In his first of a regular series, Privalgo co-founder Zeb Bham analyses the key economic factors around the current pandemic.
What we know
Monetary stimulus (Supply) – This refers to action taken by central banks around the world and can include lowering interest rates, increasing the supply of money (historically as basic as printing more paper money and coins) or increasing the amount of credit (during the post-2009 financial crisis this took the form of quantitative easing to try and encourage banks to lend to both individuals and businesses).
Fiscal stimulus (Demand) – This refers to government action aimed at impacting growth rates typically through increasing government consumption or lowering taxes, thereby increasing public debt. Other than the usual and constant tweaking made by governments in the course of ‘normal’ activity, this was historically used post WW2 to kick-start the economy after prolonged periods of negative growth. The other notable historical precedent was President Roosevelt’s New Deal in reaction to ‘The Great Crash’ of 1929.
The ongoing economic fall-out from Covid-19 has resulted in the biggest peace-time intervention by central banks and governments.
During the initial phase of this breakout, the most recent memory of intervention was the global financial crisis (GFC) of 2008/9. Then, global central bank action in the form of quantitative easing was widely seen as successful and arrested the fall of stock markets globally and spurred a period of sustained growth – up until the last two weeks.
Over the last week or so, central banks announced unprecedented levels of Monetary Stimulus to try and counter the huge falls in global stock markets. They believed that like the GFC, this would similarly arrest the fall and spur stock market gains. Guess what? It didn’t happen! Apart from brief relief rallies, stock markets continued to fall.
As I have said on numerous occasions over the last week, I felt that monetary stimulus would have little impact on this crisis. Why would dropping interest rates help airlines from falling passenger numbers, holiday companies from travel bans or restaurants that have no customers? Quantitative easing (a Bernanke invention) was deployed in the last crisis because there was a lack of credit. How would that be useful when we are faced with the current crisis. In short, it doesn’t – unless it is used in conjunction with Fiscal Stimulus.
Yesterday, chancellor Rishi Sunak announced a number of measures (Fiscal Stimulus) to combat the REAL impact that individuals and businesses large and small are facing over the coming weeks/months. Here are the highlights:
- Total package of £330bn or equivalent to 15% of our GDP
- £10,000 cash grants to 700,000 of the smallest UK companies
- Cash grants of £25,000 for retail, leisure and hospitality firms to help them survive this period
- The smallest businesses across all sectors will be able to seek grants up to £10,000
- Low cost commercial paper for large firms administered by the Bank of England
- Up to £5m in loans to SMEs, with no interest due for six months
- Business rates holiday for ALL firms in the pubs, clubs, theatres and other hospitality industries
- £1bn support for vulnerable people through the welfare system
- Assurances from the mortgage industry that lenders will provide a three-month mortgage holiday for those in difficulty due to Covid-19
Sunak went on to say that these measures represent the ‘first steps’ and he will set out the next stage of response in the coming days.
While these are welcome steps, we need more government intervention to combat the inevitable impact of the unfolding situation as it protects individuals and businesses through this period.
We can expect to see similar announcements from governments and central banks around the world.
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