During the onset of an economic crisis, national governments are thought to have two chief policy tools at their disposal:
- Fiscal Policy
How the central government collects money through taxation, and how it spends that money
- Monetary Policy
How central banks choose to manage the supply of money and interest rates
Major fiscal policy changes can take time to be implemented — but since central banks can make moves unilaterally, monetary policy is often the first line of defense in settling markets.
As the ripple effect of the COVID-19 pandemic rages on, central banks have been quick to act in slashing interest rates. However, with rates already sitting at historic lows before the crisis, it is possible that banks may be forced to employ more unconventional and controversial techniques to try and calm the economy as time goes on.
The Fed: Firing at Will
The most meaningful rate cuts happened on March 3rd and March 15th after emergency meetings in the United States.
First, the Federal Open Market Committee (FOMC) cut the target rate from 1.5% to 1.0% — and then on Sunday (March 15th) the rate got chopped by an entire percentage point to rub up against the lower bound of zero.
As you can see on the chart, this puts us back into familiar territory: a policy environment analogous to that seen during the recovery from the financial crisis.
ZIRP or NIRP?
It’s been awhile, but with interest rates again bumping up against the lower bound, you’ll begin to see discussions pop up again about the effectiveness of zero interest rate policy (ZIRP) and even negative interest rate policy (NIRP).
Although the latter has been used by some European banks in recent years, NIRP has never been experimented with in the United States or Canada.
Here’s a quick primer on both:
With rates sitting at zero, it’s not impossible for the Fed and other central banks to begin toying more seriously with the idea of negative rates. Such a move would be bold, but also seen as highly experimental and risky with unforeseen consequences.
Global Rate Slashing
Since only the beginning of March, the world’s central banks have cut interest rates on 37 separate occasions.
The only exception to this rule was the National Bank of Kazakhstan, which raised its key rate by 2.75% to support its currency in light of current oil prices. Even so, the Kazakhstani tenge has lost roughly 15% of its value against the U.S. dollar since February.
Here’s a look at cumulative interest rate cuts by some of the world’s most important central banks, from January 1, 2020 until today:
Going into the year, rates in developed economies were already between 0% and 2%.
Despite not having much room to work with, banks have slashed rates where they can — and now out of major developed economies, Canada has the “highest” interest rate at just 0.75%.
Helicopters on the Horizon
With central banks running out of ammo for the use of traditional measures, the conversation is quickly shifting to unconventional measures such as “helicopter money” and NIRP.
Life is already surreal as societal measures to defend against the spread of COVID-19 unfold; pretty soon, monetary measures taken around the globe may seem just as bizarre.
Put another way, unless something changes fast and miraculously, we could be moving into an unprecedented monetary environment where up is down, and down is up. At that point, it’s anybody’s guess as to how things will shake out going forward.
Visualizing the Size of Amazon, the World’s Most Valuable Retailer
Amazon’s valuation has grown by 2,830% over the last decade, and the tech giant is now worth more than the other 9 largest U.S. retailers, combined.
Visualizing the Size of the World’s Most Valuable Retailer
As brick-and-mortar chains teeter in the face of the pandemic, Amazon continues to gain ground.
The retail juggernaut is valued at no less than $1.4 trillion—roughly four times what it was in late 2016 when its market cap hovered around $350 billion. Last year, the Jeff Bezos-led company shipped 2 billion packages around the world.
Today’s infographic shows how Amazon’s market cap alone is bigger than the nine biggest U.S. retailers put together, highlighting the palpable presence of the once modest online bookstore.
The New Normal
COVID-19’s sudden shift has rendered many retail outfits obsolete.
Neiman Marcus, JCPenney, and J.Crew have all filed for bankruptcy as consumer spending has migrated online. This, coupled with heavy debt loads across many retail chains, is only compounding the demise of brick-and-mortar. In fact, one estimate projects that at least 25,000 U.S. stores will fold over the next year.
Still, as safety and supply chain challenges mount—with COVID-19 related costs in the billions—Amazon remains at the top. It surpasses its next closest competitor, Walmart, by $1 trillion in market valuation.
How does Amazon compare to the largest retailers in the U.S.?
|10 Largest Public US Retailers*||Market Value July 1, 2020||Market Value July 1, 2010||Normalized % Change 2010-2020||Retail Revenue|
|The Kroger Co.||$26B||$13B||107%||$118Be|
|Walgreens Boots Alliance||$36B||$26B||38%||$111B|
|The Home Depot||$267B||$47B||466%||$108B|
|Combined value of retailers (without Amazon)||$1,071B|
Source: Deloitte, YCharts
*Largest public US retailers based on their retail revenue as of fiscal years ending through June 30, 2019, e=estimated
With nearly a 39% share of U.S. e-commerce retail sales, Amazon’s market cap has grown 2,830% over the last decade. Its business model, which aggressively pursues market dominance instead of focusing on short-term profits, is one factor behinds the rise.
By the same token, one recent estimate by The Economist pegged Amazon’s retail operating margins at -1% last year. Another analyst has suggested that the company purposefully sells retail goods at a loss.
How Amazon makes up for this operating shortfall is through its cash-generating cloud service, Amazon Web Services (AWS), and through a collection of diversified enterprise-focused services. AWS, with estimated operating margins of 26%, brought in $9.2 billion in profits in 2019—more than half of Amazon’s total.
Amazon’s Basket of Eggs
Unlike many of its retail competitors, Amazon has rapidly diversified its acquisitions since it originated in 1994.
Take the $1.2 billion acquisition of Zoox. Amazon plans to operate self-driving taxi fleets, all of which are designed without steering wheels. It is the company’s third largest since the $13.7 billion acquisition of organic grocer Whole Foods, followed by Zappos.
Accounting for the lion’s share of Amazon-owned physical stores, Whole Foods has 508 stores across the U.S., UK, and Canada. While Amazon doesn’t outline revenues across its physical retail segments—which include Amazon Books stores, Amazon Go stores, and others—physical store sales tipped over $17 billion in 2019.
Meanwhile, Amazon also owns gaming streaming platform Twitch, which it acquired for $970 million in 2017. Currently, Twitch makes up 73% of the streaming market and brought in an estimated $300 million in ad revenues in 2019.
Despite the flood of online orders due to quarantines and social distancing requirements, Amazon’s bottom line has suffered. In the second quarter of 2020 alone, it is expected to rack up $4 billion in pandemic-related costs.
Yet, at the same time, its customer-obsessed business model appears to thrive under current market conditions. As of July 1, its stock price has spiked over 51% year-to-date. On an annualized basis, that’s roughly 100% in returns.
As margins get squeezed and expenses grow, is Amazon’s growth sustainable in the long-term? Or, are the company’s strategic acquisitions and revenue streams providing the catalysts (and cash) for only more short-term success?
What’s At Risk: An 18-Month View of a Post-COVID World
The WEF surveyed 347 risk analysts to uncover the most likely post-pandemic threats—and no area from the economy to the environment is untouched.
What’s At Risk: An 18-Month View of a Post-COVID World
As the world continues to grapple with the effects of COVID-19, no part of society seems to be left unscathed. Fears are surmounting around the economy’s health, and dramatic changes in life as we know it are also underway.
In today’s graphic, we use data from a World Economic Forum survey of 347 risk analysts on how they rank the likelihood of major risks we face in the aftermath of the pandemic.
What are the most likely risks for the world over the next year and a half?
The Most Likely Risks
In the report, a “risk” is defined as an uncertain event or condition with the potential for significant negative impacts on various countries and industries. The 31 risks have been grouped into five major categories:
- Economic: 10 risks
- Societal: 9 risks
- Geopolitical: 6 risks
- Technological: 4 risks
- Environmental: 2 risks
Among these, risk analysts rank economic factors high on their list, but the far-reaching impacts of the remaining factors are not to be overlooked either. Let’s dive deeper into each category.
The survey reveals that economic fallout poses the most likely threat in the near future, dominating four of the top five risks overall. With job losses felt the world over, a prolonged recession has 68.6% of experts feeling worried.
|#1||Prolonged recession of the global economy||68.6%|
|#2||Surge in bankruptcies (big firms and SMEs) and a wave of industry consolidation||56.8%|
|#3||Failure of industries or sectors in certain countries to properly recover||55.9%|
|#4||High levels of structural unemployment (especially youth)||49.3%|
|#6||Weakening of fiscal positions in major economies||45.8%|
|#7||Protracted disruption of global supply chains||42.1%|
|#8||Economic collapse of an emerging market or developing economy||38.0%|
|#16||Sharp increase in inflation globally||20.2%|
|#20||Massive capital outflows and slowdown in foreign direct investment||17.9%|
|#21||Sharp underfunding of retirement due to pension fund devaluation||17.6%|
The pandemic has accelerated structural change in the global economic system, but this does not come without consequences. As central banks offer trillions of dollars worth in response packages and policies, this may inadvertently burden countries with even more debt.
Another concern is that COVID-19 is now hitting developing economies hard, critically stalling the progress they’ve been making on the world stage. For this reason, 38% of the survey respondents anticipate this may cause these markets to collapse.
High on everyone’s mind is also the possibility of another COVID-19 outbreak, despite global efforts to flatten the curve of infections.
|#10||Another global outbreak of COVID-19 or different infectious disease||30.8%|
|#13||Governmental retention of emergency powers and/or erosion of civil liberties||23.3%|
|#14||Exacerbation of mental health issues||21.9%|
|#15||Fresh surge in inequality and social divisions||21.3%|
|#18||Anger with political leaders and distrust of government||18.4%|
|#23||Weakened capacity or collapse of national social security systems||16.4%|
|#24||Healthcare becomes prohibitively expensive or ineffective||14.7%|
|#26||Failure of education and training systems to adapt to a protracted crisis||12.1%|
|#30||Spike in anti-business sentiment||3.2%|
With many countries moving to reopen, a few more intertwined risks come into play. 21.3% of analysts believe social inequality will be worsened, while 16.4% predict that national social safety nets could be under pressure.
Further restrictions on trade and travel movements are an alarm bell for 48.7% of risk analysts—these relationships were already fraught to begin with.
|#5||Tighter restrictions on the cross-border movement of people and goods||48.7%|
|#12||Exploitation of COVID-19 crisis for geopolitical advantage||24.2%|
|#17||Humanitarian crises exacerbated by reduction in foreign aid||19.6%|
|#22||Nationalization of strategic industries in certain countries||17.0%|
|#27||Failure to support and invest in multilateral organizations for global crisis response||7.8%|
|#31||Exacerbation of long-standing military conflicts||2.3%|
In fact, global trade could drop sharply by 13-32% while foreign direct investment (FDI) is projected to decline by an additional 30-40% in 2020.
The drop in foreign aid could also put even more stress on existing humanitarian issues, such as food insecurity in conflict-ridden parts of the world.
Technology has enabled a significant number of people to cope with the impact and spread of COVID-19. An increased dependence on digital tools has enabled wide-scale remote working for business—but for many more without this option, this accelerated adoption has hindered rather than helped.
|#9||Cyberattacks and data fraud due to sustained shift in working patterns||37.8%|
|#11||Additional unemployment from accelerated workforce automation||24.8%|
|#25||Abrupt adoption and regulation of technologies (e.g. e-voting, telemedicine, surveillance)||13.8%|
|#28||Breakdown of IT infrastructure and networks||6.9%|
Over a third of the surveyed risk analysts see the emergence of cyberattacks due to remote working as a rising concern. Another near 25% see the threat of rapid automation as a drawback, especially for those in occupations that do not allow for remote work.
Last but certainly not least, COVID-19 is also potentially halting progress on climate action. While there were initial drops in pollution and emissions due to lockdown, some estimate there could be a severe bounce-back effect on the environment as economies reboot.
|#19||Higher risk of failing to invest enough in climate resilience and adaptation||18.2%|
|#29||Sharp erosion of global decarbonization efforts||4.6%|
As a result of the more immediate concerns, sustainability may take a back seat. But with environmental issues considered the biggest global risk this year, these delayed investments and missed climate targets could put the Earth further behind on action.
Which Risks Are of the Greatest Concern?
The risk analysts were also asked which of these risks they considered to be of the greatest concern for the world. The responses to this metric varied, with societal and geopolitical factors taking on more importance.
In particular, concerns around another disease outbreak weighed highly at 40.1%, and tighter cross-border movement came in at 34%.
On the bright side, many experts are also looking to this recovery trajectory as an opportunity for a “great reset” of our global systems.
This is a virus that doesn’t respect borders: it crosses borders. And as long as it is in full strength in any part of the world, it’s affecting everybody else. So it requires global cooperation to deal with it.
——Gita Gopinath, IMF Chief Economist
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