Early 2020 saw the worldwide onset of a largely unexpected and highly contagious pandemic that has impacted the global environment in many ways. Covid-19 will have a lasting impact on business and society while posing major global challenges. The emotional and psychological impact of the virus will leave its mark.
Markets have experienced one of the sharpest stock market crashes, followed, extraordinarily, by one of the greatest rallies.
Life has become highly uncertain and even fearful.
Crises like these tend to unearth and portray increasing occurrences of a deepening negative social mood – think of Brexit, US-China tensions, and US-WHO (World Health Organisation) relations.
The global economy has tumbled into a severe contraction following the swift and major shock of the coronavirus pandemic that triggered shutdown measures on an unprecedented scale. It is expected that this contraction may represent the deepest recession since the World War II, with the largest number of economies in recession since 1870.
With the world now living through the pandemic, many believe that this represents a ‘new normal’, as the virus continues to pose many challenges to society, the economy and markets. The world has not yet reached a virtuous economic cycle since the global financial crisis of 2007/8 as many ’emergency’ measures remain in place.
Monetary and fiscal authorities have ventured into what used to be no-go areas.
Today quantitative easing (QE) and ultra-low and even negative interest rates have become acceptable, albeit necessary. Markets have become dependent on stimulus. There have been considerations, in some cases actual intervention, in terms of yield curve targeting and authorities being active in markets to pursue or orchestrate certain outcomes.
Stimulus measures likely to continue
Yet central banks and governments have also had negative experiences in recent years with the premature reversal of economic stimulus measures and will therefore be very cautious in taking the foot off the pedal.
As a result, we can expect central banks and governments to keep policies loose for as long as possible, even if the economy recovers and inflation comes under upward pressure. Lower-for-longer interest rates are thus expected to remain.
And so the capitalist principle of free markets has essentially been allowed to be overtaken by unprecedented and centrally (though necessary) driven interventions in an effort to ‘save’ economies, given the extent of the crises and the potential risk (deflationary recession/depression) of not intervening.
Is this a good or bad thing?
It is good insofar as it has averted deeper crises and greater economic damage while providing the chance to nurse economies back to some health. However, the extent to which central bank balance sheets and fiscal debt have had to be continually applied to support economies and markets, may reach a tipping point at some stage.
Long road ahead
The global economic recovery remains uncertain and very much dependent on the path of the virus and the development of an effective vaccine or cure, as well as the maintaining of supportive policies. Second waves or resurgences and flare-ups have been occurring, notably in Europe.
Strong reflex rebounds in economies should be expected following the easing of lockdown restrictions after a severe worldwide shuttering at the onset of the pandemic, but there is likely a long road ahead before full recovery to pre-Covid levels.
A growing move to and reliance on fiscal policy measures is expected as monetary policies max out.
It is generally believed that the upcoming US election will be a highly contested one. This would raise potential market volatility given the uncertainty.