On April 10th, Catalant co-CEO Rob Biederman hosted a live discussion with Peter Fisher, an economist and founder of Cortus Advisors. The discussion covered a wide range of macroeconomic issues related to the coronavirus pandemic and generated a large volume of audience questions — too many to answer live. 

Peter was gracious enough to answer some of the remaining questions via email. These insights will help guide business leaders to make the most informed decisions possible in the coming weeks and months.

What is the likely impact of the pandemic on developing economies?

PETER FISHER

Virtually all countries will need to provide dramatic fiscal and monetary stimulus to stabilize their economies until C19 subsides. Many developing countries already have significant amounts of public debt relative to GDP, so adding large amounts of additional debt could create strong headwinds to future economic growth. 

Additionally, developing countries frequently need to borrow in international debt markets to find adequate capital and sometimes borrow in foreign-denominated currency, often in US dollars. So any future weakening of their currencies relative to the US dollar would add to their real debt burden. In short, developing economies have significant additional challenges in recovering from C19 than do developed countries with more developed domestic capital markets.

We expect forward-looking business leaders with global footprints will be thoughtful about what they can expect from various geographies going forward. We have seen an interesting mix of offense and defense (proactive in both cases) from our customers during the COVID-19 outbreak as they underwrite and invest behind international growth.

Rob Biederman, Co-Founder & Co-CEO of Catalant Technologies

What is the relationship between the timing of the US and EU downturns? What is the likely impact on exchange rates between the two?

PETER FISHER

The EU is somewhat ahead of the US in C19 disease progression, so may emerge slightly ahead of the US in coming out of the downturn. However, the EU has larger public debt problems relative to the US, a holdover from the 2008 financial crisis and less vigorous banking reforms in the southern countries (e.g., Greece, Italy). 

The EU, like most areas, will add significantly to its public debt load as a result of C19. The difference for the EU is that although it is unified along some dimensions (e.g., common currency, monetary policy) it is still governed at the country level on fiscal issues. C19 debt loads may become untenable in southern EU countries already burdened by high public debt. The EU will either need to spread this debt burden more evenly at the EU level (i.e., through European Central Bank sovereign debt purchases), forgive some of the debt, or risk that debt-burdened countries may be tempted to exit the EU. 

 If EU exit did occur – which is quite unlikely – those exiting could resurrect their own currencies and devalue the currencies to lessen the real debt burden.  The more likely scenario is that threat of exit will motivate EU countries to compromise on forgiving some public debt. The US dollar will continue to be very strong as a reserve currency. If pressure builds for some countries to exit the EU the value of the euro relative to the US dollar would fall.

Is the response from various governments (financial assistance and policy changes) likely to be the “new normal” for future downturns – even those that are not as sudden as this one?

PETER FISHER

In a word, yes. The US has a history of not returning immediately on the public policy front to where it left off after dramatic economic changes. Many of the policy tools in this downturn (e.g., Federal Reserve purchases of corporate and municipal debt, forgivable loans to businesses to prevent layoffs, new lending programs for state and local governments) are new in the policy toolbox and will likely be used again in future downturns since they seem to be working. 

There will also likely be a new debate about the proper role of government as the ultimate backstop and insurer for significant downturns that are not the result of economic behaviors. This downturn is universal in its effects, exogenous, and excluded from most business interruption insurance policies. Federal policies, and especially the Federal Reserve, are the principal and only significant economic tools to remedy this type of downturn. 

The challenge in future downturns will be to use federal policy selectively so as not to introduce moral hazard into the decisions of industries and households (i.e., the idea that economic actors can take on significant risk, realize financial benefits from that risk, and rely on government policy to provide “bailouts” if actual outcomes are too negative). Federal policy makers will need to be careful about communicating what types of downturns and situations they will insure against.

If the government spends on stimulus now, what tools are left to affect the shape and length of curves in the future?

PETER FISHER

The Federal Reserve can influence the level, shape, and slope of the yield curve (i.e., interest rates on the full range of debt maturities – from two months to 30 years) through open market activities purchasing and selling treasury securities for its own balance sheet. In that respect, the Federal Reserve has infinite firepower to influence the term structure of interest rates. Although the current Fed market involvement is unprecedented, it will never run out of policy power to influence the rate curve. Fiscal policy could encounter limits if the public debt-to-GDP ratio gets very large. But the Federal Reserve has unlimited policy reserve, which is reassuring for remedying any future downturns.

What are the long-term implications of government bailouts and aid on national debt?

PETER FISHER

This is a very important question. Prior to the C19 downturn, the public debt-to-GDP ratio in the US was about 80%. With the added stimulus this year plus operating deficits, the 2020 federal deficit will be about $3.8T, bringing us up to a 100%+ debt-to-GDP ratio by the end of this year. With very low interest rates this is not a problem in the near term. When we run ongoing annual deficits in the future as the baby boom generation retires, we will likely hit debt-to-GDP ratios of 150% or above eventually. 

Some macroeconomic research finds that once debt-to-GDP ratios hit 100%+, debt begins to have a negative effect on ongoing economic growth as a result of debt service expenses. As our federal debt rises and if interest rates rise we could begin to experience this type of growth drag on the economy. In the near term we do not have an option – running large deficits is necessary to keep the economy healthy. Longer term, we will need to match tax revenues more closely to spending and will need to ensure a growth rate that exceeds the rate of interest on outstanding debt.

Once the economy starts to turn around, what percentage of job losses will become permanent? What percentage will move from full-time to independent contractor roles?

PETER FISHER

We don’t know for sure.  In any downturn some jobs do not return. This is because businesses and the economy use the downturn timing to restructure their firms and industry. It is likely that many industries will change business models and restructure as a result of the C19 experience (e.g., sports, theaters, restaurants, office space configurations, transportation). 

Greater use of virtual experience models are also likely in the future. It is likely that some portion of job losses will become permanent as some businesses don’t return from the downturn and as industries restructure. On a positive note, it is also likely that new types of jobs and markets are created through necessary innovation in business models and changes in customer preferences.

The market for independent contractors is likely to expand relative to the permanent employment market.  Businesses will place a premium on maximum flexibility to ramp up and ramp down operations in an environment of uncertainty and as demand fluctuates. And many professionals will experience for the first time and prefer the independent contractor role. 

Finally, with the widespread use of remote work, the relevant talent pool for businesses will not be as tied to geography, and the relevant employers for contractors will also not be as tied to geography. In this respect talent markets will become more national and global, rather than local, providing a dramatic increase in opportunities.

How should companies build up their resilience so they can be flexible, have stamina and accordion up and down?

PETER FISHER

Businesses should move toward a more variable cost structure and minimize fixed costs of operation, and in the near term seek forbearance on ongoing fixed expenses such as debt service and rent. This will involve signing shorter-term leases, occupying less space, reducing debt as possible, conserving cash, and moving toward a more variable labor model through contingent staff and variable compensation. 

Businesses should also seek to be innovative in their revenue models to identify new distribution methods and services that are more easily delivered and in demand during these unusual times. The degree of flexibility will vary by industry and business, but these are the right directions for business model evolution.

Do you foresee any structural changes in supply chains as a result of the pandemic?

PETER FISHER

Yes, definitely. We can expect a move toward more domestic supply chains relative to the global supply chains we have seen develop, and also a move toward greater diversification of supply sources so that firms are less dependent on individual suppliers and specific geographies. We can also expect to see a move toward greater automation in manufacturing and services to reduce dependence on remote low-cost labor supply and physical handling of goods.

Regardless of industry, all companies involved in manufacturing, transporting or distributing physical goods are using this as a forcing moment to reevaluate their supply chain strategy in light of potential disruptions down the road.

What are the most important KPIs to monitor during this downturn?

PETER FISHER

There are many, but I would advise paying close attention to both consumer confidence levels and to business confidence levels. As these rise we should see higher spending and investment. In the near term both households and businesses will conserve cash and reduce spending and investment. 

Of course it also makes sense to monitor the C19 virus progression and the experiences of countries and the new policy models that are used to re-open economies. If some of these models prove successful and can be emulated, we should see a strong motivation for the full economy to re-open, balancing both public health and economic considerations. So we will need to have new capabilities to test both the presence of C19 and the degrees of immunity in the population. This combined with the ability for flow tracking and selective quarantining will enable a more engineered re-opening of the economy. Within a few weeks we should get a better measure of population-level immunity, which will provide valuable information about where we are in the disease progression, enabling an optimized and engineered re-opening of the economy.

Is there more risk of inflation or deflation in the future?

PETER FISHER

There is certainly a risk both of inflation and deflation in the current environment and with the current fiscal and monetary policies. In the near term the greater risk is deflation, both in terms of probability and difficulty of eradication once started. Japan is an instructive model on that front. Longer term there can be a risk of inflation as the level of public spending and growth in money supply are dramatic while the supply of goods and services has declined through shutdowns. However, we have not seen inflationary risks surface in a very long time. Also, inflation can be detected relatively early, and once detected can be addressed immediately. So current policies make good sense in minimizing the risk of deflation while allowing for some greater risk of longer-term inflation that can be extinguished if it materializes.