Cometh the hour, cometh the man? In April 2009, as the global financial crisis was pushing the world economy into freefall, G20 leaders met in London. “None of us has a plan,” said Nicolas Sarkozy, the French president. “Gordon has a plan,” replied Barack Obama. It was a plan that, when it came to the banking sector at least, they would all end up following.
Such global coordination is hard to find today. The world’s major economic and trading hubs – the US, China and the eurozone – not only differ in their responses to the crisis, but have often struggled to achieve even internal unity. There is certainly no global plan. Furthermore, the shortcomings of national responses may now be beginning to show.
Last Friday, Wuhan’s prevention and control taskforce revised the city’s death toll up by 50% – from 2,579 to 3,869. The announcement only added to existing suspicions abroad (and on online forums in China itself) that both Wuhan and Beijing had been underreporting the death toll.
However much Beijing may struggle with accurate reporting, it certainly knows how to impose a national lockdown – as the latest batch of economic data makes clear. On the same day as Wuhan’s data revision, came news that the Chinese economy shrank 6.8% in the first three months of 2020 – its first negative quarter since records began in 1992. Just last December, economists were fretting that China’s GDP growth in 2020 might fall slightly below +6%.
As for Washington, last week Donald Trump withdrew US funding from the World Health Organization (WHO), before announcing a new campaign: “Opening America up again”. Under the rubric, a state may begin to loosen lockdown measures once the number of new COVID-19 cases has been in decline for 14 consecutive days, thereby passing the responsibility for decision-making to state governors. US stocks rose late in the week. At the same time, recent weeks have seen short sellers take their most aggressively negative positions on stocks for years.
The president was doubtless relieved to see the S&P 500 rise last week, alongside the FTSE 100 and China’s CSI 300. But he is surely concerned by the latest economic data, not least when it comes to retail sales and industrial production. Moreover, an April survey of 57 economists found they expected 14.4 million US jobs to be lost in the coming months (beyond the 17 million already lost), with the unemployment rate rising to 13% in June. Another 5.2 million Americans filed for unemployment benefits last week.
“As we move towards lockdowns being eased, we believe that GDP will have been adversely impacted at an approximate 35% run rate for around six weeks from mid-March to the end of April, before lessening to a 25% impact during May and a 15% impact in June,” said Mark Dowding of
BlueBay, which co-manages the St. James’s Place Strategic Income fund. “Cumulatively, this will represent a total subtraction of around 6.5% from GDP over this period. We see US GDP over the calendar year at approximately -4.5%, with growth in the eurozone and UK around -6.5%.”
The president’s WHO announcement came as reported deaths in the US spiked to nearly double the previous record, reaching a record 4,591 in just 24 hours. The day after the announcement, G7 leaders used a virtual summit to express their shared support for the organisation, while senior public figures such as Bill Gates criticised the president’s decision.
The EU has faced its own problems responding to the crisis; the north-south divide, so evident during the euro crisis, has been to the fore once again. Last week, Ursula von der Leyen, president of the European Commission, felt obliged to publicly apologise to Italy on behalf of the EU for the latter’s poor response to the rapid emergence of COVID-19 in the country.
As several leading governments in the EU have eschewed coordinated measures (with France the most notable exception), it has fallen to the European Central Bank to provide the backstop. It might have preferred the politicians to take greater responsibility, but it still stepped in with a bond-buying programme in March; last week, Christina Lagarde said the bank would “do everything” in its power to support the currency area. In so saying she was echoing Mario Draghi’s promise, made in London in 2012, to do “whatever it takes” to preserve the euro.
Central banks remain fundamental to the financial response to the crisis-induced downturn: the Fed’s balance sheet has risen by $1.8 trillion in the past four weeks and now stands at a record $6 trillion. The ECB’s has risen by €0.5 trillion in the past month. These rates are far above anything trialled under post-financial crisis quantitative easing. For governments and central banks alike, these are unprecedented times.
“The actions of the Fed and the fiscal support provided by governments around the world have been absolutely critical – providing liquidity to the financial system has been of paramount importance, as has the support for individuals and businesses caught up in this,” said Jim Henderson of Aristotle Capital, manager of the St. James’s Place North American fund. “The spike in unemployment would have been so much worse if action hadn’t been taken to help companies. These are short-term measures to provide short-term support. More stimulus is likely to be required if this lasts more than a couple of months.”
Even with all the stimulus already injected, Christine Lagarde will still have a job on her hands, not least because eurozone companies rely far more heavily on credit than their US peers. Furthermore, this crisis has some way to run yet. Last week, France, Italy and Spain all extended their coronavirus lockdowns until late April or early May and signalled further extensions to come.
The UK introduced a three-week extension of its own, but there were rumours (and denials) of new decisions on school openings, and the possibility was floated that the over 70s could face lockdown for a year. Whatever else is uncertain, one thing is clear: every lockdown comes with a cost. Last week, the Office for Budget Responsibility offered a model that, if the lockdown were to continue for three months, the UK economy would contract by 35% in the second quarter, and the deficit would rise to 14%.
In short, governments around the world have some fiendishly difficult calculations to make in the months ahead. Expect them to vary.
BlueBay and Aristotle are fund managers for St. James’s Place.
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