There will be “prolonged weakness” once the recovery starts, and indefinite government support might be the only way out.
Markets should be anticipating a wave of business failures across sectors and countries after lockdowns are lifted as businesses grapple with the challenge of social distancing measures and reduced consumer demand in the face of greater precautionary saving and reduced confidence.
“Markets may be right to look through Q2 numbers and look forward to a Q3 recovery,” said Seema Shah, chief strategist at Principal Global Investors. “But it is entirely possible that there will be a Q4 reckoning, where a second wave of job losses and prolonged period of business failures tests equity sentiment.”
An Ipsos MORI survey found that 50 per cent of Britons would feel uncomfortable shopping other than in supermarkets, while the British Independent Retailers Association has forecast that up to 20 per cent of smaller shops may not reopen as government support is phased out. While that example might fit imperfectly with Australia, it tracks with data from China, where consumers have been avoiding crowded shopping spaces for fear of contracting the virus.
“Unfortunately, the fallout from struggling businesses does not just stop there,” Ms Shah said. “Bankruptcies create negative feedback loops, particularly for the labour market. Consider this: as we hear of more and more businesses contemplating closure, there are potentially millions of currently furloughed people who will not be re-employed.”
One possible solution is the extension of government support. While these measures were initially considered temporary, it may be necessary to push the timeline out until a more complete recovery occurs. The UK government’s support package – in which it would pay 85 per cent of workers’ wages – was rolled out as a three-month package but has now been extended until at least October, and the Australian government is facing similar questions of the wisdom of ending its JobKeeper and JobSeeker programs as it becomes clear the recovery will not be “V-shaped”.
“What’s becoming increasingly obvious is that global fiscal support will need to be sustained so as to prevent a surge in bankruptcies and subsequent economic strife,” Ms Shah said. “Similarly, sustained liquidity provisions and asset purchases from central banks will be required to support the economy. While this may take the sting off corporate and household weakness – and investor disappointment – it is still an outlook that inspires caution.”
Without a vaccine, there’s also the looming possibility of a second wave of virus cases to contend with. China, South Korea, Singapore and Germany are facing new clusters, and the question remains of whether lockdowns could be reimposed in the face of catastrophic economic damage.
“If a second surge were to take place, overwhelming health infrastructure, governments may find themselves with little choice but to reintroduce lockdowns,” Ms Shah said. “While the psychological impact on society cannot be exaggerated, the economic impact would also be devastating, with lingering long-term effects.
“In that worst-case scenario, even the most monstrous policy stimulus could not support continued equity market gains.”