It is important that within the next three weeks the government explains its exit strategy.
- Monday, April 20, 2020
The global lockdowns are creating a self-imposed recession for justifiable public health reasons but the human fall out from these lockdowns are very real with business failures, unemployment and debt levels rising. The lives versus livelihoods debate is no easy trade off as lifting the lockdown early can cost lives, but lifting it too late could do longer lasting economic and social damage that could undermine the wealth that supports our much-needed public services.
According to new modelling produced by Capital Economics, the British economy could take up to 5 years to fully recover to its pre-Coronavirus position. The model predicts a lasting economic hit with unemployment rising from 4% to nearly 9%, household incomes declining by up to 10% and 100,000 business failures. Capital Economics forecast that UK GDP will not return to 2019 levels until early 2022.
A very human example of the price of lockdown is that over the past week in the USA, another 5.2 million people filed for unemployment benefits, taking the total jobless figures to 22 million. This figure equates to the total number of new jobs created in the US since 2009 and therefore a decade of job creation has been lost in one month.
Unlike Britain, the US did not set up a government funded furloughing scheme that covers 80% of wages. Instead the unemployed in America will receive far less money in jobseekers’ allowances.
According to the IMF, world GDP will fall by 3.8% this year which when compared to the drop of 0.1% as a result of the 2008 great financial crisis is very concerning. At that time global GDP growth was aided by the expansion of China but this time, even though China is fast emerging from its Coronavirus lockdown, its impact on world GDP will not be so dramatic.
Around the world high state spending will result in fast rising national debt levels. Our own Treasury is expected to borrow £273bn in 2020/21 which is six times more than we borrowed in 2019/20. This level of borrowing will leave the UK with a deficit of 14% of GDP which is far higher than the 10% deficit built up after bailing out our banks in 2008. The past ten difficult years of deficit reductions through austerity measures have now been reversed dramatically. Inevitably there will be a future payback period with spending cuts and higher taxes. Tax payers need to be sure that even in this crisis, public money has not been wasted. There is already an impact upon savers with interest rates now set at 0.1% and likely to stay very low for many years.
Massive Government spending will be coming into play this month along with central bank stimulus packages. The key player for global liquidity is the US Federal Reserve. The Fed has expanded its bond purchasing programme not only to buy up US Treasury bonds but also investment grade corporate bonds and high yielding grade corporate bonds. This action has put stability into the credit markets from which a new confidence has developed. This is one of the reasons that we have seen a stock market recovery in capital values over the past three weeks. Last week, the levels of new infection reports started to show a decline which also helped markets recover value. Over the past month the S&P 500 index has risen by 19% and the FTSE 100 index by 12.3%.
The Office of Budget Responsibility (OBRS) is forecasting a 35% fall in UK GDP but also a V-shaped recovery. This may be the way that the stock market has respond recently but a U-shape economic recovery is looking more likely unless the lockdown is progressively eased as is happening in other European countries who are ahead of us on the virus contagion curve. Even with a full lockdown lift, many people will emerge from this experience financially exhausted and concerned about a second wave. Life will not be the same straight away.
While it is still early days to assume that the peak of the global Covid-19 epidemic has passed earlier than modelled, it is increasingly reasonable and rational to believe that the key reasons for a full lockdown are beginning to dissipate. The statistical evidence has confirmed that the infection is most dangerous for the elderly and infirm, who are at elevated risk of infection when the virus spreads uncontrolled through communities (In most regions, fatalities among the over 60s accounts for 95% of all loss of life due to Coronavirus). Once this group had been shielded from wider community contact hospital admissions and fatalities reduced.
But dangers persist. The broader, younger population evidently suffers severe illness to a lesser extent, but can still fall victim to the virus without it being entirely clear what factors beyond pre-existing heart and lung conditions are determining this. The understandable fear of this risk would prevent a wider return to pre-virus public life for the working age population, unless a vaccine or effective treatment becomes readily available. Therefore, it is understandable why so much hope and excitement is being attached to any positive news from the antiviral drug tests.
Hope is powerful but can lead to over-optimism. We cannot be sure whether the latest developments are reason enough to follow China’s example and end the blanket restrictions of free movement across society. The experience of those countries across continental Europe who are now easing their national lockdowns will be most instructive for those like us, who are a few weeks behind in the epidemic contagion curve.
Should these moves prove successful, it is reasonable to expect a gradual return to public life starting in May. Should the scientific results of the antiviral drug tests confirm the anecdotal efficacy evidence, then it could even make the ‘herd-immunity’ approach a viable public health strategy again. On the other hand, should re-opening society lead to renewed spikes in hospital admissions, or the tests on antiviral drugs return inconclusive results, it may mean further lockdowns are necessary.
The way in which the Prime Minister battled with his own Coronavirus was seen by many as a symbol of British determination to beat the virus. However, since Boris Johnson has had time off to recover, there has been a growing feeling that the government is incapable of making key decisions in his absence. While there is a 90% public approval for an additional three-week lockdown extension, it is important that within these three weeks the government explains its exit strategy so that businesses can prepare for a post lockdown world.
While the lockdown has certainly saved lives and allowed the NHS to cope with demand, as other countries begin to start to loosen lockdown and implement exit strategies, our government will face greater pressure to reveal their own plans. What comes next will be so important.
In the US, President Trump is starting to prepare for the easing of lockdown restrictions by issuing exit guidelines. Many companies are starting to plan to re-open. For example, Boeing is expected to resume aircraft production this week, Fiat Chrysler will open its plants on May 4th and Volkswagen resume production in US, Europe and Russia from 27th April. According to the World Bank more than 70% of East Asian large corporations have become productive but are not yet operating at full capacity. Another sign of improvement is that the number of cargo ships visiting China’s ports has returned to long term average levels. This is good news for worldwide supply chains.
Stock markets are pricing in a rapid rebound in activity on the basis that the lockdown is a one-off self-imposed shock to the global economy and it will be followed by a testing and tracing regime and then an anti-virus vaccine. We shall wait and see.
Chris DaviesChartered Financial Adviser
Chris is a Chartered Independent Financial Adviser and leads the investment team.