The Covid-19 pandemic has floored the world economy which was already on the ropes as a result of weakening global trade caused in the main by the tariffs dispute between the United States and China. Some leading institutions like the IMF have said that this is the worst economic crisis since the Great Depression. Only time will tell if they are right. Clearly, finding a vaccine or some medical fix to combat the virus, and sooner rather than later, is key to limiting the overall damage to the world economy. The longer we go on without a remedy, the worse it is going to be on both the health and economic fronts.
While the deaths caused by Covid-19 around the world have been truly shocking, the economic impact as measured by decreasing output and job losses (hopefully only temporary) has also been devastating. In fairness to the major policymakers there has been a quick response both in fiscal and monetary terms. But all the money being pumped in to help economies will ultimately be of little use if businesses and more particularly consumers don’t feel confident enough to resume spending once the restrictions on movement and activity are fully eased.
While health officials understandably need to maintain a cautious approach, there is in my view an onus on politicians to adopt as positive a stance as possible while still mindful of the risks from the virus to the general wellbeing of the public. Franklin D. Roosevelt’s inaugural speech as 32nd President of the United States, at the height of the Great Depression in the 1930s instantly comes to mind here “We have nothing to fear but fear itself”. The real worry is that households, which are such a key component of a country’s GDP, hunker down and take a conservative approach, by holding on to what they have, rather than going out and spending. Most countries have now started to gradually lift restrictions, but it is critical that lockdowns don’t go on longer than they absolutely have to, and that the messages on the health front are not all of the doom and gloom nature.
There is a danger too that we look at overly complicated solutions to the crisis. Common sense will be a more important attribute in finding the answers rather than assuming that economic theorists and those with multiple degrees coming out of their backsides will fix the mess. Some of the smartest people I know have no third-level education. They should be listened to. Co-ordinated political management of the situation is sadly lacking across the globe and ongoing tensions between the US and China and the blame game will hinder rather than help the recovery. The reality is that this is new territory for everyone and not something that is likely to be sorted out with economic textbooks. It is worth noting that the two major central banks in the world, the US Federal Reserve and European Central Bank are now both headed by people from a legal rather than economic background, and that may be no bad thing. After all, the old joke about us economists is that we were only put on this earth to make weather forecasters look good.
Keeping interest rates low will be vital as countries look to borrow and pay back the debt needed to fund their respective economic rescue packages, and if you subscribe to Modern Monetary Theory, then the likes of the US and UK who are in charge of their own currencies will simply be able to print their way, through money creation, out of the crisis. If only it was that easy, but they are still probably in a better place than the Eurozone, where things look more precarious than ever.
ECB Main Refinancing Rate %
Former ECB President Mario Draghi didn’t oversee a rate-increase in Euroland during his eight-year term in office and it is quite conceivable that his successor Christine Lagarde will end up in the same boat, which would mean no hikes before 2028 at the earliest. The last rate increase from the European Central Bank was in July 2011 just before Draghi took over the reins from Jean-Claude Trichet. US interest rates will also need to be kept ultra-low for the foreseeable future. But the main focus is likely to be on the Eurozone. Apart from keeping rates close to zero, it will also be important for the ECB to try and ensure that bond yield spreads of the bloc’s weaker countries like Italy and Greece don’t widen dramatically versus the strong members, namely Germany. There have already been some worrying signs that the premium paid for Italian debt over its German counterpart could widen rather than narrow in the coming months.
It is vital that key member states like Italy are kept on side. Anything that encourages support for League leader, far-right extremist Matteo Salvini, who is already quite popular in his home country, and his likes will only raise the chances of more tension between Rome and Berlin going forward and could potentially in the end see the break-up of Euroland and indeed the EU. It is definitely one worth keeping an eye on, especially as Angela Merkel is unlikely to be German Chancellor for too much longer and provide the voice of stability and reason as she did during the Eurozone bond crisis and “Grexit” threat. At least current Euro bond yields in general, as measured by 10-year and 30-year levels, suggest that there is no worry among investors of a strong pick-up in inflation (the main enemy of traditional fixed-income securities) on the horizon for some time to come. Therefore, rates are likely to remain very low, as least for the immediate future, but unfortunately that is the only real glimmer of light at this moment in time.
Although things don’t look particularly bright right now, I believe that ultimately a lot of positives will come from the Covid-19 crisis like cherishing the things that really matter most. We have to look at this as a seminal moment in history. If you had been alive for the whole of the 20th century, you would have lived through two world wars, the Spanish flu pandemic (which killed an estimated 50 million people worldwide), the formation of the Irish State, the Great Depression, man landing on the moon, decimalisation, the forming of the EU, the introduction of the euro, Vietnam war, Kennedy assassination, the AIDs crisis, women getting the vote for the first time to name just a few. The point is that the world constantly changes, but it survives through good and bad, and it will be no different this time. Therefore, we should embrace the moment for what it is, even though it’s not very pleasant at this juncture.
Author: Alan McQuaid is a leading economist and media commentator in Ireland. He has worked with the Department of Finance and the leading Irish stockbroking companies.