Latest UK economic and market outlook.
While these are truly uncertain times that make economic conditions even more difficult to predict than usual, there is a consensus emerging. This consensus posits that the coronavirus will cause a deep slump across all major economies, followed by a rebound due to concerted fiscal and monetary stimulus as well as a degree of pent-up demand.
We are certainly beginning to see the significant impact of the coronavirus in economic data. For example, US jobless claims recently rose to a record high of 6.7m. Meanwhile, China’s industrial output contracted at the fastest pace on record in the first two months of the year.
While these figures are extraordinary, so too are the measures being taken by governments and central banks to combat the virus. Indeed, the fiscal and monetary stimulus announced by the world’s major economies is a global policy event without precedent in peacetime. The increase in fiscal spending and loans in the US this year alone will represent over 10% of GDP, larger than the rise in the federal deficit through 2008 and 2009. The impact of central bank injections will be equally important. For example, the US Federal Reserve may finance part of the country’s fiscal stimulus by buying Treasury bonds. Its balance sheet will also swell from purchases of mortgage bonds and packages of private loan assets. This could mean that the Fed’s balance sheet increases by $2tn-$3tn this year, up from $4.2tn at the end of 2019. That would be similar to the cumulative increase over the entire decade that followed the global financial crisis.
It is not just the Developed World that has announced extraordinary monetary and fiscal measures to combat the crisis. Emerging economies including South Africa, Brazil, Poland and Turkey are now preparing to print money to buy government debt in order to fund large-scale fiscal easing. In this sense, we are genuinely breaking new ground in terms of monetary, fiscal and economic policy. Such coordinated stimulus efforts should mitigate the worst of the crisis. However, the longer the lockdown goes on, the more damage will be inflicted as more companies go bankrupt and people lose their jobs. Moreover, as and when social distancing measures are relaxed, the risk of further outbreaks of the virus increases. Fear of further outbreaks could also mean that employment and investment are slow to recover as firms adopt a wait-and-see approach. Thus, the shape of the ensuing recovery is heavily dependent on the timing and effectiveness of the exit strategy from social distancing measures.
Clearly at some point equities will move to price in the recovery, particularly as valuations in many cases are now extremely attractive. While it is notoriously difficult to predict the timing of such a turn, potential catalysts include a slowdown in the pace of new infections and a sustained rebound in global PMIs.
Nothing in this document constitutes or should be treated as investment advice or an offer to buy or sell any security or other investment. TT is authorised and regulated in the United Kingdom by the Financial Conduct Authority (FCA).