Covid-19 and the Mid-Term British Economy

Covid-19 looks like something we will not overcome quickly, with some form of social distancing required until much of the population can be immunised. This leaves potential for disruption to supply chains and diminished consumption to continue and become the first aspect of a recession (unless mass testing gets workers active quickly); in the longer term it is probably reasonable to assume inflation. With inflation we will see a decrease in demand for corporate and government bonds as portfolios will become more equity heavy, this will make it difficult for governments and large firms to raise capital.

The second aspect of recession may be a crisis of debt, whilst the Bank of England avoids bond markets for the moment using its ‘Ways and Means Facility’ this is not a long-term solution as Guilts must be issued to match this increased spending. At present short-term interest rates are low and the sensible prediction is that long term interest rates will be lower, combined with inflation we have low bond yields in the mid-term. So, with Covid-19 expenses to meet as well as the demands of a recession may lead to a very unstable and untenable situation. Usually the issue of inflation can be addressed using monetary policy however the addiction to low interest rates and the ‘Japanification Phenomena’ suggests that the bulk of the response to an economic crisis will be a challenged fiscal response rather than monetary policy. 

All of this doom and gloom and not a single mention of Brexit...