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Chief economist: Light at the end of the tunnel

The financial consequences of the corona crisis are now worse than the worst weeks of the financial crisis. But with stimuli from governments and central banks and a declining growth rate for hospitalised and dead in Italy, financial markets are now seeing light at the end of the tunnel.

As coronavirus, Covid-19, has thrown the world into a new, unprecedented crisis with great uncertainty about the disease as well as the epidemiological and economic measures taken to counter it, politicians, authorities and experts are tasked with making difficult decisions with little recourse to pre-existing evidence or data. 

But for chief economist Las Olsen and his colleagues at Danske Bank, every day offers new data and information that little by little make them wiser about the crisis and its extent and character. 

“We have started to get some more actual data on how the economy is affected by the coronavirus and the measures taken to counter it. As expected, it’s been a very hard blow, in Denmark and in the world around us”, says Las Olsen.

Image: Empty Grand Central Terminal, New York, USA during the corona crisis, Unsplash: Alec Favale

European companies hit hard
One set of data concerns business confidence among European companies, i.e. how these companies themselves assess the economic outlook. That figure is published every month, and the figure for March differs markedly from the months before, says Las Olsen:

“Although many places did not start to shut-down before the latter half of March, the numbers for the entire month indicate a two percent decline in gross domestic product for the entire first quarter. This is in the same order of magnitude as the worst time of the financial crisis, namely the first quarter of 2009. And we can expect the figure to fall even more in the second quarter. The numbers show that industry activity has been hurt but the service sector has completely collapsed with the biggest decline ever”. 

Large increase in unemployment
In the United States, the spread of the virus and the closing-down of society has happened later than in Europe but here too - as elsewhere in the world - the economic damage is already exceeding the levels seen during the financial crisis.

"In the United States last week, there were 3.3 million newly registered unemployed - five times more than the worst week of 2009. Japan has postponed the Olympics and, according to the government, is experiencing economic damage similar to the financial crisis and the 2011 earthquake combined, says Las Olsen.

It's unsurprising that it goes downhill very quickly when you close-down a large part of society. But we believe and hope that it can also go up again quickly when opening up again

Las Olsen

Chief Economist, Danske Bank

In Denmark, unemployment registrations since the press conference on 11 March announcing the partial shutdown of society is now some 30,000 above normal levels. This corresponds to an increase of one percentage point in unemployment. Turnover for retail clothing has halved, and for entertainment, restaurants and transport it has more or less collapsed. 

“It's unsurprising that it goes downhill very quickly when you close-down a large part of society. But we believe and hope that it can also go up again quickly when opening up again. The chance of this has increased because more and more is being done to keep up companies, jobs and overall demand, including a large stimuli package of easing and credits in Germany, and a very large package of income transfers and tax breaks in the US”, says Las Olsen.

Light at the end of the tunnel
The European Central Bank (ECB) has also announced a package that could eventually prove substantial, and which, among other things, allows the bank to buy up corporate bonds directly, which the bank has then moved on to actually do. 

According to Las Olsen, there is still a risk that the economic crisis will be prolonged, but the many relief packages and support measures aim precisely at limiting the spread of economic contagion as much as possible in order to prevent a prolonged downturn. 

“The many support and stimuli measures strongly contribute to the rebound on the financial markets both in terms of stocks and for example Danish mortgage bonds. At the same time, we see that the growth rate of hospitalised and dead in Italy, among other countries, has begun to decline, although the numbers remain high. In the financial markets, this is seen as light at the end of the tunnel, although it is too early to declare the health crisis over, says Las Olsen.

Research from our economists

If you are interested in hearing more about how the current situation affects the financial markets and the world economy, you can find much of Danske Research's articles available for download.