In the 3rd quarter Governments around the world continue to provide relief packages to bridge the income lost from temporary unemployment, so national debt continues to rise. Government borrowings were already at historic highs pre pandemic and now the International Monetary Fund expects global government debt to GDP to reach 140% soon. This is larger than after WW2 but can be serviced, for now, by historic low interest rates as central banks continue to collaborate with Governments.
While the news is dominated by headlines about the possibility of the worst recession since WW2 and the highest unemployment since the 1980s, global stock markets have rebounded over recent months and the US reached record highs by the end of summer. This has been one of the starkest historic cases of divergence between economic reality and stock market optimism.
With the former, we are facing global recession as country after country posts worst-yet GDP figures and the months ahead are likely to see heavy job losses. In the UK, the economy suffered the biggest slump on record between April and June, although GDP was positive in May, June, July and August. There are growing concerns about a painful autumn and winter ahead, with rising job losses amidst renewed lockdown restrictions.
On the policy front, there were announcements from the US Federal Reserve and Bank of England in September, with the former sending out ‘strong and powerful guidance’ that interest rates will remain near zero until at least the end of 2023. It also said it would not tighten policy until inflation has been ‘moderately above’ 2% for some time, confirming plans to stimulate the economy well into recovery from Covid-19. Meanwhile, the Bank of England kept its powder dry for a difficult period ahead, particularly if unemployment, expected to rise at the end of the furlough scheme in October, becomes widespread. This has led many economists to suggest the Bank will add further stimulus, possibly as early as December. The European Central Bank is expected to follow suit.
Despite ongoing economic uncertainty, equity markets continue to remain buoyant and the S&P 500 quickly roared back to all-time high territory over the quarter, albeit flattening over September as tech company shareholders took profits.
The pandemic has benefitted tech and pharmaceutical stocks and those retailers who have an established digital platform. Many long-standing companies are using the opportunity of the pandemic to restructure, and changes already in train before Covid 19 have been speeded up. We expect a different economy once this is over.
In the last couple of weeks optimism over an effective Vaccine has increased as several different pharmaceutical companies published promising results. A number are now seeking approval for use and we could see the start of mass vaccination in some countries this side of Christmas. The markets reacted strongly to this news, although we will have to wait and see how long it takes to roll out vaccination and how effective it is before we see any further relaxation of restrictions.
Our clear message is to stay invested, reviewing your circumstances as needed with your adviser.
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