As I write these words, an influential Financial Times columnist is asserting that the pandemic — at least in the eyes of the British government — is no longer primarily a health crisis. Instead, it is an economic crisis.
And certainly, despite the various lockdown-loosening measures likely to take place during June, large sectors of the economy will remain shuttered.
When even the chancellor of the exchequer is predicting 10% employment, you know things are bad.
But bad for how long, exactly? Economies can sometimes bounce back more quickly and more solidly than pundits predict.
V-shaped recovery
Here, the object lesson is 2009.
Those of us who remember 2009 will recall that not only was the recovery steeper than many had expected, but also that it wasn’t followed by a further contraction — the so-called ‘double-dip’.
Investors who remained on the sidelines caught a cold. Quite a severe one, in some cases. With share prices rocketing away, they remained in cash, hanging on grimly waiting for a market collapse that never came.
So with that in mind, here are five reasons why investors should be a little more optimistic than they might otherwise have been, given the gloom pervading the business pages.
1. The lockdown is easing now, not next month or next quarter
You don’t have to look too far to find plenty of opinions that the government’s lockdown-easing measures are happening too soon, and too quickly.
But that is ‘too soon, and too quickly’ from a health perspective. From the point of view of the economy, speed is what we want.
There’s a trade-off, to be sure: the risk is that more people will contract Covid-19. But the upside is a faster economic recovery — faster than looked possible a few weeks ago.
2. There’s a tidal wave of money hitting the economy
The contrast between the UK and America is stark. We have a furlough scheme, mortgage holidays, credit card holidays, and various measures to help the self-employed and small businesses. America has mass lay-offs, with millions thrown on welfare.
In America, consumer expenditure is falling off a cliff. Here, we have five-hour queues to get into IKEA.
From a corporate perspective, government-backed and government-subsidised business ‘bounce back’ loans and various schemes to help businesses, such as business rate holidays, add to liquidity.
How much will the UK’s GDP shrink? I don’t know. But I do know that with a tidal wave of money supporting consumer and business expenditure, the hit will be a lot less than it might have been.
3. Bank Rate is a ridiculous 0.1%
I nearly wrote that heading as ‘Bank Rate is at record lows’ — and then realised that I’ve been writing those words since 2009: eleven long years during which Bank Rate has only briefly reached 0.75%.
Even so, today’s rate is one-eighth of that level. Borrowing has never been cheaper, and banks and other lenders have never been as strongly incentivised to keep funds flowing.
Quite how consumers and businesses will respond to this isn’t yet clear, not least because with an economy recovering from lockdown, there are fewer opportunities to spend. Foreign holiday? New kitchen? House move? New car? — Oh, yes, the car showrooms are now open. But you get the picture.
4. The Conservatives’ manifesto pledges aren’t being dropped
Boris Johnson’s levelling-up agenda is still on. Big infrastructure projects are still being planned, long-closed railway lines are mooted for reopening, and sizeable investments in advanced manufacturing and technology are still scheduled.
Many had thought that the chancellor would quietly drop these. But he hasn’t, and one government minister after another has affirmed that the agenda is still on.
Put another way, that’s yet another economic stimulus that investors should welcome.
5. At least in the short term, inflation should be benign
I don’t know about you, but I’m seeing a modest reduction in the cost of living.
Fuel prices are down; electricity tariffs are falling; the cost of heating oil has fallen substantially; and of course we aren’t going out. I haven’t filled up a car since March.
Likewise, those of you working from home will be saving on commuting costs and incidental expenses.
And of course, with shops shut, there are fewer opportunities to spend money.
Put another way, lockdown certainly doesn’t seem to be inflationary. And I don’t think that the recovery from lockdown will be inflationary, either: in many industries, the challenge will be stimulating demand.
Putting it all together
Of course, I might be wrong about all this: recall the words of economist J.K Galbraith about the only function of economic forecasting being to make astrology look respectable.
Even so, there’s a persuasive logic to it all. The scale of the economic stimulus that we’re seeing is simply gigantic. It must do something.
And as always, the GDP figures, when they come out, will be a rear view mirror. When you read it in the papers, it will be too late. For now, investors must keep their senses sharp.
