As COVID-19 infection rates have peaked in many parts of the world and as economies are approaching gradual re-opening and easing of lock-down measures, there is still significant risk that the economic and financial repercussions will last much longer with high unemployment, bankruptcies and even sovereign debt defaults, says Global Head of Macro, Fixed Income and Currency Research at Danske Bank, Thomas Harr.
“If economies open up over the coming month, we will see an economic rebound in the third quarter but there is the risk of new lock-downs and a risk that unemployment rates will remain high for a prolonged period, and that we will see as wave of bankruptcies, sovereign debt defaults as well a sharp drop in credit growth and increased savings rates, says Thomas Harr.
Only so much central banks can do
Extraordinary relief packages and stimuli measures from governments and central banks reduce the risk of a year-long downturn like the economic depression in much of the world during the 1930s, says Thomas Harr, but there is only so much central banks and policy makers can do.
“Governments and central banks cannot change the fact that people are not spending and companies are not producing. Even when economies open up, precautionary savings and investment uncertainty will imply that government debt levels and central banks’ balance sheets would be elevated for a long time, constraining long-term growth prospects. When countries reopen, there is a risk that the current liquidity crisis that companies face turns into a solvency crisis”, says Thomas Harr.