Covid-19: Analysis by Michala Marcussen
Covid-19 has spread across the globe with tragic human loss and severe economic consequences. Hope is now that social distancing and closures will prove effective; both in flattening the epidemiological curve, to ease pressure on health care systems and save lives, and to buy time for medical advances. These preventative measures, while necessary, come at an economic cost, and will be achieved through four main channels.
Economic and financial analysis by Michala Marcussen, Group Chief Economist.
Policy is about to get much more harder
A certain stall is appearing in the economic activity of the major advanced economies, shaping what is emerging as a third phase of the Covid19 crisis. In contrast to the first two phases, shaped by a collapse in activity under stringent lockdowns and then a sharp bounce-back as lockdowns were eased, this third phase, of a still active virus and more localised restrictive measures, could well be with us for much longer and make far greater demands on policy.
Divergence of price
Market pricing suggest that inflation is low on the list of investor concerns and this is consistent with the present recession and the prospect of a lacklustre recovery at best. Nonetheless, a few observers are questioning whether inflation could surprise on the upside, and not least given the large amounts of fiscal and monetary stimulus being pumped into the economy.
Hypotheses fall under two broad headings in diagnosing the cause of low rates and low growth; a savings glut and a financing glut. Trouble is that not only are the symptoms easily confused, but the policy remedy for one glut may serve only to deepen the other.
Cooling effects of global warming
Climate change was long considered a slow-moving structural shift, with the bulk of the impact falling well beyond the horizon of most economic forecasts, but this is changing fast and decisions made at the upcoming COP25 in Madrid will matter for the near-term.
Dollar strength may be challenged by fiscal policy
President Trump is pressuring the Federal Reserve to ease aggressively and has complained that China and Europe are taking unfair currency advantage. And, in early August, Washington designated China a currency manipulator. The ever lower and flatter American yield curve, however, signals concern that monetary easing will struggle to revive the economy. Further evidence hereof resides in the coinciding strength of the US dollar and Gold.
What if the Japan is the good scenario?
The impressive expansion, that saw Japan become one of world’s richest nations, came to an abrupt end almost three decades ago with bursting of the bubble. Subsequent domestic policy errors combined with negative external shocks, and not least the 1997 Asia Crisis, sent the Japanese economy into the icy grip of deflation. Exiting this state was not made any easier by a rapidly ageing population and the 2007/08 Great Financial Crisis.
The clock is ticking for Europe
Last week saw a second landslide rejection of the Prime Minister Theresa May’s Brexit deal, and at the time of writing, uncertainty remains high. May’s strategy of essentially running down the clock in a bid to secure her deal has again failed at a high cost to the British economy, and to the rest of Europe.
The fear of “no game in town”
Will 2019 see the start of a recession? Consensus says no, but the financial market slump in December shows that investors are now demanding higher risk premia. To our minds, this is not so much a reflection of changing real economic fundamentals but rather a deeper-rooted concern that we are shifting from the situation where central banks were “the only game in town” to one with “no game in town”.
The paradox of uncertainty
A certain level of uncertainty is part of life, and insurance (both private and public) and precautionary savings help manage this so that we can go about our lives unabated. At times, however, uncertainty increases well beyond these levels, often driven by political events. Faced with such uncertainty shocks, business managers will often freeze new investment and hiring decisions, while consumers delay spending on big ticket items such as cars or the purchase of a new home.
Read Michala Marcussen's articles
Bitcoins, cash and tulips
Bitcoins generated much excitement in 2017, starting off the year valued at just over $1 000 per bitcoin and closing the year at around $10 000, having peaked at close to $19 000 in mid-December 2017. While the extreme volatility of Bitcoin generates both spectacular gains and devastating losses, it significantly reduces the ability of the crypto-currency to serve as a means of payment; the purpose for which it was originally designed. Michala Marcussen, Group Chief Economist, explains the latest trends around the bitcoin.
The Economic Research Department analyses, monitors and drafts forecasts/scenarios regarding global economic and financial developments on behalf of the Societe Generale group as a whole. Its experts share their vision through economic, financial and socio-political studies and articles.