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Deloitte: “extraordinary” measures but many questions

1 April 2020: Deloitte’s third weekly COVID-19 webinar focussed on the ongoing economic impact of coronavirus, and what effect emergency measures were having to mitigate this.

Jodi Birkett, lead partner in Deloitte’s Financial Advisory team, dubbed the government’s £350bn emergency rescue package and £7bn investment in the welfare system as “extraordinary”.

While the measures provided “reassurance to a jittery market” and the “direction of travel is positive”, businesses still have many unanswered questions in relations to these schemes, commented Birkett.

Whilst establishing dialogue with stakeholders to close any gaps left by the measures, the government is asking businesses to be resourceful “where their needs are immediate, and the implementation may take a bit longer”.

There was also a requirement, said Birkett, for such packages to be “funding of last, not first, resort” when other commercial options, such as asset-based lending as a route to liquidity or even bridge financing, had been explored.

However, she recognised that businesses are currently “time-poor”, managing the biggest economic challenge of a generation and adopting new ways of working alongside significant health and wellbeing considerations.

Policymaker action impact on market 

Recent actions by the ECB and the FED had finally seen the easing of pressure in some parts of the financial system, noted economist Maximilien Lambertson, with spreads over Italian and German bond yields “starting to rise quite sharply”. However, these had since gone down again over the past week.

By tracking the performance of the S&P 500 during the 2008 global financial crisis versus the current period, Lambertson found that the performance was on a similar trajectory as investors sell equities and search for liquidity and safety. But the S&P did rise on both Tuesday and Wednesday last week, the first back-to-back daily rise for a month. But this was not primarily due to monetary policy but the realisation that Congress had passed a large stimulus package.

Meanwhile in the “real economy”, sectors that rely on “in-person” activity had seen a collapse in demand due to the imposition of distancing measures. 
The large supply shock caused has led to factories and ports closing and hit supply chains in the UK and Europe in sectors such as car manufacturing which in turn has driven a sharp spike in unemployment.

Unemployment benefit searches on Google were dramatically up in the UK – and at a higher level than during the 2008 financial crisis, while the US Labour Department released unemployment data revealing a record high of 3.3 million claims.

Policymakers have reacted by announcing massive stimulus packages, but “unlike previous crises where the policy goal is to support demand, the focus now is on preserving capacity, helping business and individuals”. 

“The idea is to calm stress in financial markets while keeping households solvent and employer/worker linkages alive until we can fully lift restrictions on mobility.” 
It was difficult to judge the adequacy of the response until the size of the shock was truly known, said Lambertson. Policy can then be fine-tuned “as we better understand how long this will be lasting for”.

In terms of when the economy would “bounce back”, close monitoring of data from those Asian economies that had “successfully contained the outbreak so far”, indicated that Chinese consumer sentiment had already rebounded in March

“Other indicators like road congestion and coal consumption are also recovering to normal levels” but it was “important to note that China still maintains social distancing requirements that are stricter than many western countries currently have in place”. 

Europe and the US were still at a point where they were still assessing the full impact of the virus, while “new cases seem to have peaked in Italy recently, but other European countries lag well behind”.

In a positive note to pluck from the gloom, clinical leader Jane Halpin stated that the social isolation measures put into place by many of the world’s leading economies had now been proven to work in a’ real world’ scenario in terms of slowing down the rates of infection, and were therefore worth pursuing.

For the latest news and guidance on the ongoing impact of COVID-19 for businesses and accountants, visit ICAEW’s dedicated coronavirus hub.