Looking ahead. The global economy is picking up.
The outbreak of the coronavirus plunged the global economy into a deep crisis. However, the unparalleled economic measures are lowering the odds of a long-term economic depression. Investors can look to the future with optimism.
Global economy proves robust during pandemic
The COVID-19 pandemic has been a profound event for the world. Nonetheless, just a few months after the pandemic broke out, a new normal is starting to take hold. People learned to live with the virus within a short time.
On stock exchanges, a new chapter began after March 23, the low point of the crisis. Valuations of almost all securities have been recovering since then. What's more, capital market returns are falling although liquidity remains thin. There are four points to keep in mind:
- The global economy is more resilient than many believe. In the financial markets' judgment, a recession and lockdowns will pass. The fiscal and monetary stimulus, in contrast, will remain. It will be impossible to take back – even years from now.
- "Glocalization" does not mean the end of globalization. Even if companies do tend to increase their inventories from now on, it will not mean the end of the economy.
- New technologies, business procedures, and production processes will protect many companies from the next pandemic – making them more prepared for the future.
- Necessity is the mother of invention. In the past five months, companies around the world have made countless changes to their business strategies and value chains. The innumerable SMEs have been reinventing themselves at lightning speed.
Risk of a long-term economic crisis remains low
Investors still have reason to be optimistic. When it became clear that shutting down the economies would trigger a serious global recession, governments and central banks the world over launched monetary and fiscal policy stimulus programs on a scale never seen before. That provides us with the following key insight: If the situation takes a turn for the worse, we can count on help from the political side. That aid will reduce the risk of a prolonged economic depression considerably.
Current economic crisis cannot be compared to the Great Depression
Right now, many people are attempting to make comparisons between the current economic crisis and the one in the 1930s, but they fall short. From a socioeconomic and political standpoint, the circumstances in the 1930s were considerably more unstable than today. Back then, the bull market was based on speculation that legislators attempted to rein in with a disastrous countermeasure. They adopted significant tax hikes on every income level while, at the same time, raising most minimum wages. Yet, instead of encouraging private consumption, the measures primarily reduced corporate profits, leading to more layoffs.
Monetary policy – not yet the purview of independent institutions – caused the money supply to shrink by 30%, and the banks' minimum reserve requirements were doubled within a year. This lethal cocktail caused virtually the entire credit supply for the economy to dry up. A well-intended, but completely failed, economic and monetary policy resulted in disaster almost overnight.
Economic measures boost recovery
Today's policy is doing the opposite. It is covering many of the costs of the lockdowns and doing everything to overcome the crisis as quickly as possible. With this historical background, the contrast between what the crises initially have in common and their key differences becomes clearer.
- Today, economic and monetary policy are all-in. They are supporting the vital cycle of credit and liquidity through fiscal transfers resembling helicopter money and interest rate cuts.
- Today, we are not experiencing a credit crunch but, on the contrary, a flood of credit and an operationally healthy financial sector.
- Private households will have greater savings after the crisis than before.
- Most of the newly unemployed are expecting to get their jobs back in the near future. In the Great Depression, things were different.
- Analysts estimate that, measured by their market capitalization, more than 70% of companies in the S&P 500 are operationally sound. Economic sectors such as technology, health care, and finance account for the lion's share of earnings power and market capitalization.