The economics of lockdowns
- “Lockdowns” are becoming the norm when dealing with covid-19. They will trigger steep – if hopefully transitory – contractions in GDP.
- Business cash reserves are scarce in the US, but everywhere credit will need to flow to avoid second-round effects
- Fiscal deficits will probably be quite high this year. Levels close to 5% in Europe are not unreasonable, and significantly higher in the US.
- We contrast the forcefulness of the Fed’s decision on Sunday with the ECB’s constraints. We think political decisions around the ESM could unleash the ECB’s firepower. More action could still come from the Fed though, but the fiscal response is still lagging.
More lockdowns ahead
We think it is reasonable to assume that “lockdowns”, following the Italian, and then French and Spanish examples, will become widespread in the Western hemisphere. This will trigger very steep declines in GDP, hopefully transitorily, as output is some sectors will fall to nearly zero. We need to stress-test businesses, banks and governments for such significant shocks. Our conclusion is that readiness – not necessarily the actual implementation – to engage in large-scale quantitative easing would be necessary to nip in the bud second-round effects on business survival and the labour market, paving the way for a brisk rebound once the epidemic is under control. The Fed has made swift progress on this this weekend. The ECB made the most of its constrained framework once again. But we still need to see the materiality of the fiscal push which this new phase of monetary accommodation has just been made more financially sustainable.
When it comes to handling the epidemic, all countries want to be like South Korea, with Hubei as the adverse scenario. Unfortunately, for now the propagation of the virus in Italy – the most advanced European country in the epidemic – follows very closely the profile observed in Hubei with a lag of 37 days (see Exhibit 1). The Italian government is resorting to increasingly draconian measures – and there are some tentatively reassuring signs the number of new cases is abating in the first “red areas” in the North - but given the average incubation time (5-6 days) we will have to wait until early next week to see if the latest wave of containment measures has been efficient.
We probably need to take Italy as the right benchmark for the outlook in the other European countries. As we suggest in Exhibit 2, the epidemic is advancing in France, Spain and Germany with a lag of about 8 days behind Italy. France and Spain have now resorted to draconian “lockdown” measures themselves, and we think it is (or at least should be) what we will see in the rest of Europe very soon…and possibly a bit later in the US.
About AXA Investment Managers
AXA Investment Managers (AXA IM) is an active, long-term, global, multi-asset investor. We work with clients today to provide the solutions they need to help build a better tomorrow for their investments, while creating a positive change for the world in which we all live. With approximately €750 billion in assets under management as at end of March 2019, AXA IM employs over 2,350 employees around the world and operates out of 30 offices across 21 countries. AXA IM is part of the AXA Group, a world leader in financial protection and wealth management.
Visit our website: www.axa-im.com
Follow us on Twitter: @AXAIM
Visit our media centre: www.axa-im.com/en/media-centre
AXA Investment Managers UK Limited is authorised and regulated by the Financial Conduct Authority. This press release is as dated. This does not constitute a Financial Promotion as defined by the Financial Conduct Authority and is for information purposes only. No financial decisions should be made on the basis of the information provided.
This communication is intended for professional adviser use only and should not be relied upon by retail clients. Circulation must be restricted accordingly.
Issued by AXA Investment Managers UK Limited which is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No: 01431068 Registered Office is 7 Newgate Street, London, EC1A 7NX. A member of the Investment Management Association. Telephone calls may be recorded or monitored for quality.
Information relating to investments may have been based on research and analysis undertaken or procured by AXA Investment Managers UK Limited for its own purposes and may have been made available to other members of the AXA Investment Managers Group who in turn may have acted upon it. This material should not be regarded as an offer, solicitation, invitation or recommendation to subscribe for any AXA investment service or product and is provided to you for information purposes only. The views expressed do not constitute investment advice and do not necessarily represent the views of any company within the AXA Investment Managers Group and may be subject to change without notice. No representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein.
Past performance is not a guide to future performance. The value of investments and the income from them can fluctuate and investors may not get back the amount originally invested. Changes in exchange rates will affect the value of investments made overseas. Investments in newer markets and smaller companies offer the possibility of higher returns but may also involve a higher degree of risk.
© AXA Investment Managers 2020. All rights reserved