As the coronavirus pandemic forces governments around the world into unprecedented action, economic activity has been hit hard. Central banks around the world have taken emergency measures to help shore up the financial markets and help businesses including interest rates cuts. The U.S. Federal Reserve decided to lower the target range for the federal funds rate to 0 to 1/4 percent.
In a statement, the Federal Open market Committee said: ‘The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy’. Measures also include offering billions of dollars in loans to small businesses.
Many analysts believe the disease’s spread could lead to a global recession. The European Banking Authority has postponed EU-wide stress tests to help banks prioritise operational continuity. They have also urged competent authorities to postpone non-essential supervisory activities, and take advantage of any regulatory flexibility to ensure continued lending during the anticipated economic downturn.
However, Yann Murciano, CEO at BLEND Network, believes the current market sell off is only partly due to fears around the impact of the coronavirus. He says: “We are in the very late stage of the cycle and have witnessed the longest equities bull run in history. Given this, markets are extremely nervous and with coronavirus uncertainty have largely overreacted. In the short term, we expect some disruption and continued sell offs, however, this should be reversed and lead to a rebound as the virus eases or is controlled”.
The restrictions on businesses in Italy and Spain are likely to have dramatic effects on economic growth. Spain has recorded thousands of new cases over the weekend, and has urged people not to leave home except to buy essential supplies. Italy, the most affected European country, has put together a 25 billion euro package to help shield the economy. It has also forced all shops except pharmacies and grocery stores to remain closed until its quarantine measures are lifted.
France has ordered schools, restaurants and all non-essential businesses to close. Austria has restricted gatherings of more than five people and closed its border with Italy. Travellers from the UK, the Netherlands, Russia and Ukraine will not be able to enter the country directly. The country is battling 800 cases of the disease. So far, the UK has not mirrored other European countries in closing borders or restricting travel.
Newly appointed UK Chancellor of the Exchequer Rishi Sunak unveiled a thirty billion pound fund to fight the disease in the budget. The measures include increased health service funding, a suspension of business rates for many firms, and statutory sick pay for many workers. On the same day, the Bank of England announced a surprise interest rates cut. Rates are back to a historic low of 0.25 percent, down half a percentage point. It’s the first unscheduled rate cut since the global financial crisis more than a decade ago.
The outgoing Bank of England chief, Mark Carney, also unveiled a raft of other measures to help small and medium sized businesses through the worst of the disruption from the coronavirus. While it will help businesses in the short term, it does not leave much headroom for later, with the UK also facing uncertainty as it tries to negotiate a new trade relationship with the European Union. Recently released economic figures show completely flat growth in a rolling three month average, suggesting any boost to confidence from the Conservatives’ large election victory is yet to translate into economic reality.
The Office for Budget Responsibility has forecast annual growth at 1.1 percent for 2020, the lowest rate since 2009. The worse news is that those figures were calculated before assessing the impact of the coronavirus. Decreasing demand due to the disease, particularly from China, has also affected oil markets. Saudi Arabia has ramped up production as part of a price war with Russia, leading to the cost of a barrel plunging by around a quarter.
Murciano offers this advice: “Investors should be looking at fixed-return and less-risky alternative investments options. We have already seen investors liquidating their equity positions and looking for alternatives that provide steady yield. A good option remains investing in fixed – returns property lending.
The worst affected remains China, which has 81,048 cases, although it appears to have passed the peak of infections, with just a few dozen new cases each day. WHO chief, Dr Tedros Adhanom Ghebreyesus, said many countries had showed “alarming levels of inaction” amid a rapid increase in cases outside China over the past few weeks. He’s calling for “urgent and aggressive” action from all countries to contain the spread of the disease.