This is not another GFC

Current market conditions are very difficult but not a repeat of the Global Financial Crisis (GFC). With monetary policy nearing its limits, fiscal policy will be key to economic recovery.

Quilla Consulting’s Director, Mathew Jeremy, said “The GFC was a financial shock in the US which spread to the global real economy. Coronavirus is a health shock emanating from China and spreading through the real economy.”

Speaking at yesterdays’ Market and Portfolio update webinar hosted by Quilla, Jeremy says the implications for the global financial system are different to the GFC.

“The liquidity pressures we have seen so far are much less than in the GFC. Central banks learnt the lesson of supplying lots of liquidity in the GFC and they are applying that lesson now.”

Despite this, markets are concerned that with interest rates so low monetary policy may not be able to do enough to fend off a global recession. This means governments must act on fiscal policy.

“We think there will be a massive fiscal response because something else has to step up to the plate,” said Jeremy. “The fiscal response will be aggressive and we will get it before we get the all clear on the pandemic. “

The timeliness of the fiscal response will be affected by two things: the pace of new infections around the world and the weakness of the economic data. Both of these will get worse before they get better and drive governments to act.

“The pace of infections has a way to go with more bad news to come. If we use the infection data from China, it might be two to three months before we can see a peak in the global infection rate.”

“Considering the uncertainty, we think we have got a couple of months of bad data before things get better, but it’s not another GFC. Pandemics end as their life-cycle runs its course, and then things can start getting back to normal relatively quickly.”