Fiscal support has been forthcoming but at what cost?
We believe at present investors are quite correct in assuming that extensive fiscal support will be made available to prevent the healthcare crisis turning into an extended period of sub-par economic activity. Fortunately for the global economy, the exogenous nature of this shock has precluded any talk of moral hazard which has in turn allowed a very rapid use of government balance sheets to address some of the distributional consequences of measures to control the spread of coronavirus.
Furthermore, the re-start of quantitative easing by central banks means that increased issuance of government bonds is likely to be readily absorbed at current market yields.
The longer-term impact on government balance sheets should not however be underestimated. Our initial view that lockdowns were likely to be imposed for weeks rather than months was largely based on the unsustainability of the extraordinary costs to national governments of shuttering the economy and supporting furloughed workers.
For example, the UK’s OBR has projected that UK debt to GDP will rise to 95% by 2021, 17% above its pre-COVID-19 reference scenario. This also assumes the rapid return to trend levels of GDP growth by the end of 2020. The reduction in interest rate expectations and the lingering concerns in terms of the sustainability of the debt burdens of developed nations has lent increasing support to the gold price during 2020 to date.
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