Investment Clock insights

NCov-19: Sending the economy off course

Melanie Baker

9 March 2020

By the start of this year, after a two year slowdown, prospects for global growth had improved on the back of past policy easing and a reduction in trade policy related uncertainty. Global data were showing more and more signs of bottoming out. Things have changed rapidly.   While those supports for global growth are still in place, near-term economic prospects have been severely knocked by the coronavirus.

There has already been and will likely be more hits to confidence – for businesses, investors and consumers. And that can have an impact on activity in and of itself, as well as on financial conditions. Businesses and consumers hit with a confidence shock – faced with an increase in uncertainty about their prospects – save more and invest less.

Virus containment efforts, while important from a health perspective, are disruptive for the economy.  These near-term economic effects are bigger once you move to larger scale measures such as shutdowns/cancelling events/travel bans and quarantining of areas.  Some companies simply won’t be taking in revenues; some people – e.g. the self-employed or those on zero-hours contracts - won’t get paid; employees may be encouraged to take unpaid leave.

With an extended period of disruption, come the risk of layoffs and firms shutting their doors permanently.

However, we are likely to see more economic support measures from governments and central banks. In China, where containment efforts and disruption effects have been large, we have seen measures such as additional liquidity provision, targeted tax and fee cuts, social security bill cuts and some monetary policy easing.  Economic support measures don’t stop a virus spreading, but that’s not the point. Economic measures that ultimately support businesses through what may prove a difficult period for cash flow (the kind of measures, BoE Governor Carney recently referred to as “bridging” measures) can help keep businesses going through a difficult period and reduces the risk of lay-offs. This helps make sure that this is a temporary economic disruption.

General fiscal and monetary stimulus measures can of course also help calm the nerves – in an economic sense - of business leaders and investors. And, importantly, they can strengthen the recovery when it does come.  We’ve already seen rate cuts in countries including the US, Australia and Canada. The Bank of England looks likely to follow (with a good chance of action before their official meeting in late March) and fiscal stimulus already looked likely in the UK, even before the outbreak of the virus.  The ECB are likely to take some action at their policy meeting this week.

What can we say about the economic effects so far?  We have little traditional ‘hard’ data (like industrial production or retail sales) which reflect this crisis.  That is partly a reflection of how quickly things have escalated – particularly outside of China. The Chinese business surveys are consistent with a dire impact on activity in February. Chinese daily data for things like traffic jams, air quality and data on factory restarts, suggest that activity is gradually picking up again even if activity is still below normal.  However, the virus and its effects have now spread across multiple economies. Global growth looks likely to at least brush recession thresholds.

Summary: As near-term global growth prospects have weakened, so policy easing is stepping up and is likely to step up further.  That policy support will ultimately help the global economy weather this storm and support a recovery.  In the meantime, economic support measures that help businesses and consumers ‘bridge’ this crisis are vitally important to prevent the company closures and lay-offs that would deepen and extend this downturn.

Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice. Portfolio holdings are subject to change, for information only and are not investment recommendations.