As former UK Prime Minister Harold Wilson famously observed, “a week is a long time in politics” and it appears to be an even lengthier period when it comes to the impact of Covid-19 and the various measures in place to manage the pandemic.

Further to our summary article, ‘Coping with Covid-19’ this piece provides further insights and analysis from the Deutsche Bank Research teams around the world, ranging from wider macro-economic analysis to specific country and business sector insights.

"Our human and physical capital, our technology, and our institutions are going to come through this fairly unscathed"
Oliver Harvey, Macro Strategist, Robin Winckler, Strategist, Deutsche Bank Research

Bold action from central banks – such as the ECB’s €750m bond buying programme covering both sovereign and corporate debt – has been the monetary policy response. But with interest rates already at historically low levels, that particular tool in the armoury is of limited effectiveness. The problem, noted Deutsche Bank’s market strategists Oliver Harvey and Robin Winckler on 20 March, is not one of demand shock but rather supply shock that is now spilling over into demand.

“Consumers did not initially stay away from shops and restaurants because they were worried about their future economic prospects, but because governments told them to stay at home,” they reflect. “Holidays are not being cancelled to shore up household finances but because countries have closed their borders. Workers have not been furloughed from factories because of insufficient orders, but because employers are worried about the risk of spreading disease.”

The point is that the mass unemployment caused by such measures will result in a dramatic drop in aggregate demand. At the same time the fiscal responses of the various stimulus packages coming from governments could, they note, drive up inflation, while not being particularly effective. Vast economic stimulus is unlikely to boost demand in these sectors as long as the pandemic ravages, Harvey and Winkler reflect.

They continue, “If the government tries to keep spending at levels before lockdowns began, while at the same time keeping lockdowns in place, there will be simply more money chasing after significantly fewer goods and services. The result of this will be inflation, and a lot of it.”

But overall, they don’t believe the risk of “runaway inflation that would warrant a flight to pure inflation hedges like gold” to be very high. And despite comparisons with wartime conditions, they conclude “this pandemic is going to have far less of a dent on the productive potential of the economy: our human and physical capital, our technology, and our institutions are going to come through this fairly unscathed”.

"Fiscal policy is trying to deal with a solvency issue"
Torsten Slok, Chief Economist of Deutsche Bank Securities

However, many firms and households will not be able to navigate the crisis – the end of which seems to be a light further down the tunnel each time an economy releases an ever-expanding case and death rate list – in the absence of government support. As Torsten Slok, Chief Economist of Deutsche Bank Securities puts it in his socially distanced Podzept telephone podcast with colleague Matt Barnard of 25 March, “Fiscal policy is trying to deal with a solvency issue, making sure that households are solvent and can stay afloat and build a bridge to the other side of the virus”.

In its briefing, “The economic emergency: experimental treatment”, published 21 March, The Economist shares its own analysis that “40% of consumer spending in advanced economies is vulnerable to people shunning social situations. Firms in leisure and hospitality are especially rattled”.

The article goes on to detail regional measures to avert widespread unemployment and SME sector collapse. It also points out that rich countries, both in human and economic terms, are in a relatively fortunate position with strong healthcare systems, “and investors who, for now, remain willing to lend to them on cheap terms”. Poorer nations have far less certain prospects, with less room to borrow and job markets containing a large number of informal workers ineligible for protection.

Deutsche Bank’s Barnard notes that there is huge uncertainty about how long companies can weather low revenues and high costs – resulting in stock market falls. While merchandise-based businesses can build up inventory going into a recession, the service industry cannot do likewise, and an economy based on service revenues will take longer to recover. This can be seen in the Covid-19 ‘heat map’ below.

While most experts agree the virus will eventually fade and the world rally from the temporary external shock, certainty has lessened that there will be an economic rebound in the second half of 2020. Not only that, but because of where different regions are in their various points of the pandemic “cycle”, the recovery is very difficult to predict. “Any optimistic vision needs to believe in some kind of ‘V’, and that is next to impossible when the real economy is only starting the downside of the V at an historic pace of descent,” reflects Alan Ruskin, Deutsche Bank’s Co-head of FX Strategy. “We are too soon into social distancing to start seeing its end, which is the core metric for risk recovery.”

Postponement rather than cancellation seems to be the theme of the day, with firms and households hunkering down in their regional lockdowns while preparing for recovery. With the announcement that the 2020 Tokyo Olympics will not be cancelled but rather moved to 2021 – a move unprecedented in peacetime – the collective spirit to survive and thrive seems alive and well.

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