Corona Virus Update

Coronavirus update: World War C

25 Mar 2020

Ben Kumar, Investment Strategist

The world is at war again. This time we have a common enemy and the battleground is our homes, workplaces and shops. It won’t be easy.

Defeating COVID-19 will be a war of attrition. The lockdown here in the UK – and most of Western Europe – is the initial delaying tactic, to stomp on the coronavirus and give medical services time to prepare.

It’s also worth looking behind the frontlines. In the Investment Team, we’re tracking responses from governments and central banks around the world – and are seeing wartime-like stimulus measures being put in place to keep economies going (see the table for our summary of measures in key countries).

The exact policies differ from country to country, but have lots in common. Governments and central banks have acted fast, in unison, and in size.

In Europe, individual countries are targeting policies at their specific populations, supported by the European Central Bank – although miscommunications will happen when trying to coordinate 27 countries. In China, the government and the central bank are moving in lockstep – as you’d expect given that one controls the other – to make sure the economy gets the support it needs.

In the UK, the government has adopted shock and awe tactics. Rather than calculating the exact amount of stimulus needed, the Chancellor has thrown everything at the problem, with an open-ended promise of more.

And the US, as ever, is putting everyone else in the shade (eventually). Although the stimulus programme is taking its time to work through the political bureaucracy it is the biggest programme of government support ever seen, worth $2 trillion and includes direct cash payments to individuals.

Economic policymakers are finding the COVID-19 crisis to be far simpler to deal with than the financial crisis. In 2008, the situation was financially complex and poorly understood ­­­­­— no-one really knew what collateralised debt obligations were, much less what to do about them.

Coronavirus is a far simpler problem and the next steps are obvious. Keep people in their jobs, keep companies afloat, keep the financial system stable. Politicians have realised that acting early can be extremely effective, particularly if the first wave of stimulus is aimed at ordinary people rather than large companies. Once people are secure in their jobs and homes, the pressure on the wider system is far less – no runs on banks and no defaults on loans.

The short-term outlook for economic growth is highly uncertain, as it depends how fast and how much the virus spreads over the next few months. But governments are making it clear that after the war is won, the global economy will still be standing.

We will win the war on coronavirus, and we will come out of it stronger.

Stimulus Measures

US

Monetary Policy – Federal Reserve is ‘all in’

• Interest rates at 0%

• Asset purchases in the ’amounts needed’ — no limits

• Coordinated swap lines ease international funding pressures

Fiscal Policy – Slow but significant

• Total $2 trillion in support

• $350 billion for small businesses

• $250 billion for individuals – direct payments of $1,200 to lower and middle income Americans

• $500 billion in loans for distressed companies


Europe-wide

Monetary – ECB doing everything it can. “Whatever it takes 2.0”

• €750 billion bond-buying programme, pledging a "no limits" effort to safeguard the Eurozone

• Provide liquidity to banks through new lines of low-cost funding

• Allow commercial banks to maintain lower capital and liquidity levels than normal, to keep lending going

Fiscal – limited scope for a bazooka - can only support individual countries in their efforts

• The European Commission waived deficit limits capped at 3% of GDP to help governments unleash fiscal stimulus

• State-aid rules relaxed to unblock support for struggling businesses

• EU finance ministers to discuss how to deploy ESM funds to best effect


Germany

Monetary – ECB policy as above

Fiscal – Germany tears up its rulebook to pump money

• Loosened its previously non-negotiable balanced budget policy to allow for fiscal stimulus

• Introducing a second large rescue package this week. The new package is worth €650 billion, including an ‘economic stabilisation fund’

• Approximately €100 billion is earmarked for the state to take over shares of companies temporarily to prevent them from going bankrupt and to protect them from external takeovers

• Businesses who are negatively affected by the virus will have access to "unlimited" loans from the state development bank – approx. €500 billion available


China

Monetary – People’s Bank of China has shown its usual rapid response

• Increased liquidity by injecting ¥100 billion into the banking system

• Cut reserve requirement ratio to help banks in supporting small and medium-sized enterprises – equivalent to a total liquidity injection of ¥550 billion

Fiscal – Stimulus channelled through the local governments

• The Ministry of Finance is allowing local governments to retain 5% more tax revenue from March to June 2020

• Local governments have also issued ¥1.2 trillion in bonds, more than 66% of their quota allocated for 2020

• Tolerance for missing growth targets in state-owned enterprises


UK

Monetary – Early and significant moves from the Bank of England a signal of intent

• Bank interest rate cut to 0.1%

• £200 billion of QE purchases – similar size to 2008 response

• Term Funding Scheme supports banks in order to support new lending of £200bn to SMEs

Fiscal – Shock and awe tactics from Chancellor; directed at real economy, rather than large businesses

• The UK will pay 80% of the salary of workers who would otherwise be laid off by their employers, up to a total of £2,500 a month

• Further measures expected for self-employed, beyond deferral of tax payments

• Pledging up to £330 billion (15% of GDP) of state guarantees for bank loans companies

• Package of direct support for businesses worth more than £32 billion (or 1.5% of GDP), including cash grants of £10,000-£25,000 for businesses

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