When the US economy starts to wobble, typically the rest of the world falls over and following the acceleration of the Covid-19 crisis in the world’s largest economy – and some heart-stopping headlines around unemployment and infections – BLM looks at what is next for the US economy.
Dr Tony Syme, expert in macroeconomics and international finance at the University of Salford Business School, believe that the US economy is in for a rough time.
He comments: “The economic pain felt by Americans will be severe, but short-lived if the experience of previous pandemics is anything to go by.
“The Federal Reserve’s estimate of 47 million lost jobs and an unemployment rate of 32% at the peak of the crisis do not appear to be the work of doomsayers given the latest economic data.
“A record 6.6 million people filed for unemployment benefits and that record is likely to be broken again this week, while IHS Markit reported that their purchasing managers index (PMI) for the services sector hit a record low of 39.1 for March – readings below 50 signal a contraction in the sector.
“Travel restrictions and the spread of the coronavirus meant that most business in the tourism, leisure and hospitality industry were going to close even without the government-mandated closures. For those Americans who remain in employment, the opportunity to spend their income is being severely curtailed. In short, there will be a period of forced saving for those who remain in work.”
Written on the back of a fag packet
Pre-pandemic, some prominent business leaders in the United States were relatively happy with President Donald Trump’s handling of economic affairs but his failure to grip the crisis early – and his written on the back of a fag packet response – has seen that good sentiment wane.
So how bad will it get and what can we glean from history?
Dr Syme says: “Such restrictions as we’re seeing now were implemented after the outbreak of the 1918 influenza pandemic which killed up to 50 million people worldwide, including over half a million in the United States.
While there were distinct waves in that pandemic, due primarily to demobilisation following World War One, there was also a rapid increase in consumption patterns and business activity once the pandemic had subsided.
“The longer-term impact of the 1918 pandemic was a labour shortage and an associated increase in wages. That is unlikely to be the impact of the current pandemic as it is currently affecting a different demographic: in 1918, a disproportionate number of the victims were men and women aged 15-44; the current virus is disproportionately affecting those of retirement age.
“The longer-term impact of the current pandemic will depend on the length of the current lockdown measures and the likelihood of any future waves and upon the government responses to funding the current bailouts.
“It is too early to forecast the future path of the coronavirus and the degree to which civilian restrictions will remain in place, but one thing is clear when the pandemic passes: no government will want to pay for the stimulus plans by raising taxes.”
Finally, a serious reaction
Whilst Trump has been criticised for his sluggish response, he has at least now responded with an unprecedented economic shot in the arm for the USA but it’s still way behind many other nations.
Dr Syme explains: “The scale of these stimulus plans is huge. President Trump has signed a $2 trillion stimulus bill, which equates to 10% of GDP. But that is small-scale to some of those in place in Europe: the UK stimulus package equates to 17% of GDP and the German package equates to 21% of GDP.
“And this is where there is a significant difference between the American and the European government responses to the crisis. Whereas loans to businesses are commonplace to ease cash flow problems, the American bill contains direct payments of $1,200 to adults, whereas European responses provides direct subsidies to businesses to encourage them to retain their staff.
“The huge increases in unemployment seen in the U.S. are not being seen in Europe as a consequence of these schemes, such as the Kurzarbeitergeld scheme in Germany. But with all these schemes, these are just the initial government responses.
“The longer that the current crisis continues, the more expensive these worker-subsidy schemes will be and the more often direct payments will need to be made to families by governments that follow that strategy.
“The long-term impact may be that governments will respond to this huge increase in public debt as they did after World War Two. Those that borrow in their own currency cannot go broke. They only require their large fiscal deficits to be fully underwritten by central banks and it is those central banks who control the supply of the currency.
“Modern Monetary Theory has the potential to be the new economic orthodoxy in the post-crisis era. There are few alternatives. No government will want to raise taxes and no population will allow their health system to be so under-prepared for the next health crisis.”
That transatlantic relationship
Chris Manson is CEO of Newable, an organisation which supports businesses looking to trade with the USA.
His view is that the economic impact will only be temporary.
He comments: “The Covid-19 pandemic is taking its toll on both the US and UK economies but much like an old VHS tape which has been temporarily paused, things will pick up again. We are already seeing some green shoots of recovery in China as factories, ¬offices and shops reopen – we would hope other economies should follow in due course.
“The stimulus package introduced in the US will provide remedial support for businesses and similarly, the UK Government’s package of funding, which must be applauded for its speed of deployment, is already helping businesses at this challenging time.
“It is important to recognise that prior to the current situation, both the US and UK markets were in good health, with combined trade worth £221bn. Wall Street was celebrating record highs just a few months ago and the promise of a UK-US trade deal is around the corner, while these stimulus packages will tide over SMEs on both sides of the Atlantic in the meantime.”
Alpesh Patel, who is CEO Praefinium Partners and a former Visiting Fellow in Business, Oxford University – gives his analysis of the current US economic situation.
The US/UK Market Crisis: Short sharp shock?
Where We Are
As I write the US and UK Governments are making available trillions of dollars to businesses and individuals. Sadly, the tap is open but the pipe to deliver the money may be broken. SMEs are complaining they are not getting the money they need from banks.
My fear is telling banks they must lend isn’t going to work – the bankers are well aware when the dust settles, they will be under fire for making bad loans and fired for the same.
My other fear is that this crisis lasts longer than anticipated and pent up demand for our hotels, flights and restaurants will be too late to save many.
Whilst all UK businesses should check out Business Interruption Loan Scheme, the speed of processing, eligibility gaps, and simply some businesses making people redundant when they could have had financial support, are all worries.
Let me turn from the economy to the financial markets and the largest companies in the UK and US, which we can use as a barometer where we have more data than we do for private businesses.
Why It May Be Short Term
According to Goldman Sachs the average decline for an event-driven market decline is 30% and the duration is about 9 months. Of course since the Covid-19 crisis, from peak to trough, it has been much sooner. The average time to recover they say, based on an analysis of bear markets since 1900, is about 18 months.
Could we have the much desired ‘v’ shape recovery? Bear markets tend not to be V but W. They can rise, as we have done into technical bull territory, before the second leg drops below the first.
For the US markets that could mean a fall to below 18,000 (15% more) and for the FTSE 100 to under 4,000 (more than 20% lower than levels as I write).
Let us recall the Financial crisis saw the US markets fall 54% from their peak and they took 48 months to recover from their bottom.
And then there is oil.
The oil war between Russia and Iran is really about America. The desire to flush out the American shale market for one thing by the Russians.
The economic damage to that industry and the companies around it will add to US economic problems. As for the benefits of cheaper fuel and energy costs – for consumers losing their jobs countrywide, the positive benefits are marginal.
Add to all of this, the economic problems in the Middle East, with the blockade of Qatar by UAE and Saudi Arabia and you see why OPEC itself is a weakened force and Russia’s alliance with it is something the latter felt it could disregard.
We see in the West why actually a stronger OPEC would be beneficial. If the Middle East cannot unite over this – there really is no hope.
There may be inward UK investment – sort of. We should not be surprised with USDGBP also having taken a hit, partly for the level of UK spending to GDP, but also a stronger safe haven US dollar, to see FTSE 100 companies, debt-ladened in some cases – looking even cheaper in US prices – to face a slew of take over bids -maybe from China where the Shanghai index is not even down 10% this year.
Take those companies with low Altman Scores (a measure of working capital and likelihood of bankruptcy) – Carnival (-75%), IAG (-65%), Melrose (-61%) and that’s in GBP terms, even cheaper if you’re a Dollar buyer.
Of course for private investors, there is the simple arithmetic that should a company return to where it was 3 months ago, and it’s dropped 90%, then the make a ten-fold return on their money. Great, even if that 3 month fall takes a decade to recoup, let alone a year. Of course some such companies will not survive despite immense government grants and loans.
There is also the positive news that some companies are actually doing well – as a measure of their share prices – Polymetal, Pennon, Fresnillo, Hikma all up in the UK and in the US – Citrix, Netflix, Gilead are all up 15%+ in the past 3 months.
None of this of course holds any joy for the millions seeking unemployment benefit, the SMEs which will fail and the huge debt burden after all this is over.
Whilst we pray for a sharp recovery in personal consumption, the danger is, it is again, like after the financial crisis, a long slow grind. The difference this time, to end on a positive note, the money is not going to a few banks, but to virtually everyone – eventually.