With countries being hit in ways not seen since the financial crisis, experts are questioning what shape the economic recovery from Covid-19 will take.
As the Covid-19 pandemic began spreading around the world in late February, the financial impact was felt almost immediately in global stock markets, which suffered some of their largest falls since the financial crisis of 2008.
As the virus sent countries into lockdown, forecasts for GDP in 2020 made for increasingly unhappy viewing - with the OECD in June saying that the US could expect a fall of 7.3% over the year, and the UK faring even worse with a predicted fall of 11.5% .
With stock markets rallying within a matter of months, experts are beginning to speculate as to the nature of the recovery that economies around the world will take. And this was an area that was recently addressed in our webinar by Todd G. Buchholz, renowned economist and former White House Director of Economic Policy.
While acknowledging that, in light of the ongoing coronavirus uncertainty, nobody knows exactly how global markets are going to play out, Buchholz argues that what he calls 'The Great Cessation' can end with a V-shaped recovery in the US.
"It wasn't detonated by excess speculation, it wasn't created by a trade war or normal tightening by central banks," he says. "This was a medical disaster - a cessation that was implemented by governments and private sector individuals deciding to make themselves safe. As restrictions are lifted, I do think consumers will have the wherewithal to claw their way back and we will have a relatively normal economy again, in roughly nine months' time."
Still, Buchholz freely acknowledges that there is a much greater degree of optimism in the US compared with more downbeat assessments in Asia, Europe and the UK.
US confidence is clearly helped by huge liquidity flows from the Federal Reserve into the system. As Buchholz points out: "If Jerome Powell [Federal Reserve Chair], wasn't this aggressive we wouldn't be talking about a V-shaped recovery, we'd be talking about a lingering recession with no end in sight. It's important to recognise the old Wall Street saying: 'Don't fight the Fed'."
James Maitland, our Regional Head of Americas and Global Capital Markets Service Line Leader, believes that lessons have been learned from the 2008 financial crisis by governments and central banks around the world, saying: "The key principle is the sustained access to credit and liquidity throughout an economic downturn". He argues that decisive action on this front has bolstered the case for a V-shaped recovery.
The role of inflation
Buchholz does point out, however, that the aggressive flooding of the markets with liquidity "only works if you believe inflation is going to stay low".
He stresses that he, like every central banker in the world, does believe that it will remain low. Yet, he sounds a note of warning. "If I or, more importantly, they are wrong, it's an utter disaster for the world economy, because then the central banks are going to have to slam on the brakes," he says.
"They aren't going to be able to countenance zero percent interest rates. There'll be defaults, government deficits that have already ballooned beyond anyone's prior imagination will be unsustainable, so there is a very big long-term bet here that inflation can stay under control."
Buchholz goes on to predict that, if they are wrong about the inflation profile, the Fed and other central banks will have to reverse rather quickly, or else we could suffer even worse stagflation than occurred in the 1970s.
Amid all these concerns, however, Maitland sounds a note of cautious optimism. "If governments have shown one thing during the crisis, it's the ability to take fast and decisive action. In challenging times, they often take the steps necessary to ensure survival and I can't see this being any different."
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