Shock and awe: Planning economic Covid-19 recovery
Three steps for markets to bounce back
Financial markets are attempting to stabilise after the shock delivered from large parts of the global economy shutting down as policymakers struggled to prevent the spread of the Covid-19 pandemic.
While we still have little clarity on the path or duration of the virus or the subsequent economic impact, it is now possible to look at the range of likely outcomes and develop a plan; although flexibility will still be a key requirement.
I see a three-stage path to recovery for markets.
Firstly, they needed to come to terms with the prospect of a very abrupt, unexpected and deep recession and form a technical base.
Secondly, the markets need to calibrate the likely scale and duration of the loss of demand as consumption, investment and global trade collapse.
Thirdly, we also need to factor in the probable significant longer-term impact on global supply chains. For example, to what extent will this recession impair the productive potential of the global economy over the medium-term and will companies be forced to build greater resilience into their operations?
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In my view, we are currently somewhere between the first and second phase of the recovery, thanks largely to the extraordinary policy stimulus seen in recent weeks.
Central banks and governments are doing everything within their power to counter the demand shock and to ensure that, once economies are finally reopened, the recession, while severe, will be relatively short-lived and the subsequent recovery strong.
The US Federal Reserve is leading the way with a huge $2.3trn package, which includes additional cheap loans to businesses and buying private debt including high yield bonds.
The Bank of England also announced that it is providing an unlimited overdraft facility to the UK government to finance its planned fiscal expansion.
This "shock and awe" response is unprecedented in the peacetime history of financial bailouts and economic rescues. In previous recessions or financial crises, policymakers usually reacted slowly and carefully, trying to avoid political backlash or "moral hazards".
Authorities today are under no moral, political or even legal constraints to bail out the economy and financial markets, partly because this particular crisis is more like a "global natural disaster", which requires a major relief programme.
They will continue to "do whatever it takes" to preserve the integrity of the financial and banking systems, which will clearly speed and aid the ensuing economic recovery.
It is true that these policies won't influence when economies can be reopened, nor can they guarantee that the demand collapse is reversed any time soon. Neither will they necessarily address any longer-term supply side issues.
However, the speed and magnitude of the monetary and fiscal response will most likely more than offset any direct GDP losses as a result of the shutdown and will help limit any financial instability.
Naturally, there will be vulnerable and lower quality borrowers that will fail, leading to a rise in corporate bankruptcies and unemployment but many more businesses and jobs will be saved or will start from fresh.
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