An extraordinary year so far

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30/07/2020
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Needless to say, this has been an extraordinary year so far. There is a funny video circulating on social media showing the comedian Michael McIntyre visiting a fortune teller a year ago, who proceeded to tell him what life would be like at this time. The best line is when Mr McIntyre talks about the trip for a safari he was planning with his family – whereupon the fortune teller says that the only trip he would be planning in 2020 would be to the nearest garden centre.

Humour like this have served to lighten the gloom amidst the crisis of this pandemic. And, as the sketch above makes the point, it was not possible to see this coming. Even in the middle of February, while news stories of the spread of the virus outside China were becoming a daily occurrence, the hope was still that it could be contained. The first death in Italy occurred in the middle of February, the first in the UK on 3 March. On 12 March, the Prime Minister advised people to avoid congregating in pubs and clubs and against all non-essential travel. On 23 March, the “Stay at Home” lockdown was implemented.

As at time of writing, the total number of confirmed cases worldwide is 16,495,309 and deaths 654,327. In the UK the number of attributed deaths has passed 45,000 but is probably more (Johns Hopkins University).

But alongside the public health emergency there has been an economic crisis of ginormous proportions. This is the first recession in history to have been deliberately inflicted, with such severity, by governments upon their citizens. We will argue for many years about what governments did right or wrong, but essentially, in order to stop the spectre of older people dying in hospital corridors and an overwhelmed health system, the government shut down the economy and put huge swathes of the working age population out of a job. So, efforts to contain the health crisis have been far more damaging to the economy than the virus itself.

However, in acting to flatten the infection curve (or “squash the sombrero” as Boris Johnson put it) the authorities implicitly deepened the economic recession curve. Given huge parts of the economy were shut down for many months, this is likely to be the deepest recession in peacetime history for at least the past 150 years.

And because this was self-inflicted, national authorities have had to act to mitigate the worst impact. To date, around the world, this action has been unprecedented and previously unimaginable. It has taken the form of monetary stimulus, being interest rate reductions and wholesale purchases of government and private sector securities and a vast amount of fiscal stimulus, being tax reductions, grants to employers, loans and even in some cases (and there will be many more of these) nationalisations of otherwise struggling companies regarded as national champions. Around the world, many trillions are being spent in this way – but will not be enough to nullify the damage.

Amidst all this, the financial markets have been in a panic like never before. Equity markets around the world fell in the first quarter at the fastest rate in history, only to bounce back at the fastest rate in the second quarter. The UK market, largely because of its heavy energy and service-related exposures, has suffered more than most. The best example of the extraordinary market movements we have seen is in the US. The S&P500 index reached an all-time high on 19 February. From there it fell over the course of the next five weeks, one of the fastest bear markets in history. The low was reached on 23 March, the day the US Federal Reserve announced a major expansion of its programme to support the economy – “The Federal Reserve is committed to using its full range of tools to support households, businesses and the US economy overall in this challenging time”. From that point, the market enjoyed its fastest three day rise in over 80 years.

There have been other extraordinary market events too. On 20 April, the futures market price for oil dropped below zero – a sudden drop in demand meant supplies were piling up and traders feared not having storage space if they had to take delivery – so there was an orgy of selling. Just as in 2008, liquidity in the bond markets dried up leading to some weird pricing behaviour. Indeed, throughout late March and early April, market pricing was extremely disrupted as the entire financial services and trading sector got used to trading from their spare rooms at home.

The good news is that markets have muddled through and there are tentative signs of a recovery – although from an extremely low base. Unfortunately, there is no precedent for determining how markets and the economy might emerge from all this.

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