“T’was the best of times, t’was the worst of times …”
The risks of Plan B and a further Covid Lockdown are multiplying. It will clearly impact markets, but the real economic effects of Covid combined with energy costs, supply chains and bleak company earnings forecasts may be pushing us towards stagflation anyway.
"How to address the biggest economic shock in 300 years?” asked UK Chancellor Rishi Sunak while doing his pre-budget politicking last week. Whatever you believe or don’t believe about Covid, Sunak is quite right to consider it at the centre of the on-going economic crisis. Markets should factor that reality accordingly – which boils down to a very simple question: how much will Covid force Central Banks and Governments to act to stabilise the global economy?
This week pay attention to the UK Budget on Wednesday on how Chancellor Sunak addresses the ongoing critical-care needs of the UK by stepping away from his previous “policy-mistake” sounding mention of austerity spending cuts and tax-rises to make noises about increased “levelling out” spending. Hanging over everything will be the question – how much more economic pain could Covid inflict?
It’s a tough question. A new lockdown would be economic suicide. The UK government plans to ride it out – but the history of the last 19 months says they won’t hesitate to make a U-Turn and institute Plan B if they think their credibility is on the line if the numbers of infections surge and the health service looks swamped. That’s a potential trade: should you sell UK stocks now on the likelihood the government will panic? (And buy-them back almost immediately as the Bank of England stops the noise about a rate cut and QE taper.)
But… another question is how much will rising infection numbers cause the economy to contract anyway? How much has confidence already been dented?
Here in Blighty, It’s a tale of two headlines:
Daily Telegraph: Coronavirus cases to slump this winter, say scientists.
The papers looks like it boils down to a political split – which may reflect the UK’s national pride in our venerable National Health Service. How much we are prepared to sacrifice to protect the sacred cow of the NHS has become a badge. The left-leaning, Labour supporting Daily Mirror is peddling one set of scientific views, while the daily journal of the Conservative Party, the Torygraph, finds another set of white-coats to quote.
What does the threat of Plan B or further lockdowns mean for the UK economy? A quick glance round the motorway service stations we stopped in yesterday shows many more people wearing masks, and I’ll be interested in how many people start working from again as the perceived threat level rises.
I wonder how rationally people consider the pandemic. The vector for the rise in infections is schoolchildren being children – their interactions will diminish this week due to mid-term holidays. Back in September, a British Medical Journal report (How is vaccination affecting hospital admissions and deaths?) said 84% of hospital admissions before July had not been vaccinated, although rates of vaccinated infections were rising – their conclusion was simple: unvaccinated people are 3 times as likely to go to hospital and 3 times more likely to die. There is a broad consensus the efficacy of vaccines wanes after 5-6 months – hence booster shots.
Maybe the best way to move forward is the Swedish solution of taking personal responsibility to rising infection numbers? However, research in the Guardian earlier this year suggests that strict-lockdown Denmark and easy-going Sweden experienced similar levels of economic dislocation, but Sweden suffered a death rate 5 times higher than Denmark! It’s down to behaviour – Sweden kept the schools, offices, shops and pubs open, but people got careful, stopped going out and kept the kids at home anyway.
As the supply chain crisis continues, and energy prices go through the roof, we already know it’s going to be a tough holiday season – retailers warning of toy shortages and price hikes on scarce Turkeys. It impacts consumer behaviour – we all want to spend, but if we can’t because of rising prices and falling incomes, and it feels dangerous to do so – then what effect does that have on spending patterns? It’s got to be negative.
We’re seeing the supply chain effects beginning to hit corporate results – an increasing number of firms have been giving lacklustre holiday earnings guidance. Intel took a spanking last week on the back of expectations of a downbeat outlook. Snap got pummelled on the back of a disappointing Q3 number. This week is big for Big Tech earnings – and names from Apple to Amazon could be pummelled by supply chain shortages and the problems these cause meeting holiday demand.
Headlines about a downbeat Apple sales forecast have consequences – not just in making global consumers a little more depressed about the future.
The very first thing junior economists learn about is multiplier effects – on consequences as lay-people call them. A company finds it can’t get it full allocation of Christmas units to sell so it cuts advertising, cuts stuff overtime and starts planning to cut investment in new plants, warehouses and future spending. Repeat over the whole economy, and with everyone with less in their pockets… as “transitory” inflation feels increasingly permanent, and you’ve got a perfect recipe for stagflation.
I often get accused of being a misery-guts and far too negative about the state of the global economy. My own market mantras include the classic: “Things are never as bad as you fear, but never as good as you hope”.
Think about that for a moment. Covid caused the greatest economic downspike in 300 years, but the actions of swift government interventions to prop up commerce and fuel consumer spending kept the global economy functional, but wobbly. The markets quickly began to anticipate recovery and upside – yet these remain vulnerable to the news and perceptions around this Coronavirus.
Covid fears are multiplying again. Renewed Covid instability on the back of lockdown news from China, Europe, Australasia, wherever, will continue to roil markets. Supply chains remain fractured and the consequences of the virus effects on the global economy will continue.
Get used to it…