagion landing, particularly one that can do a decent job of escaping the vaccines (a variant of concern in India has two mutations on the spike protein which make it particularly hazardous-looking).

On our side of the pond, despite very peppy retail sales figures in the US, and the hope that the spending surge will fuel a strong, sustained recovery here, the fat lady hasn’t sung yet. Our spring boomlet could still fizzle by the early summer. While the plural of anecdote is not data, I see our aides making big one-time purchases (used cars!) that were necessities, and saying that their budgets remain tight. How many who are on the bottom of the K-shaped recovery are in similar straits?

We still have a lot of known unknowns:

Even though the stimulus kept business closures to a far lower level than expected, many retail businesses are getting by due to rent moratoriums. Some, but no one now seems to have a good fix on how many, may not get enough profits in the door to cut a deal on their arrearages with their landlords. Indeed, perversely, a better-seeming economy (see Wolf Richter on the boom in new business formations) may make landlords less willing to cut tenants who can’t make up all the past due rent much of a break

We don’t know how close we are to a vaccination top-out. 65% of the population? 75%? Add to that that many people are resistant to an annual booster….so what happens if another shot is necessary sooner than that, either due to immunity not lasting a full year or nasty variants requiring another jab tailored to them?

Infection rates are rising alarmingly in Michigan and are moving up in other states. As Lambert keeps pointing out, school reopenings look to be a significant contributing factor. But many parents are at their wit’s end with remote schooling and the Biden Administration has thrown its weight behind getting classes back in session without doing much of anything to make schools safer. Adding insult to injury, the CDC’s Rochelle Walensky told Michigan to lock down rather than allocate more vaccines. I don’t see states outside the Northeast and the West Coast having any stomach for that, should it prove necessary

The US has also been unwilling to enforce hard quarantines for entrants from overseas. Yet Brazil and India are spawning all sorts of new variants

So despite Covid conditions looking better, it’s premature to declare victory.

By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK

I have long suggested that the big issue for the economy when facing the challenge of coronavirus was not surviving the lockdowns – we now know how to do that – but in managing the recovery. At that point, I have always argued, the real problems will be revealed.

Most especially, companies deprived of working capital (cash, in common parlance) as a result of losses incurred not made good by loans, and by a combination of lost skills (whether through simple lack of practice or significant staff turnover) will face the crisis of trying to get back to trading at the scale that they were working at pre-March 2020 and will discover that the thinned out resources at their command will fail, and they will too.  To put this in the language of business, the effort to be what they once were will represent for them what is described as over-trading, which is the phenomenon of stretching available resources too thinly with the risk that the whole edifice then fails.

I fear that the evidence to support this prediction is growing. In the FT this morning this is noted:

The number of companies in significant financial distress has risen at the fastest rate in more than seven years, sparking warnings that “the dam of zombie businesses could be about to break” when government Covid-19 support comes to an end in the summer.

The report comes from insolvency firm Bebies Traynor, which has been using a consistent measure of such stress since 2014. Basically measuring the number of firms revealing stress in their credit status, plus those suffering court orders against them, they now think 720,000 businesses are in distress. That’s a 100,000 increase in a quarter. It’s also a significant proportion of the number of firms that they must be monitoring in the UK.

Of course, some firms are always in such distress. Business failure is normal. But this trend is not. If the data does reflect likely forthcoming failure – as this firm clearly thinks that it does – then this indicates real problems to come, just as I predicted there would be at this stage of the recovery cycle.

This poses a real challenge for the government. Not only does this create the real risk of substantial losses on the loan facilities that it made available – many of which will not be repaid if this rate of failure happens – but such a loss of capacity could be severely disruptive to the economy over the year or more ahead.

It has to be admitted that new companies might rise, phoenix-like, from the ashes of many of these failures. But that ignores another issue, and that is the multiplier effect within business failure. The shareholders of many companies may well have a perverse incentive to shut up the old shop and reopen as a new one over the coming year or so, shedding liabilities for loans that will prove extremely burdensome to repay if they do just that. And let’s be clear, they can often walk away from their debts at present, precisely because limited liability provides them with that opportunity. But it is not only the government to whom they will owe money. They will also owe their suppliers and if the knock-on effect of failure is big – and it may well be so – then the moral hazard implicit within all limited liability structure may well create a real risk to companies that as yet are showing no stress at all.

Even if we avoid another lockdown (and I think the chance that we will avoid such an event very low indeed) the risk to business at present is exceptionally high. Those who predict sunny days ahead really can’t read the runes of cash flow. And cash flow is king. It’s just that most economists have never run a business and so they really do not know that.

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  1. PlutoniumKun

    I’d add one unknown to the UK vaccination figures – in the London region there is a huge (I’ve seen estimates well over a million) floating population of people ‘off the books’ – illegal immigrants, floating casual workers from eastern Europe, etc., although Brexit has probably reduced the number by a few hundred thousand. I suspect these people won’t get the full vaccination and may well act as a reservoir of infection and a source of new variants for a while to come. It also seems that the Indian variants have gotten a hold in the UK, which might be big trouble if they evade the existing vaccines. My guess is that in most European countries there will be some sort of equivalent reservoirs which will make keeping a firm lid on the virus very difficult, even with officially 95% coverage.

    On the economic front, perhaps those commentators here who work in banking might have more to say on this, but while casually checking on my mortgage last week I noticed that my bank has massively expanded the range of loans it is offering. Ever since the Celtic Tiger crash in Ireland the Central Bank has been refusing to allow banks to loan more than fairly ‘reasonable’ levels for homes. But all of a sudden I see loans offered that hark back to pre-2017 – buy to let, home improvement loans, etc., all at very low rates. My guess is that via the ECB there has been an instruction to let loose the dogs of domestic credit in order to stave off a post-Covid slump. Needless to say, this is most likely going to do little more than drive the cost of housing even higher.

    1. shtove

      UK TV is unusually saturated with mortgage ads, aimed at first timers and equity releasers.

  2. DJG, Reality Czar

    Yves Smith: Thanks for this post. The dilemma here isn’t only that we see no end to the coronavirus (unlike countries like New Zealand or even Vietnam that decided that the coronavirus isn’t something to be “managed). The dilemma is also in Murphy’s term, “recovery.”

    In the countries that didn’t manage coronavirus well, which may now become places where the virus is endemic, the “new normal” isn’t going to arrive. As you indicate, we all have to be leery of anecdotes, but I’m not seeing great enthusiasm among people I know to crowd into poorly run restaurants and bars, just because the rule was altered.

    Much of the service industry in the U S of A has been devastated. Now, we are hearing that restaurants are having trouble bringing in new staff. We don’t truly know what new economic arrangements will have to be put in place. Will people be willing to crowd offices in city centers again? Does anyone know just how poorly hotels have fared? How has the food distribution system changed and adapted–and will it revert? Let alone mentioning the disastrous U.S. system of health insurance and health-care rationing.

    One of the remarkable mistakes of the U.S. elites has been not to give a raise to the working population. Manchin and Sinema prancing around have a strong whiff of the moral caliber of the pre-Revolutionary nobility in France. We haven’t assessed what will happen from such outright neglect. Only a malign elite truly believes that a minimum wage of $15/h is somehow politically / economically unattainable.

    Necessity may trump “recovery.” Necessity isn’t a bad thing–but let’s not kid ourselves about recoveries and return to the old normal. If the U.K. has a minimum of 720,000 firms in financial distress, what’s the number in the U S of A?

    1. tegnost

      Particularly when every city that approves the 15 wage does so over a long period of time and this bill would also slowly raise the rate. I find myself wondering whether one of the real lurking problems the bosses see is if the min wage in the big city is 15, and the rural wage is the same, the incentive to suffer city life diminishes. Comparative advantage and all…

      1. polar donkey

        I work in a restaurant in Memphis. There is a labor “shortage”. There are a couple reasons for that. Restaurants will not or can not pay competitive wages. Most McDonalds start at $12 an hour, as are most chain fast food restaurants. Independent restaurants are hesitant to match that. Labor prices going up along with big food\supply price spikes. This at a time when restaurants, especially sit down, are not back to pre-covid levels. We’re running 70-75% of old sales. I doubt we ever get back to that. People’s behavior has changed (I haven’t eaten in a restaurant in over a year, and aside from if I had to travel out of town, don’t plan to again, and that’s only if outdoors.) Plus, price increases narrow your clientele base.
        Additionally, here Amazon and FedEx are in a bidding war for labor. Both have starting pay around $20. Memphis is a poor city. $20 seems great for a lot of people here, but $20 isn’t getting you a decent house and a decent car. Stimulus and higher unemployment benefits have allowed a sizeable chunk of labor force to stay home for awhile. Who can blame them. Used to have sh-tty job that never offered vacations. This is the one time you can have one. Many restaurants think labor market will loosen up some when unemployment benefits go back to the old normal. Many of those restaurants will be out of business by then. I’d prefer the government pass the minimum wage increase to reduce unknowns and allow people to start planning.
        I think when stimulus for individuals and PPP money for these small businesses runs out there will be another downturn for bottom 60% of economy. Doesn’t seem to ever be downturns for the top.

        1. bob

          “This at a time when restaurants, especially sit down, are not back to pre-covid levels. We’re running 70-75% of old sales.”

          Tips are based on receipts. Less receipts equals less tips. Less tips mean less pay for workers.

          The problem is a pay shortage. They are not making what they were before. Why would they be lining up to work for less than they were 18 months ago?

        2. Jason

          “People, governments, and economies of all nations must serve the needs of multinational banks and corporations.” – Zbigniew Brzezinski

          Everything is going according to plan.

    2. allan

      “Manchin and Sinema prancing around ”

      They have company:

      New Hampshire’s Democratic Senators Are Quietly Resisting a Minimum Wage Hike [Intercept]

      … Democratic state Rep. Maria Perez said that, during the call, she was stunned by how similar Boucher’s rhetoric sounded to that of the senators and that she had heard the same arguments coming from their staff when she had lobbied them to support a wage increase. “The language that I heard from the senators is the same language I heard from the Restaurant Association,” Perez said. …

      1. Jen

        If Perez is stunned, she clearly hasn’t been paying much attention to our lamentable delegation. This is absolutely par for the course. Hassan is up for re-election this year and it would not, IMO, take much to defeat her. If Fetterman looks solid in PA, and Booker makes it in TN, I would cheerfully throw her under the bus.

    3. ChiGal in Carolina

      Mr Reality Czar Sir,

      I am particularly interested in your reports on what is happening in Chicago since I will finally be moving back in August. Here in North Carolina, most but not all people I know shun restaurants and the like. However, when I venture into town for some necessity, I see people hanging out in bars and restaurants, which opened up last June or so after a brief “lockdown” and are now I believe at 50% capacity, hygiene theatre included. When I go walking, I see more and more people not masking.

      Most of my peeps in Chicago are as conservative as those I know here but not all–several are going to restaurants, even malls! I can only imagine that translating what the general public here is doing to what is happening there, it is no surprise Cook County is red for high transmission on the CDC site that is updated daily. Here in Orange County we are orange for substantial transmission. According to the stats, 50% of adults over 18 have been fully vaccinated as compared to around 30% in Cook County.

      Re the topic at hand, although a few restaurants have indeed closed, many have been creative and banded together to provide once a week pickup of meals/baked goods/specialty produce from a centralized pickup location. Also several restaurants offer weekly pickup of five nights of family dinners ordered online in advance. These restaurants have added a living wage surcharge to ensure their people make a decent living and the citizenry is enthusiastically supporting these ventures.

      I really wonder what Hyde Park is going to be like when I return…

      1. DJG, Reality Czar

        Hyde Park? Serendipitously, I talked on the phone last night with some friends who still live there. It sounds as if Hyde Parkers are strict about observing the protocols.

        As you know, I am up in Edgewater, where observance is good. The independently owned stores along Clark are savvy, and restaurants have set up curbside delivery. The Hopleaf closed rather than try to deal with the strictest rules, though, because the interior is impossible to “safety distance”–all of those little rooms. It just reopened, although those snug rooms are still too small.

        As you also know, Chicago’s neighborhoods vary considerably. Even when I venture over into Ravenswood and to Lincoln Square, I see different adherence to the protocols.

        I walked over to Gethsemane Garden Center over on Clark two weeks back to buy a plant, and it seemed wildly daring. Till I got there and saw that everyone was rigorously masked–and that I was supposed to wear gloves (which I had forgotten at home).

        My friends pointed out that the hot spot on the North Side is Lakeview and thereabouts–most likely the long stretch of bars in “Wrigleyville” or “Rickettsville,” straggling from School Street to Byron on Clark. They were sad enough before the epidemic, watering holes for out-of-shape Cubbies fans. Now they are vectors for disease.

        The numbers and contagion: Yes, Illinois is stuck at around 2500 to 3200 cases a day. It’s a disaster. Let’s hope that vaccination works–people here *do* seem to be willing to get the vaccination.

        1. ChiGal in Carolina

          Thanks for the report! Guess I will be hunkering down in my little town within a city.

          Ah Gethsemane! One of the great pleasures of being back will be having a yard again. And yes, we make the trek all the way from the south side, it’s that good.

  3. doug

    Several articles have appeared across my state in the last few days, with dire headlines about inability to hire staff. One local restaurant owner was given ample coverage, and blamed govt for him not being able to hire. The only issue is the fact that this same restaurant owner has had to run the largest help wanted ads for the last 7 or 8 years to keep his place staffed. The turnover there has always been a joke. But now it is the governments’ fault…
    Mr. Murphy nails it: getting restarted is going to take some time, creativity, and it will be uneven.

  4. Raymond Sim

    It’s hard to imagineer a reopening without tacitly assuming the virus isn’t in charge anymore.

    Unfortunately that cannot happen until proper 19th century public health measures are put in place, and transmission brought down to far lower levels than we see anywhere in the U.S.

    If events in Iran, South Africa and Brazil haven’t persuaded you, then the current outbreak in Delhi should: There is no such thing as naturally acquired herd immunity.

    We may be able to acheive useful herd immunity through vaccination. But ongoing high rates of transmission mean ongoing high rates of mutation. Vaccinating our way to herd immunity under current conditions means outrunning the virus’s evolution of vaccine escape, while giving this proven immuno-houdini every chance to do its stuff.

    All through the past fifteen months “We can open up!” optimists of all ideological stripes, and every possible level of actual expertise, have been a constant presence, invariably obliged to dismiss one or more aspects of SARS-CoV-2’s obvious potential capabilities, usually by calling any mention of such things “fearmongering.”

    We’re now experiening a pandemic of immune-evading Covid. We’re setting the stage for next year’s pandemic to be one of vaccine-escaping Covid, the economic and social consequences of which are all to easy to imagine.

    That’s the risk.

      1. Synoia

        The next wave will probably not be in summer on the West Coast – because there will be plenty of Sun.

        Historically plagues and pandemics hit in the January – March period. As did Covid.

        1. Tom Collins' Moscow Mule


          1. [FACT: Exposing yourself to the sun or temperatures higher than 25°C DOES NOT protect you from COVID-19

          You can catch COVID-19, no matter how sunny or hot the weather is. Countries with hot weather have reported cases of COVID-19. To protect yourself, make sure you clean your hands frequently and thoroughly and avoid touching your eyes, mouth, and nose.
          FACT: Exposing yourself to the sun or to temperatures higher than 25C degrees DOES NOT prevent nor cure COVID-19]

          2. “Any hopes that summer’s high temperatures might slow the spread of the coronavirus were smashed in June and July by skyrocketing cases across the country, especially in some of the warmest states.”

          3. India? Brazil?

          Anyway . . . . COVID 19 double mutants, triple mutants, and wave after wave, because it is never too late to catch the next wave. Because, YOLO and FOMO, ect., along with all the rest of the facile, juvenile marketing garbage targeting this culture’s permanent adolescent population. Besides, the Wall Street Gambling Casino, backstopped by the FED and all the other central banks that have bought in, is at record highs and that is all that counts in a world of make believe and sleight of hand illusion..

        2. Ian Ollmann

          Winter in cold climates, air-conditioning season in the American South (including AZ, LA)
          It’s all about masses of people in spaces with poor ventilation.

  5. John Wright

    I will relate my experience on a recent driving trip to/from the SF Bay area to Los Angeles.

    While I have been vaccinated and my LA relatives have been vaccinated, I still wanted to lower my exposure risk during the drive.

    I took food/water in the car and the only expenditure was to stop, once, for self serve gas, no restaurants or gas station mini-shops were entered.

    If others are behaving the same, the restaurant/hospitality industry will not be seeing a quick recovery.

  6. Susan the other

    Let’s do a Covid Resolution Corporation. In connection with the IRS and Treasury. Every knock-on unpaid debt or bill all down the business watershed can be processed during a comprehensive moratorium which can last for several years. Piling NIRP loans on top of NIRP loans is OK too. The only thing to keep in mind is that this will be a long-haul effort. Just hit the carry key. To do otherwise is insane. It will become both a real time exercise and a valued lesson in how money, cash flow, actually functions. Which in due time will become the best evidence against neoliberal economic ideologies. Besides, we really don’t have another option.

    1. Hepativore

      The case for neoliberalism has been debunked over and over for decades since the Reagan era, yet it still chugs along, heedless of the suffering and discontent it has caused in the vast majority of the population. No matter how many times it seems like a killing blow has been dealt to it, it rises again like a zombie that refuses to die.

      Kyrsten Sinema and Joe Manchin attend closed door meetings with corporate lobbyists where they openly laugh at Bernie Sanders as he and the “Squad” dutifully bow their heads and go along with whatever garbage bills the corporate Democrats put together inspite of the courageous rhetoric coming from the “progressive” wing of the party.

      Even as we speak, Joe Manchin is trying to come up with a way of permanently killing the idea of ever getting a wage increase of more than $11 per hour. He wants to tie the $11 hourly wage to the median wage index so that it will automatically increase at the same rate. This way, Democrats can pretend the minimum wage issue is “solved” and the working class never gets an actual raise in terms of purchasing power.

      Also, Bill Gates and the vaccine makers are gleefully anticipating twisting the arms of governments of various third world countries in terms of how much they will profit from draconian COVID-19 patent protection laws.

  7. eg

    Regarding the chart featured in the article, Canada is below Serbia but above Germany for vaccination rate. Our stimulus as measured by the Federal budget deficit has been substantial. Unfortunately many Provinces are struggling with overburdened ICU capacity and high daily case counts due to the spread of variants of concern. The third wave has been enabled by late or insufficient lockdown measures (Ontario is exhibit A). Unfortunately the public discourse doesn’t appear to grasp that you can’t vaccinate your way out of the 3rd wave because the R0 value of the variants is too high.

    We are a long ways away from getting out from under this.

  8. Kevin Carhart

    If a business accepts PPP, especially to the point where they would fold without it, could this make their activities more FOIAble?

  9. Ignacio

    There is no ‘end’ for the new coronavirus, it has come to stay and we have to get used to it. The mortality will be lower when we are no longer naive to the virus and vaccination will indeed help though nobody can say at what pace and to what level of mortality. It may take years but hopefully not. I might be mistaken but I am not very much worried with the most virulent strains.

    It is being said that multiple vaccinations will be needed but I am not sure it would be good to follow too frequent vaccinations, at some point it can be counterproductive.

  10. Ian Ollmann

    > Adding insult to injury, the CDC’s Rochelle Walensky told Michigan to lock down
    > rather than allocate more vaccines.

    To be fair on this point, the CDC has an excellent point. By the time the vaccine reaches full potency in 5-6 weeks, it is much too late to stop the surge. Michigan is better off staying at home and waiting its turn for vaccines at the usual pace. The problem isn’t lack of vaccine, it is the lack of staying out of transmissible spaces. Michigan knows how to stop this one. It just isn’t doing it.

    If you ask me, we aren’t necessarily out of this one yet, even those of us in sunny California. India is having big problems with its variant and it is only a matter of time before it shows up here. As a point of fact, it already has.

    1. drumlin woodchuckles

      It always bears repeating, over and over and over again, that here in Michigan an attempted return to hard lockdown would probably elicit unpredictable armed resistance and massive passive refusal. Governor Whitmer perhaps does not want to take that chance after our little festival of ” riflemen in the Capitol” and the kidnapping plot.

      Given that reality, the CDC’s Walensky and Walensky’s CDC have precisely zero point at all whatsoever.
      If Walensky really thinks Michigan can be lockdowned again, let Walensky don the body armor, pick up the gun, and come out here and lead the lockdown herself.

  11. Quiet Rebel

    Part of the problem with schools not being able to offer safer conditions are the parents. Even without parental interference it is hard to make a child wear a mask correctly, but children who have parents who are contemptuous of masking wearing make it hard to get kids to wear a masks. It is not just on the schools. The parents and the schools need to work together.

  12. Quiet Rebel

    If what you say is true, would sending more vaccine really help Michigan? If the people are going to react to another lockdown the way you say they are, then they seem like the same people who refuse to take the vaccine, so you would get the worst of both worlds Covid infections increasing and wasted vaccine doses.

    I am sorry to say, but sometimes the government can only do so much. The government can get the correct information to the people, but it is up to the people to decide for themselves to follow the guidelines.

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