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Mass unemployment reveals damage to leading economies

As we await positive news about a waning of the virus threat, we live in highly volatile markets subject to large moves based on what governments do and say.

Fallen dominoes on pound, euro and dollar bank notes.

by
John Redwood

in Features

03.04.2020

Nearly 10 million Americans have registered for unemployment benefits in the last two weeks. Many others were unable to get their claims established as the system is heavily overloaded. We should expect a further rise this week. We expected really bad news, given the extent of the lockdowns, but this does not make the figures any less shocking. They herald a big reduction in GDP and all the other main statistical series which monitor retail sales, industrial output and services delivered. This, in turn, will produce more turnover lost, profits wiped out and dividends cut. There will be similar bad news in Europe, with figures beginning to emerge showing sharply reduced economic activity.

The stock market yesterday in the USA rose a little, mainly because the President went to the aid of the oil market, suggesting a deal was imminent between Russia and Saudi Arabia to make significant cuts to production to raise the oil price. Oil rose sharply, only to retreat again as Russia denied there were talks underway to reach the conclusion Mr Trump wanted. Oil shares ended with a bit of hope value left in their prices. The market was not overwhelmed by the employment news, implying that more analysts and commentators have now scaled back their expectations and understand that with so much of the economy unable to go to work the general figures will be dire for the duration of the restrictions.

The big issue remains how long will these controls stay in place? We have always argued that the markets could bounce substantially if a credible view developed that normal working will resume after just a few weeks of disruption. If, on the other hand, controls are still in place at the end of this month and any relaxations will be slow and partial, it will mean many more companies will get into financial distress and the period of little or no profitability afflicting a big section of the market will drift on.

The virus is still increasing its spread according to the official figures in all the major advanced countries, though there are some signs of slowing growth rates as absolute numbers increase. There are various lines of work being pursued to speed the lifting of restrictions. Some think existing drugs can provide better treatments. Some think we are close to a working test for people who have had the virus, which would allow them to return to normal working. Some think there is now more emergency capacity in health services in advanced countries which might allow more flexibility, especially if the lockdowns have now flattened the curve of the disease. A minority think the actual death rate of this virus is low like flu, and that current precautions for the bulk of the population are therefore excessive. They argue for concentrating the protections on the vulnerable, the elderly and those with other conditions, who face a higher probability of death if they catch it.

In the meantime, as we await positive news about a waning of the virus threat, we live in highly volatile markets subject to large moves based on what governments do and say. Advanced economies are now very dependent on what governments allow them to do, and on massive government funding to keep parts alive that are not allowed to trade. The oil price is manipulated by the large producers, creating its own parallel crisis to the epidemic. Central banks have shown great determination and resource to send the message they will keep interest rates very low and facilitate massive government borrowings as countries battle to subsidise people and companies that cannot earn their own living. This is not a sustainable model for economic development, and there will be limits to what governments can finance through borrowing even in these deflationary times. All hinges on some early improvement in the numbers getting the disease, or in some breakthrough in the way governments treat the disease and respond to it economically. Meanwhile, the companies that do well will work for the government or will be supplying essentials to a population largely staying at home. Government debts will build up swiftly and many more will come to depend on cheques from the government.

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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