Coronavirus and the economy: your questions answered
Chief Economist & Strategist Keith Wade chatted to us about coronavirus and its economic impact. Here are your nine questions answered.
Q1: How do you think that the virus will affect the global economy?
It is going to have a very significant impact. The virus could create a fall in GDP unlike anything that we have seen in the last 50 years or so – a fall in GDP of between 10% and 15% in the second quarter of 2020.
Q2: How severe could the downturn be?
We’re talking about a deep recession. It will probably be the deepest recession that we have had since World War II.
But this one is different, because this recession is artificial. It is being created by the government telling people not to go to work.
We need to wait until the government can lift the restrictions and people can go back to work.
We expect the incidence of coronavirus to fall as it would tend to ease off during the summer. That should provide a window of opportunity for the economy to restart and on that basis we forecast a really strong bounce back in the third quarter of the year.
Q3: What are central banks and governments doing to help the economy?
Central banks and governments are acting as a safety net to cushion the fall. They are providing loans and supporting wages to keep businesses going and intact during this very difficult period.
Most governments have announced measures that amount to around 2-4% of GDP, to help the economy directly, primarily through supporting workers.
Major central banks globally have either cut interest rates and/or restarted a form of quantitative easing (QE), whereby they purchase existing government bonds in order to pump money directly into the financial system to keep the money supply flowing.
The worst outcome would be if the recession results in a massive number of bankruptcies and hugely increased unemployment.
Q4: Are the authorities doing enough?
They are doing a lot. They have indicated that, even when we get the bounce-back and the recovery, they will keep policy extremely loose to make sure that the recovery stays in place.
This is made possible because there is very little inflation at the moment. We have, of course, seen a big fall in oil prices, and that is keeping prices down as well.
Q5: What do central banks have left in their arsenals?
There is not a lot more that central banks can do. “Forward guidance” – where they tell people what to expect further down the line – would seem to be their biggest weapon rather than more QE or interest rate cuts.
Policymakers have indicated that they would not want to cut interest rates below zero because of the negative effect that it would have on the banking system.
They could broaden the range of assets that they are buying. For an extreme form of QE, you can look at Japan where they are also buying equities through Exchange Traded Funds and Real Estate Investment Trusts.
I am not sure how comfortable other central banks would be with that – it raises all kinds of corporate governance problems.
Q6: Has coronavirus got the potential to turn into another financial crisis?
That is the risk. The central banks are trying to avoid this by providing liquidity to the economy at a time when it desperately needs it.
The danger is that there is a tightening of financial conditions and a further lurch downwards. I believe that they are doing enough to try and avoid that.
I worry that, if we don’t see policymakers acting decisively in the eurozone, then we could potentially see another euro crisis.
Q7: How long-term are central banks and governments thinking with these measures?
I think at the moment they are thinking three to six months out but they have made it clear that they will continue these measures if they have to.
If we get what we call a “V” shape recovery, so a major fall followed by a big bounce back, then we should be able to see through this in three to six months’ time.
The danger is that coronavirus comes back and we see another dip in economic activity due to further shutdown measures in late 2020, which is a “W” shape recovery.
There is a chance of that. Governments are suppressing the impact of the virus – they are not getting rid of it. Many people won’t have the virus but, once people start to mobilise again, then another group of people could catch it.
With another shutdown we could be looking at a 12 month period, up to the point when a vaccine is made available and widely distributed.
We estimate that this would probably add about 9% or 10% of GDP to government borrowing this year if we did see the “W” shaped forecast.
Q8: How will governments recoup the money they are spending in the crisis?
Well, this is the great difficulty. We all know that’s not sustainable – eventually taxes would have to go up or spending cut.
Governments are going to be quite wary because the austerity that followed the global financial crisis was very unpopular and it had a political backlash.
I think that we will probably see interest rates remain quite low for a long period of time to enable governments to manage this process with the extra debt that they are going to build up.
A lot of this debt will end up on the balance sheet of central banks and it will be a while before we see taxes increase – a multi-year scenario.
Q9: Is there any suggestion that a prolonged lockdown could be worse for society than the actual virus itself?
A recent Bristol University study suggested that a fall in GDP of about 6.5% as a result of shutdowns could have a worse effect on people’s health than the coronavirus itself, though this is just one view.
It does explain why the government is so keen to put in place income support and policies to keep businesses alive. It will help to cushion people and prevent them experiencing the worst effects of the recession.
Keep up-to-date with the latest market and economic developments related to coronavirus with Schroders by bookmarking their coronavirus hub page and following them on twitter.
Important Information: The views and opinions contained herein are of those named in the article and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The sectors and securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. This communication is marketing material.
This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. Issued by Schroder Investment Management Limited, 1 London Wall Place, London, EC2Y 5AU. Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.