- Governments and central banks globally will move towards greater intervention with fiscal activism and increasingly creative monetary policy.
- Asia is primed for economic leadership due to its higher levels of economic growth and its greater control of the virus.
- This article is an excerpt from a longer Fidelity white paper on the new economic order which you can access by clicking here.
As the Covid-19 crisis plays out, and particularly if we see the base case economic scenario developing, we think new long-term trends will set the world on a unique course. The key features will be state intervention, fiscal activism and continued Asian economic strength.
Central banks all over the world have embraced an interventionist mantra for years to support the economy, using ever more unorthodox tools at increasing scale. We think these authorities will continue experimenting with creative solutions including some form of yield curve control by the Federal Reserve; but with central banks pushing against the limits of monetary policy, governments will have to step in.
Using the Covid-19 crisis as cover, politicians are embracing interventionism, accelerating a trend that had grown in response to a global economy characterised by low growth, high debt, growing inequality and rising populism. The nascent reversal of liberalisation, deregulation and free market politics - which were first ushered in by Margaret Thatcher and Ronald Reagan in the 1980s - has now moved into overdrive.
Austerity and privatisation trends will continue to be undone, and more regulation and higher taxes will become permanent features of the landscape. Social welfare schemes, particularly relating to healthcare, are likely to be expanded. Some measures, such as nationalised benefits, could remove liabilities for corporates, but others, such as greater scrutiny of share buybacks and executive compensation, could constrain shareholder returns.
Further integration between government and industry could take the form of long-term loans and equity stakes, to address short-term liquidity and solvency concerns. We may see partial nationalisation of the airline industry, and, in a deeper, longer downturn, intervention in the infrastructure and healthcare sectors as well. Governments will reassess their national industrial policies and seek to remedy vulnerabilities, particularly around national security.
In the aftermath of the Global Financial Crisis bailouts, governments argued that austerity measures were required to restore discipline to public purses. That philosophy has been discredited to the extent that the last decade has seen anaemic growth while the cost of debt has remained at rock-bottom levels. Both of these factors are now compelling arguments for greater fiscal activism.
Developed market economies will need transformative programmes to escape low growth once the Covid-19 crisis has passed. The US will be a key test. Since March, the US labour market has experienced an unprecedented rise in unemployment, which could easily peak at 20-30% of the workforce - levels last seen during the Great Depression. The resulting impact on consumption from severe job losses threatens not only US GDP, of which 70% is consumer driven, but by extension the rest of the world. The US worker, a factor of production, is one and the same as the US consumer, the source of final demand. Returning to a virtuous cycle of high employment and growing consumption will likely require expansive fiscal support.
The fiscal injections that the US and other governments are currently deploying are insufficient to produce long-term growth; indeed, they are better described as interventions to bridge populations through lockdowns, rather than stimulus per se. To steer through this crisis and recover fully afterwards will likely require a sustained and large-scale programme of government investment targeted, crucially, at the average person on Main Street.
Continued Asian strength
The virus originated in Asia and the region is returning to normal sooner than elsewhere, barring any significant second and third waves of infection. Mainland China, Hong Kong, Taiwan and South Korea demonstrated organised, disciplined, well-resourced and targeted reactions to the outbreak. As a result, they appear to have it more under control than others and are slowly beginning to re-open their economies. This puts Asia at an advantage as the rest of the world still organises its responses.
However, there are deeper structural reasons why we think Asia is primed for economic leadership. Asia has higher economic growth, stable political regimes and widescale adoption of technology that will help it take a lead. Certain countries also have lower debt and supportive demographics. Asia has arguably been driving global growth for the past 10-15 years, so this is a continuation of a powerful trend.
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