How will the world’s economy recover in aftermath of the coronavirus crisis?
THERE are two worlds experiencing this pandemic.
There are the office-bound middle classes and some lucky skilled workers who can simply work from home. Apart from the nuisance of setting up office at the kitchen table, dealing with one screen and a couple of kids, they are feeling virtually no financial pain from this beyond their investments.
Then there are all the service workers, factory staff and tradesmen whose employers shut down overnight. They are worried about whether they will get their unemployment or furlough cheque before the rent comes due. Add to this group all the people who started cafes, small stores and other businesses. Many of them are scared about their health and their finances. And many of them have little to no savings or investments to call on. The idea that this upheaval can be swiftly and completely reversed straight after lockdown is a little starry-eyed.
The way I see it, there are three linked questions which are key for the economy and markets:
1. Will the money from big central bank and government support programmes actually get to where it’s badly needed?
Western governments have been exceedingly generous in their support packages for workers.
The average US unemployment benefit has been roughly trebled, the UK and Europe have agreed to subsidise the lion’s share of companies’ payroll to dissuade large-scale lay-offs. Hundreds of billions of pounds, dollars and euros have been offered as bail-out loans for SMES; many of them will be written off if businesses retain their staff.
Despite this, the number of unemployed both here and abroad is soaring. The strain on civil services is palpable. Execution is crucial here.
You can write all the cheques you want, but they’re worth nothing if you can’t send them out quick enough. The UK’S Universal Credit system takes five weeks in normal times; early reports say US states have been completely overwhelmed by the millions of people attempting to sign up for the dole. We will be watching reports of the efficacy of these programmes closely.
2. If the money does get through and makes an impact, how much will it support the economic recovery?
People don’t spend only because they have money – even though that’s a big part of it. They have to have things they want to spend money on and feel confident enough to actually pull the trigger. Once the lockdown is lifted, some people will no doubt be off to the nearest pub and/or restaurant like a shot. But how many others will be cagey about the risk of the virus flaring up once again? Perhaps older people (who also happen to be predominantly wealthier and better able to spend). Maybe more than a few mums and dads will shy away from shelling out for a family cinema ticket because they are worried about how their employer is faring after months spent bleeding cash.
The vigour of the recovery will depend on how many people fall into each of these camps.
It’s sort of like converting the world from a Lamborghini into a Jeep.
3. If it does make a difference and economic activity snaps back, what effect will massive global spending have on inflation in the longer term?
A whole bunch of money has been injected into the world’s economy, yet it seems likely that the amount of stuff that our global society can produce will shrink.
Many people and businesses are already talking about possibly cutting back on global supply chains, something that would likely make our global economy more robust yet less efficient.
It’s sort of like converting the world from a Lamborghini into a Jeep. This has its merits and its drawbacks. Historically one of the consequences of producing less stuff and creating more cash is higher inflation.
Given the huge debts that the pandemic will leave on governments, they will want higher inflation as it will help reduce the real value of their borrowing.
Yet higher inflation has an impact on interest rates and GDP growth as well.
We won’t know the answers to these questions for weeks and months – perhaps even years in the case of inflation and longer-term government and central bank policies.
But we are trying to get insight into how these questions will be resolved and prepare our portfolios today for all the possibilities.