Lessons from past crises
* Today we are launching our “The COVID-19 crisis: Economic impact and policy responses” chart book, which is available here: https://blogs.deloitte.co.uk/mondaybriefing/2020/03/the-covid-19-crisis-economic-impact-and-policy-responses.html. The report will be updated weekly and aims to provide a graphical overview of the key economic developments of the COVID-19 crisis. Do feel free to use any of the charts in your own presentations.
* Join our “Responding to COVID-19” webinar every Thursday at 13:00 GMT. Each week a panel of Deloitte experts are assessing the latest health, business and economic developments and discussing how organisations can navigate the emerging challenges. To register for this Thursday’s webinar, on 2 April, please visit:
https://event.on24.com/wcc/r/2246547/228A8CA86194F697F8A462DC575F6DC1
* The speed and scale of the economic downturn generated by the coronavirus are unprecedented. There may be no template for today’s crisis, but the past shines light on the choices we face today. History, Mark Twain is thought to have said, does not repeat itself, but it does rhyme.
* The policy response to the global financial crisis of 2008-09 offers important lessons. In the weeks after the failure of Lehman Brothers it became apparent that the damage to the financial system could push the world into a 1930s-type depression. The then UK chancellor, Alistair Darling, said in 2018 that Britain came within hours of "a breakdown of law and order" the day the Royal Bank of Scotland was bailed out. That policy response came quickly and was substantial. Central banks collapsed interest rates, pumped liquidity into the financial system and bought private sector assets.
* The conditions of extreme uncertainty at the height of the financial crisis have something in common with those in a war or, indeed, today. Some of the normal rules of good government have to be eased. The emphasis is on speed and scale in the response. Cost becomes a problem for later. Decisions have to be made on the basis of imperfect and changing information. This requires improvisation and an acceptance that most decisions will be imperfect, many will fail and some, even, will prove counter-productive.
* With hindsight the decision not to bailout Lehman Brothers in 2008 might be thought an epic mistake. (It has been reported that at the time officials concluded Lehman might well have sufficient assets to warrant an injection of public funds. The analysis never reached those who made the decision to let Lehman fail.)
* In their response to today’s economic threat policymakers seem, consciously or not, to have absorbed many of these lessons. The fiscal and monetary interventions have been on a huge, and in some areas, unlimited scale. UK Treasury officials are unable to cost a raft of new measures to support households because they are dependent on demand, and are open ended. The US Federal Reserve has said it will buy US treasury bonds in unlimited quantities. And, in radical departure, the Fed will, for the first time, buy corporate debt.
* Policies have been rolled out at speed, in much the same way that the allies’ wartime economy often prioritised volume over quality. (Russian and American tanks were of variable design and quality, but they were produced in far greater numbers than Germany could manage.) A national emergency robs decision makers of the luxury of time.
* In war the winner is said to be the side that makes the fewest mistakes. In reality the path to victory is strewn with errors. The Battle of Britain is more remembered now than British military defeats such as the Norway campaign or the fall of Singapore.
* Today there is an acceptance, as Britain’s chancellor, Rishi Sunak said last week, that we cannot allow “the perfect be the enemy of the good”. There also seems to be a recognition that inefficiency is the price that must be paid for a comprehensive response. As Neel Kashkari, president of the Minneapolis Fed, told The Wall Street Journal: “If a bunch of businesses get help that didn’t need it, that’s fine, that’s much better than taking a decade to rebuild the labour market….We just have to get over it, err on the side of getting more help out there”.
* The battle against coronavirus is a more unifying cause than the efforts to arrest the global financial crisis. Bailing out banks and supporting financial markets was hardly popular. The mobilisation of the state today, and the expansion of its role, have so far proved uncontroversial. Politicians seem more likely to stand accused of doing too little. Today’s expansion of the state currently commands not just the consent but the active support of the public (700,000 people, for instance, signed up for the UK government’s NHS volunteer scheme in less than ten days, almost three times the original target).
* Popular support, as in wartime, gives the government the scope to act on a significant scale. With much private sector activity suppressed, public spending will is needed to sustain household incomes and support business. Government activism, whether in expanding the NHS, taking over capacity in the private health sector, the suspension of rail franchises or a vast scheme of income support, is the order of the day.
* Public spending will soar. Last week’s US $2tn stimulus package is equivalent to almost 10% of GDP. The Financial Times estimates that the increased public spending announced in the UK in the last two weeks amounts to over £60bn, or 3.0% of UK GDP. Public borrowing in 2020-21, which two months ago looked likely to come in at around £50bn, could now hit £200bn according to the Institute for Fiscal Studies.
* Countries have always run up huge debts fighting wars and countering recessions. In the UK the financial crisis lifted debt from 40% to more than 80% of GDP. In coming months government spending will be the prop holding up economies across the West. Tax revenues will plummet. Levels of public debt seem likely to rise above the peaks seen during the financial crisis.
* Crises or wars can shape economies in other ways. The financial crisis revealed deep fragilities in the financial system. Policymakers today are less tolerant of financial risk and banks face far greater regulatory scrutiny. In the UK, the mass mobilisation of the second world war helped create a consensus in favour of big government, with the creation of the welfare state, widespread nationalisation and activist economic policies. The war helped popularise the idea of the state as a guarantor of welfare and economic security.
* The current crisis has revealed unforeseen weaknesses in food supply chains, medical supplies, healthcare provision and many other areas. What is highly efficient in normal times – such as just in time food supply – can become a vulnerability in a crisis. Governments and voters may be unwilling to return to the status quo ante. The step change in health spending now underway may never be unwound. Switzerland, which for decades has seemed slightly idiosyncratic in its commitment to maintain strategic stockpiles of food, now looks like an exemplar.
* Pandemics have long been seen as possible ‘black swan’ events – unexpected negative shocks with major consequences. But for the public and private sectors they have tended to rank low down a long list of threats. This is likely to change, just as Hong Kong and Singapore’s experience of SARS has shaped their health policy and their response to the coronavirus. What is happening today seems sure to establish pandemics as a core risk for large businesses, along with the likes of cyber-attacks, terrorism or climate change.
* Often the long term effects of an external shock exceed the immediate effects, sometimes in quite unexpected ways. Thanks, in part to the vigorous response of the Fed, the 9/11 terror attacks did not knock the US economy off balance. But the attacks transformed America’s defence and foreign policy, triggered two long wars and changed the balance of power in the Middle East. The Fukushima nuclear disaster in Japan in 2011 led to the closure of the country’s entire civil nuclear programme and a surge in fossil fuel imports and in electricity prices. Economists at the US National Bureau of Economic Research have found that higher energy prices squeezed spending on heating, causing a surge in deaths far larger than had been seen in the original nuclear disaster.
* In dealing with pandemics, societies face a trade-off between human health and economic activity. The 1918 flu epidemic killed over 50m people globally and almost three quarters of a million Americans. Many Americans carried on working because, in the absence of social security, they had no other source of income. Concern about the economic impact of restrictions on movement meant some US cities were slow to act and suffered far higher casualties than those which moved quickly. Remarkably, the US federal government had little formal role in combating the 1918 flu epidemic and President Woodrow Wilson never publicly mentioned the disease. Richer societies, with more extensive systems of welfare and government, have far greater capacity to control diseases.
* The restrictions on movement introduced across the West testify to a collective willingness to trade economic activity for human health. The loss of activity in the near term will be significant. Second quarter GDP in the US, EU and UK is likely to contract sharply. Last week Professor Simon Wren-Lewis of Oxford University updated his earlier analysis of the effects of a flu pandemic. He estimated that in the initial quarter of a pandemic GDP was likely to contract by 30%. This is at least three times as much as any other forecast I have seen, but it testifies to the potential impact of social distancing on activity.
* In one important respect what we are seeing today is different from anything that has preceded it in modern times. In past crises governments have sought to boost economic activity, whether to fight wars or counter the effects of a natural disaster or a downturn. This time governments are suppressing economic activity, through restrictions on movement, in order to slow the progress of the coronavirus. The vast interventions by central banks and governments are designed not to stimulate activity, but to preserve jobs and businesses for the upturn.
* In that endeavour policymakers seem to have been guided by the experience of earlier crises. They have acted swiftly and on a large scale. Conventional wisdom has been pushed aside, the normal rules of government suspended or altered. This is all to the good. The immediate effects of this crisis are immense. History suggests that it is will have profound long term consequences too.
OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 6.1% at 5,510 following a week of major global policy announcements.
COVID-19
* Global cases of COVID-19 rose to over 710,000 and deaths to over 33,500. The US now has more cases than any country, with over 135,000. Italy’s cases rose to over 97,600 and deaths over 10,700. Spain has over 78,700 cases, Germany 61,000, France 40,100 and the UK 19,500
* The UK ordered the public to stay at home for three weeks, except for basic necessities and essential work, and all non-essential businesses closed
* UK prime minister Boris Johnson and health secretary Matt Hancock announced that they had contracted COVID-19
* China eased travel restrictions in Hubei province, the location of the first outbreak of COVID-19. It suspended international flights and barred entry to most foreign nationals to prevent a wave of imported infections
* India and Pakistan began nationwide lockdowns. India announced a $22.5bn support package including cash and food support for the poor and insurance coverage for medical staff
* Japanese prime minister Shinzo Abe announced that the 2020 Tokyo Summer Olympics would be delayed by a year
Policy response
* US Congress passed a $2.2tn relief package, including one-time cash transfers of $1,200 to most Americans, increased unemployment payments, funding for states and local governments, business loans, forbearance on mortgage payments and deferral of student loan payments
* The Wall Street Journal reported that work has already started on a further US stimulus package, possibly larger than last week’s $2.2tn
* The US Fed announced unlimited purchases of government debt and mortgage-backed securities in an attempt to calm financial markets. It also announced it would purchase investment-grade corporate debt for the first time ever
* The European Central Bank lifted restrictions on its new Pandemic Emergency Purchase Programme, including the self-imposed limit to buy no more than a third of any country’s eligible bonds
* Germany approved a fiscal package worth €750bn including support for small business and the self-employed and funding for medical care
* The European Council rebuffed an attempt by nine euro area countries to have the euro area issue a coronabond to help finance the fight against the virus
* UK chancellor Rishi Sunak announced a support package worth £3bn a month for self-employed workers
* The UK suspended the railway franchise system for at least six months following a collapse in passenger traffic
* The UK government requested estate agents to stop marketing homes and arranging for visits. Many banks have temporarily suspended their mortgage offers
* The UK Financial Conduct Authority, Financial Reporting Council and Prudential Regulation Authority gave companies more time to publish results
* The European Central Bank has ordered European banks to freeze dividends and share buybacks to help strengthen their ability to absorb losses and lend to households and corporates
Financial and economic impact
* The OECD estimated that output in the developed world could be 20-30% lower than usual as result of business closures and people staying at home
* A record 3.3m Americans filed for unemployment benefits in the week ending 21 March, nearly five times more than the previous high set in 1982
* Almost 500,000 people in the UK applied for Universal Credit in the nine days to last Wednesday, according to the Department for Work and Pensions
* Business activity collapsed to record lows in the UK, euro area and US in March according to flash PMI estimates from IHS Markit
* The UK composite PMI fell to 37.1 in March from 53 in February. A rapid decline in UK service sector activity led the fall in the composite PMI, but manufacturing activity also dropped at the fastest pace since 2012
* The German IFO employment barometer fell to its lowest level in a decade in March as businesses freeze hiring intentions and plan to make redundancies
* US equity markets rose for three straight days, the first time in over a month, buoyed by the news that Congress was nearing passage of a fiscal rescue package
* Sterling hit its lowest level ever against a weighted basket of foreign currencies on Tuesday
* Boeing suspended production for two weeks at its factory near Seattle while Airbus resumed production in France and Spain after a four-day halt
* Countries banned exports of vital foodstuffs. Kazakhstan banned exports of wheat flour and Vietnam suspended new rice export contracts
Business response
* Nike said that 80% of stores that sell its products in China had reopened
* What the Wall Street Journal describes as the “the fastest reallocation of labour since World War II” will require staff in hotels, restaurants and airlines switch to new, temporary roles in online retailing, health care, agriculture and food retailing
* Automakers including Fiat, General Motors, Ford, Tesla and Nissan committed resources to boost production of ventilators
* Global issuance of investment grade corporate debt as surged as companies have raised funds to shore up balance sheets
* US president Donald Trump invoked the 1950 Defense Production Act to compel General Motors to produce ventilators, although the company was already planning production
* Walmart temporarily raised its lowest hourly wage by $2 to attract more warehouse workers
* The FT reported that Dyson will manufacture 15,000 medical ventilators designed from scratch to be delivered in “weeks” after it received an order for 10,000 units from the UK government
And finally... an attempted armed robbery of a convenience store in Birmingham was foiled after the shop keeper threw a handful of hot chilli powder over the would-be thief, causing the knife-wielding robber to flee the scene - a site for sore eyes