We keep hearing about doom and gloom. We hear that our economy will collapse and we shall go into deep recession.
Let's take a closer look.
During the economic crisis of 2008/09, the US government injected a fiscal stimulus of $152 bn. In 2020 with COVID crises, that government has committed a stimulus of $2 trillion. This is same as $2000bn, over 13 times that of 2008/09!
For the UK, the figures are £70 bn for 2008 and £330bn for 2020, nearly five times that of 2008. Other major world economies have also followed this trend.
When we look at the ratio of public debt over GDP (Gross Domestic Product), the UK stands at around 86%. The US is 106% and Japan 234%. Back in 1946 post World War II, this ratio for the UK had reached 150%. So, we have plenty of headroom to go.
The UK fiscal injection has included:
1. Paying up to £2500 per employee per month to sit at home under the so called ‘furlough’ scheme. This money comes straight into the employers’ bank account and paid to the employee. This is free money as the employer or the employee do not have to repay.
2. For the self-employed people, there is a similar scheme paying up to £2500 pm. Again free and not required to repaid.
3. Business interruption loans. These are loans available to businesses where the government will guarantee 80% as security for lenders. The government will also throw in the first 12 month's interest.
4. Business grants of up £25,000 for small businesses. This is free and not required to be repaid.
5. Business rates holiday. These can be quite large amounts. Again this is free for 12 months not required to be repaid. This is for 2020/21 year and available for those who are eligible.
6. Bounce back loan. These are loans for affected small businesses up to £50,000 and 100% secured by the government. Again first 12 months is interest free.
Does it not sound like the government has a money tree? Well this is more or less the case. The government has thrown a lot of money into the economy. Under normal times these levels of spending would be considered madness.
All this money will see its way into the economy when the recipients start spending which they will do when they gain confidence. Already online shopping is up by 40% and sale of alcohol has jumped up materially also. This spending will boost the economy to recovery. My own view is that the bounce back will be fast with a V shape.
Yes, some business sectors are suffering and will take a long time to recover. The airlines, pubs and restaurants are all in this sector. But then there are others that will see positive growth. These will include food and groceries, technology, pharma and communications companies. There will also be innovative new ideas that will emerge. There will be eating out concepts where you receive all food material from your favourite restaurant and you cook fresh at home.
Questions are being asked about how and when will all this fiscal injection be repaid. Ultimately the government has to recover from tax revenue and reduction in spending. I feel that the economy will not be ready for large tax increases nor another austerity period. I see therefore that the government will play a balancing long-term act by not increasing taxes quickly nor bring in austerity but allow the recovery process to take place over a longer period. There is room for this given the above mentioned borrowing ratio.
Let's look forward to better times.
