A global asset manager sees COVID-19 bringing about a new era of government intervention in the global financial system, with previously unprecedented policy moves likely to be the new normal.
While the worst of the COVID-19 pandemic may be behind us, it’s likely that the crisis will have radically changed the global financial system.
“History is littered with examples of large-scale crises ushering in new governmental, economic and social structure,” said Fidelity global chief investment officer Andrew McCaffery. “In very recent history, the global financial crisis led to an era of low interest rates and growth, and repeated central bank intervention. Now we think the COVID-19 crisis has the potential to spur its own set of changes.”
The US Federal Reserve recently stepped up its policy moves, essentially vowing to ensure the smooth functioning of financial markets through “QE infinity”. Other monetary authorities – including the RBA – have been more restrained, winding back their asset purchases as the liquidity shortages that ravaged markets through March began to subside. But the continuing challenges – including falling inflation, high unemployment, and a deep recession – mean policymakers are likely to step up interventions.
“The New Economic Order will be a world of increased government intervention displacing the free-market policies pursued since the 1980s,” Mr McCaffery said. “Fiscal activism will bear more of the burden and work in conjunction with monetary policy. Corporate governance and sustainability will become widely adopted concepts after proving their worth during the crisis.”
And while the IMF and some governments predict a “V-shaped” recovery as lockdowns are lifted and businesses reopen, Fidelity sees a rockier road out of the crisis.
“How the crisis unfolds largely depends on the trajectory of the virus, the strategies used to exit from lockdowns, and how policymakers respond,” Mr McCaffery said. “The base case, to which we ascribe a 60 per cent probability, is a U-shaped recovery: this entails social distancing for the rest of the year and lockdown restrictions gradually being lifted throughout the summer.”
Economists agree that the Reserve Bank is likely to remain in inflation fighting mode until December. ...