A Marathon, not a sprint…Global Markets have got what it takes to win
The Centre for Disease Prevention and Control gave evidence to the European Parliament in May that across all 28 Member States, only Bulgaria was reporting increased COVID 19 infection rates. Germany has ticked up a little since, but the overall picture is positive. The Centre’s Director, Dr Andrea Ammon, confirmed that Bulgaria aside “there are four countries with no substantial changes in the last fourteen days: Poland, Romania, Sweden, and the UK, and all the others are showing a substantial decrease.” Lockdowns across Europe have reduced aggregate transmission rates by 45% since April and “the initial wave of transmission has passed its peak”. But she emphasised too that this is a marathon, not a sprint: “the economic consequences of the pandemic need to be managed for the foreseeable future and people need to prepare for that”.
Front and centre of those preparations will be how we work to deal with radically increased levels of central government debt incurred to meet the challenges of COVID, not only in Europe but across the globe.
The Institute for Fiscal Studies forecasts the UK Government will be required to borrow an additional £200 Billion over the current financial year and is now heading for a debt to GDP ratio of 95% (up from 83% at the beginning of April). This flies in the face of received orthodoxy that only basket case economies (think Zimbabwe and Venezuela) are prepared to contemplate debt levels in excess of 100% GDP. The UK now looks set to join them, but it’s not alone: the United States has a debt to GDP ratio of 110% and the equivalent figure for Japan is a dizzying 250%. Unprecedented levels of State intervention are now changing the economic landscape and defying received wisdom.
But that’s only part of the picture, because received wisdom is also breaking down on more than one front at the moment: absolute debt figures are not as significant as they were in the days they threatened European Bond Markets in the aftermath of the Greek currency crisis. Most commentators agree that any significant increase in interest rates (already at a historic low) is unlikely for at least the next ten years, and that means the cost of financing debt is lower than it’s ever been before and likely to stay that way: so it’s not so much the size of the relative debt that matters, its what it costs to carry it forward and market conditions are conspiring to make that easier than ever before.
Bear in mind too that not all countries are running such high debt to GDP levels even in the current circumstances. India, for example, has a debt ratio of 66%, which in itself bodes well for the rigour and resilience of our global economy.
And finally, for those Governments still keen to find some extra cash down the back of the sofa, France has suggested the introduction of a new Digital Tax. Speaking recently, and not without a certain irony, at a Linkedin Digital Conference, France’s Economic and Finance Minister Bruno Le Maire pointed out that digital behemoths like Amazon and Facebook have done very well out of locked down markets, but they are still the least taxed.
He might have a point there…
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The economic dynamic between historically low interest rates and almost unheard of government spending programmes is very interesting, and I think it’s right that orthodoxy of economic conservatism would be misplaced at the moment. We need to build for the future and grasp the opportunities for what may well be a more connected, cohesive and re-focused future.