The massive crisis response means that the coming recession probably won’t be a replay of 2008 – but the execution could be off.
While even the most pessimistic long-run economic forecasts now indicate that the recession is unlikely to be worse than the GFC, BlackRock Investment Institute believes that policy execution is a “key risk” to that view.
“A recent example shows the difficulty of delivering the aid to those in need: A $350 billion loan program for distressed small businesses in the US quickly reached its limit, with evidence that the smallest businesses had severe difficulty accessing the program,” BII analysts said in a note. “There is also the risk of permanent damage if the freezing of economic activity lasts for an extended period of time – especially if ongoing policy support loses momentum.”
“An extended interruption could morph into a financial crisis if it were to lead to an unprecedented wave of corporate insolvencies, putting pressure on the banking system.”
That policy response has involved a $3 trillion fiscal stimulus and the Federal Reserve launching “QE infinity” in the US; an emergency fund of at least €1 trillion in the EU; and more than a hundred billion over several packages in Australia. But those stimulus packages suffer from the same uncertainty that has dominated markets, with virus spread and lockdown measures likely to dictate when countries can return to “business as usual”.
While BII expects that any recession won’t look the same as the GFC, given that the 2008 recession started in the financial system and spread to the real economy, the coronavirus recession could still lead to long-lasting and possibly even permanent changes to consumer and business behaviour.
“The initial risk asset response in 2020 – with equities down 30 per cent to 40 per cent across the world – has been on an order of magnitude similar to the financial crisis,” the analysts wrote. “We see the lasting impact of the current economic shock as less severe given much greater fiscal and monetary support this time around.”
“Yet effective implementation of such policy support is critical, and we remain cautious over a tactical horizon due to the substantial near-term uncertainty on the evolution of the virus and containment measures.”
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