Investment professionals have warned that the latest stimulus package delivered by Chancellor Rishi Sunak in order to limit economic impacts of the coronavirus “just isn’t enough” to “fill in the production chasm that is coming our way” over the coming months, and that extreme fiscal spending will only be “storing up problems further down the line”.
Some commentators are even calling for helicopter money, in a bid to "directly stimulate consumer demand".
This comes following Chancellor Sunak's announcement at 5pm yesterday (17 March 2020) that the UK government will roll out further emergency fiscal policy measures, including a £330bn government-backed guaranteed loan scheme for businesses, and a further £20bn of stimulus; including £10,000 grants for small businesses, business rates suspended for one year across all leisure sectors, and a Business Interruption Loan Scheme for smaller companies which will provide interest-free loans of up to £5m for the first three months.
The market's reaction to the ‘whatever it takes' stimulus package was muted, with the FTSE 100 index down approximately 4% after the first hour of trading. At time of writing (10.46am), the UK blue-chip index is down 5.2%.
Joe Healey, investment research analyst at The Share Centre, said this market reaction "reinforces our belief that the future dictation on markets relies wholly on the spread of the virus rather than the immediate fiscal and monetary responses".
He said: "Monetary policy seems to have lost its ‘je ne sais quoi' having limited impact on market direction, this is down to the fact that most central banks are now at extreme lows and have put all their eggs in one basket which has frightened investors further in the event of a recession."
Kevin Doran, chief investment officer at AJ Bell, agreed with Healey, pointing out that while Sunak's stimulus is "a powerful package of cash flow measures" that amount to assistance in the region of 15% of GDP, "what is missing is any real help to fill in the production chasm that is coming our way over the next few months".
"If this is ‘whatever it takes', I'm afraid ‘it just isn't enough'," he warned. "Why households are possibly receiving relief and corporations are getting low-cost loans is probably as much a function of politics as it is economics, but if the Chancellor was serious about being brave and bold and all those other adjectives he tossed about, the smart thing to do would be to give genuine debt relief to both businesses and households, with interest written off on debts for the entire six month period."
According to Doran's calculations, the total interest received by the banks on their loan books amounts to approximately £28bn per quarter.
"Wiping out the interest on those loans for six months would shave £56bn or so from the bank's profit and loss and tip the entire sector into the red for the year, but would amount to only 3% of all loans outstanding and a touch over 12% of the bank's risk capital," he reasoned. "As a percentage of GDP, it is a giveaway of around 3%, which, while we are at it, we should top up with government support for the five million people who pay rent instead of mortgages in the UK.
"And while you're at it, extend the holiday to all forms of consumer debt. Secured and unsecured. If you are going to do ‘whatever it takes', make sure that it's big, simple, effective and powerful."
Adam Vettese, an analyst at multi-asset firm eToro agreed, pointing out that while Sunak's stimulus package shows he is "willing to throw the kitchen sink at this to bolster the economy", the £330bn loan scheme will also have to be paid back by firms eventually, meaning the UK government "could be storing up problems further down the line".
"If people pick up on that, then it may well do nothing to prop up share prices in the short-to-medium term, which will be painful for pension savers and investors," he warned.
"Having said that, Sunak has promised unlimited further action to ensure the economy is protected, so it is wise to reserve judgement until we see what else the Chancellor has up his sleeve."
Edward Park, deputy CIO at Brooks Macdonald, agreed that repaying the "headline-grabbing" £330bn of government guarantees to finance bridging loans will be "easier said than done" for businesses that need to provide support to staff, pay rent and honour contracts with suppliers.
"The business rate holiday for the leisure, hospitality and retail sectors will be welcome but these areas of the economy have already been under strain due to shifts in consumer habits and weak UK consumer confidence so still require more," he said.
"The UK market reaction has been lacklustre as investors do not want the economic impact of coronavirus deferred by interest-free loans but want to see direct stimulus via helicopter money.
"Helicopter money was used by the Hong Kong government earlier in the virus outbreak and is now being suggested by the White House. These measures are designed to directly stimulate consumer demand or support corporate balance sheets by non-refundable government cash handouts."
Park added that most of the support implemented by governments and central banks so far has "an implementation lag" before it enters the economy, with interest rates taking between 18 and 24 months to "fully take hold".
"The highly accommodative monetary policy support that we have seen in the last two weeks will supercharge the recovery when it comes but will do little to mitigate corporate stress in the next few months," he explained. "As a result, markets may not find a real floor until fiscal stimulus directly tackles the economic impact of the next few months."
From a sentiment perspective, however, Chelsea Financial Services' Darius McDermott the Chancellor's statement could reassure people at an individual level and "hopefully lead to a period of calm - at least in society, if not in stockmarkets".
"Recession seems inevitable, but it could be temporary: we are being asked - or forced - to stay in, and consumption has fallen off a cliff," he said.
"Events like this do change behaviour. Long term I expect we will see huge shifts in some areas like supply chains and increased digitalisation and automation. But the immediate impact should be short term and, as soon as we are able to move freely again, consumption should pick up quickly and the bounce back could be just as dramatic."
McDermott added: "These are unprecedented times, warranting unprecedented measures. The government is now delivering and has promised to extend the help if required: it will do whatever it takes."
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