The world is clearly heading on the steep downward slope towards recession due to the Covid-19 pandemic. The duration of this recession and, very possibly, global depression will be heavily dependent on the longevity of this crisis. Also crucial to this war will be human endurance, decisive government policy and geopolitical relationships.
Financial and housing markets are collapsing, with retirement and sovereign funds worldwide losing trillions of dollars. This is consistent with findings in the study, ‘The Power of Bad: The Negativity Bias in Australian Consumer Sentiment Announcements on Stock Returns’ (Journal of Banking & Finance, May 2011), that negative market effects occur with bad news. In fact, negative and positive news have asymmetrical effects of equivalent magnitude in the market, and it disproportionately affects equity markets, as well as foreign exchange markets.
Unsurprisingly, we are witnessing a temporary, short-lived recovery in equity markets propped up by trillions of dollars in government stimulus packages — a dangerous and superficial way of reversing, or trying to contain, the economic havoc caused by the pandemic. These stimulus injections are simply not feasible to keep the economy afloat, should the Covid-19 crisis last longer than forecasted.
While the health system is occupied with saving human lives, it is a serious oversight by governments worldwide to rely on stimulus packages to safeguard livelihoods from the current economic meltdown. Governments do not understand how their authoritarian and unilateral decision of shutting down entire economies, and attempting to salvage the fallout with stimulus until Covid-19 is no longer a threat, will pan out.
Massive government borrowings to fund these stimulus packages are not free gifts. Who will repay this enormous debt, and how long will it take? The answer is clearly more bad news than governments are prepared to confront right now. But, ultimately, taxpayers will be responsible for repayment, and it will take at least a decade, if not more.
Some forward-looking indicators are plummeting at an astounding speed. Since the Covid-19 pandemic, US consumer sentiments have plunged vertically with almost zero slope and no sign of turning around any time soon. Australia’s consumer sentiment slope is barely at a 10-degree slope, and is declining at a similar rate.
Across-country historical time series of sentiment data shows that at the end of March, South Korean consumers were the most pessimistic about the economic and financial market outlook, followed by Italy, France and others. Currently, China is leading the consumer index, indicating that its economy may see the light of recovery much faster than any other country.
With China lifting its 76-day lockdown of Wuhan on April 8, the country is certainly in a good position to recover economically compared to other nations, where restrictive measures are only just beginning to come into effect. China will take full advantage of this during the rebound.
(The writer is associate professor, financial economics, University of Sydney Business School, Australia)
