As governments around the world take drastic economic stimulus measures to protect their economies against the impact of coronavirus, what do experts think of the announcements to date? Pete Wilson reports on the latest opinions and analysis from across the financial services sector.
During his speeches on March 17th , the Chancellor of the Exchequer, Rishi Sunak, said he’d do ‘whatever it takes’ to support the economy as it deals with the impact of the coronavirus pandemic. Sunak unveiled the most drastic peacetime economic measures in generations, but this is only the beginning of developing action aimed to mitigate the worst affected sections of the economy.
Along with a £330bn loan package to business (15% of GDP) and another £20bn in additional fiscal stimulus, Sunak spoke of tailored solutions for industry specific problems. The Leisure sector will see business rates suspended for a year. A Business Interruption Loan Scheme will provide up to £5m for small businesses, and smaller business will have access to £25k government grants. A 3 month mortgage payment relief scheme has also been introduced. Though this is only the first step.
The financial industry has seen this as an appropriate start, emphasised there will be a prolonged period of economic turmoil, and has given insights into what could, and should, come next. Here’s what some of the experts have been saying:
Simon Goldthorpe, chairman of Beaufort Group, welcomed the “unprecedented announcement” as needed reassurance for British business at “a time of extreme stress on the economy.”
David Page, Head of Macro Research at AXA Investment Managers summarises the response as, “designed to offer a combination of social and private means to bridge the significant drop in demand expected over the coming months.” Page continued, stating the objective of the government is maintaining capacity of businesses “so that as demand recovers beyond the impending virus-induced drop, firms are well placed to benefit from the rise in demand.” This would also mitigate job losses that would otherwise “prolong a period of subdued demand.”
Robert Alster, Head of Investment Services at Close Brothers Asset Management suggests that the “emergency loan package risks not being enough for the UK’s small and medium sized businesses,” many of which are in desperate need of capital, and “might be unwilling to take debt on in such an uncertain environment.” Alster continued to say these firms “will likely lay off staff instead.” These measures are not comprehensive. Though Page highlights the scale of the economic shock has been “exceptional.” Page went on to say “recession appears unavoidable” but that the announcement is the start to limiting “any such recession’s depth and persistence.”
There is an industry-wide understanding that this announcement was only the first in what is a developing economic situation, echoing what Sunak said himself. Alster stated, “This crisis is set to be a marathon, not a sprint, so we expect to see more large-scale and targeted financial intervention.”
Goldthorpe highlighted a wide-held concern throughout the industry, that being, “the devil is in the detail.”
Kevin Doran, chief investment officer at AJ Bell, has been critical of a lack of detail and unaddressed concerns over production loss. He highlighted that for most people the “headline grabber” is a 3 month mortgage payment holiday, but goes on to scrutinize the detail. Doran states if it’s a simple payment holiday there is “nothing new here.” However if it’s debt relief the picture looks quite different, “given that there’s £1.3tn of mortgage debt in the market, earning the banks an estimated £6.5bn of interest every quarter.”
A further concern highlighted by Doran was that the announcement was, “missing any real help to fill in the production chasm that is coming our way over the next few months.” He explained that the £330bn in 6month interest free loans, grants, and tax breaks serve to cover “cash flow issues during the lock-down.” This will be provided by a lending business within the Bank of England itself, the Covid Corporate Financing Facility (CCFF), “which will see the Central bank take on private debt to its balance sheet,” and moreover “originate the loan itself direct with the business issuing the commercial paper.” He went on to state that it was “Interesting, but again a cash flow tool, not one that replaces lost production.” Doran suggested “the smart thing to do would be to give genuine debt relief to both businesses and households, with interest written off on debts for the entire six month period.” He concluded, “If this is ‘whatever it takes’, I’m afraid ‘it just isn’t enough’.”
However there are more measures coming, and industry insiders didn’t hesitate to speculate what they may be. For example Page highlighted Sunak looking into “additional ways to ease pressures related to wage payments.” Considering the moves taken by the US government, Gilles Moec, Group Chief Economist at AXA Investment Managers suggested that “direct government cash handouts to households partly funded by the ECB through QE is possible, even if the limit on this would be lower than in the US – as long as the ECB sticks to its limits on public debt holding.”
Summarizing the announcement on the 17th of March, in the context of the market falls witnesses on the 18th, Moec went on to state, “At the end of last week the US and the Euro area were mirror images: the US Fed went further than the ECB, but the US government had been more hesitant than its European counterparts. Now the US government has caught up, but the ECB still has some way to go.”