Saturday 14 March 2020

Friday's 'relief rally' in US and Australia probably premature

After record losses on Thursday, the Australian market started out badly on Friday but then recovered (and actually ended with slight gains) in the afternoon. Then the US market did quite well in Friday trading, recovering a large fraction of Thursday's decline. As usual, market commentators attempted to attribute the market movements to one 'sound bit' cause - in this instance the 'prospect' of the US congress and the US President getting their act together and providing some financial support in terms of sick leave and other measures to provide financial support to victims of Covid-19. However, I don't think that 'fiscal measures' are going to be particularly effective in ameliorating what is a medical and social behaviour crisis. Normally providing financial support (e.g. $750 government hand-outs to welfare recipients in Australia) would boost spending, and have a 'multiplier effect' (you give someone $100 extra cash and they go to the shops and spend $200). But in this crisis I don't think that having some spare cash will encourage people to go shopping if they are sitting at home in order to avoid catching Covid-19. Similarly, while providing 14 days sick leave in the US will replace income for those required to self-isolate for two weeks, it won't go far for those that actually catch Covid-19 and end up in hospital for treatment, and will be of limited help for those that finish off two weeks self-isolation due to exposure ('close contact') to a Covid-19 case, but find out that they are 'negative' for the virus. In those cases they are still likely to eventually catch Covid-19 for real - and will have already used up their sick leave. I suspect people will be extra cautious and any financial support will end up being used to reduce household debt or kept as an emergency reserve (to pay bills when you are actually sick with Covid-19). People are only likely to spend the extra cash on household consumption (and hence provide economic stimulus) if they feel that the crisis is being mitigated and will be brought under control by government action - and I can't see this happening any time soon.

Given the continued rate of growth in global Covid-19 cases (about 4% increase in numbers each day), and the worrying death rate (about 3%-4%, which suggests considerably under-reporting or lack of testing), the economy is likely to suffer more and more as patient numbers overwhelm medical capacity and death rates rise exponentially. This is likely to disrupt business and the economy no matter what fiscal stimulus measures are taken.

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