How has the novel coronavirus impacted the economy? - AG Employee Benefits

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Filip Corten on the economic impact of coronavirus

Published on 27/05/2020

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How has coronavirus (COVID-19) impacted the financial markets?

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The first five months of 2020 have been very rocky, also for our Branch 23 funds. While 2019 was an excellent year, the novel coronavirus has since sent ​ripples through the financial markets, including Branch 23 fund​s which are heavily dependent on the economic climate. How big is the impact of COVID-19? And what can we expect in the short and long term? We asked Filip Corten, head strategist for Branch 23 investments at AG.​


Can you describe the impact of the novel coronavirus on the financial markets?
 

C
oronavirus has had a shock effect on the global economy and the financial markets. Never before in history have we experienced a global shutdown of the economy and lockdowns in just about every corner of the world. The initial market response was markedly negative, with a sharp correction in both equity and credit markets. 

I
n March, equities had their worst weekly performance since the 1930s, and volatility hit unprecedented levels. We also saw huge variability in returns earned on individual stocks. There were days when certain stocks were up 10% while others shed 20%. We have never before seen such fluctuations. 


Also with corporate bonds, there was enormous tension, with a very sharp increase in spreads (excess return compared to government bonds) and it became nearly impossible to buy or sell. 

Do you think coronavirus will have an impact on the global economy in the long term?

T
oday we see that, as a result of the lockdowns, the spread of the virus is under control, and the financial markets have somewhat recovered. Equities have risen by around 15% since the mid-March low point, and there has also been an improvement in corporate bonds. We do expect further recovery to be somewhat slower and more volatile.

The damage to the economy is considerable, with an expected drop in gross domestic product (GDP) of 5-10% in 2020. A recovery is expected to happen next year, but its strength remains uncertain because it is not yet clear how quickly the economy will be able to normalise. A fully recovered economy will only be possible if a vaccine is available to the population.

Several governments and central banks are implementing recovery plans and/or economic support measures. What are the objectives of such recovery plans?

The purpose of the tax policies and measures announced by different governments is to keep businesses afloat and support demand. 

In Europe, we see investment programmes that should have a positive impact in the coming years, and governments will guarantee loans so that companies can continue production to meet demand. In the United States, families even literally get a cheque in their mailbox to boost consumption.

The monetary policy of central banks is based on keeping interest rates low so that companies have an incentive to reinvest. Banks are also encouraged to grant loans. Central banks have also restarted quantitative easing, or buying back government and corporate bonds on the financial markets. The objective is to keep interest rates low for all countries and companies. For example, the European Central Bank wants to avoid a sharp rise in Italy's interest rates which would force Italy to borrow at excessively high interest rates.

Do you think the coronavirus crisis will have a lasting change on the way people view the economy? 

E
ver since Trump rose to power in the U.S., we have noticed that the ongoing trend towards more and more globalisation has come to a halt. We can assume that policymakers in Western countries post-coronavirus crisis realise that, for strategic sectors (e.g. healthcare), it is too risky to be overly dependent on China or other countries, and that globalisation has reached a peak. Companies will also evaluate whether they need to make changes in their production process. 

In theory, this crisis could be a turning point, but history has shown us that expectations should not be too high and that we return to "business as usual" fairly quickly.



Do you have a question about the coronavirus? Read our FAQ​ with all the information about your insurances and the pandemic.​