The latest dramatic financial and social interventions by the government to stave off the economic effects of the Coronavirus crisis, have been well received, politically and in financial markets but now come questions about how long Prime Minister Boris Johnson can prop up the economy with such huge portions of itself – up to 15% of the total value.
Overall commentators are reasonably positive, if the government keeps its nerve and sticks to the “whatever it takes mantra.”
Despite a parade of graphs on the BBC’s website, showing the plummeting value of gold, stock markets, oil, OECD growth forecasts etc, the head of the government’s spending watchdog, The Office for Budget Responsibility, Robert Chote, marked his approval of the £330 billion bailout programme and the underwriting of wages and business costs the Chancellor, Rishi Sunak, rolled out last week.
Chote told Treasury Committee MPs “This is not a time to be squeamish about one-off additions to the public debt. It’s more like a wartime situation that this is money well spent.”
Even so, Chote also said the economy was “probably shrinking as we speak”.
Financiers seem to be going along with that, predicting the opening of economic chasms. Berenberg Bank’s chief economist, Holger Schmieding, foresees, between now and May, the “drop in economic output in Europe is likely to exceed that from September 2008, “ when the banking crisis engulfed the world’s financial system. Financier David Owen, of Jefferies, puts the loss at “potentially almost 15% of GDP (Gross Domestic Product) in a worst case scenario.”
Despite this, many have have come out in support of Sunak’s measures, arguing they are saving the economy from becoming a complete ‘car crash’. Independent financial strategist Mathieu Savary of BCA Research, has suggested the Chancellor is driving with due care,
“These measures are designed to avoid a freeze up of the credit market and make sure small businesses and individuals are not bankrupted for no reason of their own making. This increases the odds that economies will be able to rebound once the worst of the pandemic is behind us.”
The investment bankers Goldman Sachs are even predicting a little global growth by the end of 2020. It is not much, 1.25%, but still, it’s seemingly positive.
Much talk has also taken place as to which letter describes this downturn. Is it a V a U or an L? In a V shaped recovery numbers drop straight down and bounce straight back up; in a U shaped they drop down, scrape along the bottom for while and the come up whereas in an L they drop right down and stay down.
Most experts have alleged we have a V on our hands, “Provided the rise in unemployment is limited to a maximum 4% (which I think is the aim of the government measures) and viable businesses don’t have to be shut down, quite a lot of the economy will have a V shaped recovery and GDP in 2021 will be back were it was,” says deputy chairman Doug Williams of the Centre for Business and Economic Research thinktank.
International compare seemingly favourably to the Chancellor. Chief strategist of Principal Global Investors, Seema Shah noted there was a step change from 0.5% of GDP to 10% in the latest package which not only compared well with other countries like Sweden at 6% “but it appears to go even further than the US’ proposed $850 billion fiscal package, which had already prompted a very positive market reaction.
Image: Maurice via Wikimedia Commons