No two shocks are ever the same…

Those who thought that uncertainty had peaked at the end of last year will have had cause to think again over the past seven days or so. The fact the word Brexit barely surfaced in discussions around Budget 2020 and other economic events over the past couple of weeks speaks volumes. We have moved to an entirely new crisis that has very much overshadowed the UK’s departure from the EU.

The old saying is that a week is a long time in politics, and it is also very much the case in economics and financial markets, and of course public health. On Wednesday alone, we had an emergency interest rate cut by the Bank of England before breakfast, two Budgets in one before lunch, an official Pandemic declared by dinner time, and a US travel ban to Europe by bedtime. And that followed Stock Market turmoil on Monday with the worst morning’s trading since the financial crisis over a decade ago, driven by the sharpest fall in the oil price since Gulf War One in 1991.

And with the likes of Italy, Spain, and Denmark going into lockdown, combined with other measures around the world to deal with the spread of coronavirus, such as schools and universities being closed in France and Ireland and pubs being shuttered initially in Belgium it has been quite a time.

Consumers will understandably be unsure what to make of it all, and clearly anxious about the health and other impacts of the pandemic.

In terms of the Budget, we have become used to having two budgets in a year. Two budgets in a day was something new though. We had an emergency budget and a normal one all wrapped together. The last time we had an emergency budget was June 2010. Back then it was a public finance emergency, and austerity was the response, whereas this time around it is a health emergency rather than a public financial one.

The Chancellor unveiled a £12billion package to mitigate the impact of COVID-19 and this followed the Bank of England’s emergency rate cut and the launch of a multi-billion pound package for the same purpose. Notably, the Chancellor also said that he would give the NHS whatever it needs, whatever it costs. When has a Chancellor ever given effectively a blank cheque for anything else? The answer is, outside of war time, probably never. And this gives an insight into the scale of the crisis.

The normal budget had no shortage of headlines itself, even without the COVID-19 element. The UK government’s latest plans represent the largest, sustained fiscal loosening since the pre-election Budget in March 1992. Over the next five years the plan is to double investment relative to the average over the past 40 years. Investment is hitting record levels in modern times. Public spending as a share of national income is set to rise above that of the ‘Blair Brown years’ and to be the highest since the mid-1980s when Thatcher was shrinking the state. Public spending is growing at twice the rate of the economy which clearly isn’t sustainable, and is also quite remarkable given that it is a Tory Chancellor delivering it.

In relation to the stock markets, the fact that a 10 percent fall in the stock market on Thursday didn’t even hit the headlines is in itself remarkable. As one correspondent tweeted, the fall in the UK stock market since the beginning of the year, is bigger than Black Monday in 1987 and bigger than any three-month period in history. But the fall still remains tame compared to the 59 percent fall between 2007 and 2009. As the sun came up on Friday, global equities recouped some of their losses with Wall Street posting its biggest one-day rebound on record. But this week has already begun like last. Despite the Federal Reserve’s emergency policy action on Sunday night, which included cutting rates to just above zero percent, stock markets and the oil price have started the week plunging again.

Many people are drawing comparisons between the current situation and the global financial crisis of 2008/9, and whilst some of these comparisons are understandable and valid, there are clear distinctions. As Bank of England Governor Mark Carney said, the prospects with the current situation are ‘disruption’ rather than ‘destruction’. He was making the point that whilst severe, this crisis should pass relatively quickly, and shouldn’t have the same kind of legacy the financial crisis did into the years ahead. Though, the longer the disruption obviously the greater the likelihood of some destruction at a firm / sector level, the scale of which remains to be seen.

The other big distinction is that in 2008/9, economists were front and centre due to the nature of the crisis, but this time they very much aren’t. The economy was the number one priority in 2008/9 but today health is. Economists’ forecasts might see a slump in demand from the media. Whereas all eyes are on what the epidemiologists and other health experts predict, and rightly so.

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