Never – at least in living memory – has the global economy come to a halt almost simultaneously with the onset of the global Covid-19 pandemic in early 2020. It was a shock to life as we know it, impacting society on the economic, social and psychological levels. The loss of human life from Covid-19, although not the worst to date given previous deadly pandemics, has been widespread around the world. The cross-border spread of the virus has been exacerbated by a highly globalized and integrated global economy that offers many opportunities for its rapid and wide transmission. The long-term effect and the scars of the pandemic remain to be seen; time will tell us. But there is no doubt that Covid-19 will leave a lasting impact and form a tragic part of the annals of history.
The global rush to find a safe and effective vaccine against Covid-19 has meant that vaccine development has had to be accelerated. The recent rollout of approved vaccines – developed to an unprecedented level in a year – has been a positive development, giving hope to a world plagued by viruses. Vaccinations have shown positive signs, with adequate supplies and deployments being the hurdles. The reality is that some form of global herd immunity will be needed to effectively fight the virus and bring the global economy to a level of normalcy. There is therefore a need for countries to cooperate and support each other, moving away from “nationalization of vaccines”. because each country strives to ensure an adequate supply to its own population.
With regard to the risks, the most important thing is that the expedited follow-up of a vaccine does not imply any compromise on safety or efficacy. Some risks are the potential for side effects so far unknown and the effectiveness of vaccines against new variants and future pandemics of coronavirus.
The service sector hit hard
In a global economy where services have largely become an important sector for economic growth and job creation, the economic impact of the pandemic has been particularly painful. These include tourism, entertainment, travel, restaurants, other hospitality-related services and associated industries, which depend as they are on human interaction. The small business sector has been hit particularly hard, with many businesses scheduled to close.
Economic and stock market rebound
The lifting of restrictions after the initial shutdown saw economies rebound from depressed levels. Given the current trajectory, a number of countries are expected to meet or exceed pre-Covid levels within the next year, all other things being equal. The recovery of the markets, after a very strong and sharp fall in early 2020, has been equally strong with many trades above pre-Covid levels. Heading into 2021, we saw that bullish sentiment continued to increase the markets even further. Spirits have been lifted by extraordinary stimuli and vaccines, as well as the prospect of massive infrastructure spending. The euphoria of the financial markets has led to economic recoveries, which nevertheless vary from one country to another given their respective developments in the field of viruses and vaccines. Rising inflation expectations triggered a surge in global bond yields, which plummeted bond investment. This introduced nervousness into the markets by weighing the possible consequences of the rising inflation outlook and by drawing inspiration from statements and actions by central banks and tax authorities in response.
What has been remarkable since the Global Financial Crisis (GFC) is that many experts have continued to speak of the economy as still recovering and not expanding, despite economies emerging from recession and economic growth. markets are optimistic given the stimulus measures. So they implicitly recognized that times are different. The pandemic would have anchored this feeling and these prospects of “recovery”, even after a strong rebound last year and what is expected to be strong growth in 2021. The following excerpt paints a perspective of the “new normal”.
“The almost unprecedented prosperity after World War II allowed DM (developed markets) to convert their economies from producing goods to expanding services. This new trend faltered when the GFC caused the worst recession since World War II – but the GFC was not a recession. It was a depression, which is now starting another new diet. The extraordinary fiscal and monetary policies adopted to escape GFC have plunged the world into a transition from past service-oriented economies to the future world dominated by technology and digitized.. ” (Leigh Skene, Scene from Skene – A Brave New World, March 15, 2021, TS Lombard)
The question indeed is whether the GFC and now the pandemic caused an inflection point that has propelled the world into another era. A few points deserve to be underlined. Since the GFC, central banks have done everything (“whatever it takes”) to stem the economic fallout from the crisis by aggressively easing monetary and fiscal policies (quantitative easing [QE]). Some central banks have put in place control or influence over the yield curve while others have extended their asset purchases to ETFs. Borrowers were supported (including zombie companies (companies that need bailouts to keep operating) at the expense of savers, as it was deemed necessary to ensure the overall stability of the financial system. The world had become a place where some entities considered economically important, such as the big banks are also too big to fail because their demise would have profound repercussions, notably on the financial system and socio-economic stability. fears.
The stake is that since the GFC, the markets (and the experts) continued ask the authorities to do whatever is necessary to support the economy and / or the markets. Markets appear fragile, with ongoing monetary / fiscal support measures needed to keep them cheerful. When the Fed indicated a cut in QE in 2013, it led to a so-called “tantrum tapping” from the markets, which prompted the Fed to take stock. The need for markets to be supported by the “right” monetary / fiscal measures appears to remain largely in place. The recovery benefited and represented much more for the markets (“Wall Street”) than the real economy (“Main Street”).
Post-GFC, can the stimulus measures continue?
Fast forward and we have a global pandemic that is affecting many countries at about the same time. Monetary policies had to fire all the political bullets they had left to support the economy. Above all, the budget component had to step up its efforts to provide meaningful support to all as the pandemic shut down economies. Countries with larger pockets could do more and even extend new rounds of stimulus to a population hit by the second or third wave of the virus. Many countries have budget deficits and booming debt-to-GDP ratios as a result of these interventions and support measures.
The free market economy, if it still exists, is not what it used to be. The so-called capitalist countries have and continue to need the state and central banks to make them function and the authorities have become a safety net for taking risks. Because the markets are a barometer of underlying social mood and potential economic developments, authorities are taking note and acting to appease them. If the markets are not happy with the authorities’ responses or actions, or the lack of them, they can cause another tantrum.
Hopefully the tide will turn towards a pandemic given the rollout of vaccinations. Other complications, such as recurring waves or indomitable variations, would make it increasingly difficult for the fiscal authorities to continue to provide support. Nonetheless, markets will continue to look to the authorities for action if the going gets tough.
As public debt levels rise given the need of the time and bond yields rise now, one wonders how long this can last. The bottom line is that economies and therefore markets have become – by force and demand of developments and circumstances – much more dependent and centrally directed, if not centrally controlled; something that may not accord with free market principles. It would appear that the encroachment on a more centrally influenced and controlled economy and markets has occurred almost surreptitiously, tipping in favor of an inflection point.
We are walking a tightrope.
Fabian de Beer is Director: Investments, Mergence Investment Managers.