Aftermath: 3 leading economists discuss the outlook for markets in a post-COVID-19 world
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Markets are “probably six to 12 months ahead of the economy” when it comes to pricing the impact of COVID-19, Westpac chief economist Bill Evans says.
However, continued uncertainty around the pandemic is manifesting, meaning investors need to be prepared to shift their outlook quickly.
“What we really don’t know is at what point we think the crisis will peak. Our base case over the last couple of weeks has been that the peak will be at the end of June,” Evans said.
Speaking at a KangaNews panel on Friday, Evans said the framework for that outlook was based on the experiences of China and South Korea in their efforts to contain the virus.
However, he said those countries had exercised something closer to best practice, compared to the major western economies.
“We certainly do not think Europe, the US or Australia are exercising best practice,” Evans said.
From a policy standpoint, Evans praised the actions of the Reserve Bank of Australia in targeting the three-year bond yield and providing some clarity to the market.
On the fiscal side, both Evans and ANZ chief economist Richard Yetsenga highlighted the need to focus on the direct welfare of people, rather than business.
The Morrison government took another step toward that path over the weekend, announcing plans for wage subsidies equivalent to $37,500, on the condition that employers keep their staff employed through the crisis.
While Australia scrambles to maintain order amid the chaos, Evans pointed to further troubles abroad.
“What worries me the most about markets is that the country that seems to be the least on top of this is the US,” Evans said.
“Even if Australia gets on top of its own issues, we will still have massive volatility in the markets until confidence returns to the US.”
Those concerns were echoed late last week by Seth Carpenter, chief US economist for UBS, who discussed how the crisis was impacting the world’s largest economy in a conference call.
As a frame of reference, Carpenter relayed a discussion he’d had with a staff member at the US Federal Reserve who described COVID-19 as “the (2008) financial crisis and 9/11, happening at the same time”.
Like Australia, both the US central banks and federal government have taken unprecedented steps to maintain liquidity and fund people’s essential living costs.
“Despite the magnitude of the policy response, it’s implausible to forestall a negative second quarter,” Carpenter said. UBS now expects the pace of economic contraction to exceed 10 per cent in the June quarter.
“But what good policy can do is to help with recovery afterward so the bounce-back is more vigorous.” However, the bank no longer expects a “v-shaped” recovery.
“It’s not going to work for Q2; you can’t spend money if you have to stay inside your house,” Carpenter said.
In an optimistic scenario the US economy will return to positive growth in Q3, but “nothing like being able to undo the collapse”.
“On a macro level, we see the US potentially suffering lost output for a couple of years. So in effect it’s a level-shift down, and some of it just never comes back,” he said.
Key developments on the medical side are an important variable in the length and duration of the crisis. But as long as the health impact is getting worse before it gets better, policymakers will just be playing “catch up”, ANZ’s Yetsenga says.
And from an economics perspective he offered some interesting insights into what may lay ahead for markets and investors.
Using phrases such as “v-shaped” or “u-shaped” implies the status quo will eventually return to where it was before.
However, “I think working on this presumption would be a big mistake,” Yetsenga said. Instead, the post-crisis world will be different in “immeasurable ways”.
“We are moving closer to modern monetary theory as a way to implement policy. There are a lot of issues with this that I have a problem with, but this is the reality,” he said.
“I don’t think there will be a ‘u’ or a ‘v’. I think we will get through the collapse and the recovery will be slow, and it will be towards a very different environment.”