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The calm before the storm?

The real economic impact of Covid-19 is yet to be seen by most people. Over the next few months, that will change.

The real economic impact of Covid-19 is yet to be seen by most people. Over the next few months, that will change.

John Redwood

in Features


So far, the pandemic has been dreadful news for the minorities who have lost loved ones to the disease, or who have lost their jobs and incomes. For many others on both sides of the Atlantic, they have received their pay from employers, sometimes with the help of state-sponsored furlough and short-time working schemes, spent more time at home and enjoyed reasonable spring weather.

Whist the restrictions on movement and the absence of live sport and entertainment has been negative, people have found many new ways to find entertainment online at home and to stay in touch with family, friends and work colleagues through social media and teleconferences. An eerie calm has descended, with good buy-in to the idea that we should mainly say at home. Plenty of walking, bike riding and running is compensating for other loss of exercise for those so inclined.

During this period the loss of collective income from closing down large parts of the economy has not become apparent to many. The furloughed worker gets his or her pay from state subsidy. The mortgage holder may be using a three-month delay on payments. The commercial tenant may be withholding rent and pressing for a lower rent in the future. The small business may be taking advantage of easier terms for tax owed – and drawing down cheap loans to pay the bills. The large company may be spending its cash reserves and using up prearranged borrowing facilities.

Unlocking lockdown

Now governments are looking at a slow pace of restoration of lost freedoms, we need to ask what the economic world will in, say, three months into relaxation?

The danger is that difficult decisions will need to be taken by businesses and individuals that the era of calm has put off. At some point, the furlough schemes will reduce their payments or stop. Banks will want some interest payments on their loans and mortgages. Landlords will want the rent owing or will drive a bargain over a new level of rent that does have to be paid. Businesses will have to make a judgement about how many people going forward can be paid out of the revenue they generate, about how much property they can carry on renting, and how many goods and what services they can supply to customers that have the money to buy. Even on an optimistic forecast of the pace of lifting restrictions, there will still be a big shortfall in total demand this year compared to last.

Governments have so far skewed response to favour individuals at the expense of companies. Tenants are getting enhanced rights against landlords, borrowers against lenders and employees against employers. Savers will be asked to make the larger sacrifices. Dividends come low down the priority list for payment. Central banks will want to keep interest rates very low. There will be more bankruptcies and aggressive capital reconstructions as businesses assess the financial damage done by a three-month loss of revenue. We are now seeing a blizzard of bad numbers for everything from car sales to GDP, with many dividend cuts and lower profits.

Meanwhile, markets are sustained through the very poor news backdrop by the continued largescale programmes of money creation and state borrowing which continue at an unprecedented pace. This means backing the US and the digital revolution, as the main drivers both of easy money and of technological change. Share investment in sectors, areas and companies that can trade successfully in current difficult conditions and emerge stronger through the period of relaxation makes sense.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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