UBS: The fear factor

Written by: UBS Posted: 01/05/2020

BL67_UBS Donovan_PaulBL67_UBS_Marc_NightingaleIn 1933, with the US’s Great Depression at its peak, Franklin D Roosevelt’s inaugural speech included the famous words: “The only thing we have to fear is... fear itself – nameless, unreasoning, unjustified terror which paralyses needed efforts to convert retreat into advance”. Paul Donovan (pictured far right), Chief Economist for UBS Wealth Management, and Marc Nightingale, Director at UBS Jersey, discuss the current reaction to coronavirus and speculate about the potential long-term effects


The big economic impact of the virus comes not from the virus itself, which may not have a significant direct economic impact, but from fear. 

Fear changes the behaviour of consumers (cancelling flights and hotel reservations), companies (encouraging employees to work from home) and policymakers (for example, the US Federal Reserve reducing interest rates).

However, one thing we have learned from major events like this in the past is that the market consensus and economic forecasters always underestimate the resilience of humans and the speed and strength of the subsequent recovery. 

After the Fukushima Daiichi nuclear disaster in Japan in 2011, the immediate reaction was very negative, speculating that power would be out for two years and that Japan’s third-quarter growth would be 1.6%. 

In fact, the growth was 10.4% annualised, due in part to people adapting. And there were no blackouts; instead people turned off their air-conditioning systems and wore shorts to work. 

Fear is potentially irrational and causes big problems for economic models that don’t easily take irrationality into account. This makes it difficult, at least for the next quarter or two, to accurately predict the ongoing economic impact. 

Without a doubt, however, we are currently experiencing both a simultaneous supply and demand shock. 

The supply shock is the less important of the two, seen by the supply chain disruption experienced in China, which has now returned to normal and caused only temporary problems. 

The bigger shock is from demand, with people changing their behaviours, which will clearly vary from country to country. 

Reduced demand for services doesn’t really bounce back and can have longer term effects on the economy. For example, if someone chooses not to travel to Jersey this year due to the virus, they won’t take two holidays the following year to make up for it. 

BL67_shutterstock_virusOn the reverse side, however, reduced travel can lead to higher disposable income that will be spent elsewhere.

So, we currently have a situation with relative demand shock as opposed to complete demand shock. How significant the demand shifts will depend on the spread of the virus and whether the fear factor continues to increase.

In the long term, we believe there are some key areas that may also be influenced:

• Online retail – when a consumer starts buying online, they are less likely to go back to bricks and mortar. The current increase in online buying driven by a desire to reduce social interaction may well lead to a more rapid growth in the ongoing trend away from the high street.

• Remote and flexible working – we have previously observed that an external shock is needed to persuade people that flexible working actually does work. During the 2012 London Olympic Games, the government encouraged people to work from home to reduce the strain on the transport system. Since 2012, the number of passengers travelling on the underground has grown distinctly more slowly than the economy of London. Coronavirus may do this for other countries and we could start to see changing working patterns, accelerating the trend already in place.

• Localisation – we were already expecting to see supply chains become shorter and simpler as people localised their production. US President Trump’s trade pact has possibly been one accelerant to this, and coronavirus could well be another.

• Inventory – after 2008, there was a significant reduction in inventory levels and small businesses became notably more efficient. The impact of coronavirus could result in many businesses feeling the need to move away from ‘just in time’ inventory plans to build in contingency or insurance inventory.

We don’t wish to downplay the effects of the virus, especially on those who have been or are going to be directly affected.

However, we would advise against panic as whatever the outcome of the virus, and for however long it lasts, we will see people adapting. After that, the long-term effects will become apparent. 

Find out more
If you would like to obtain a clear and experienced view on how the current situation may affect your financial goals, please contact:
Marc Nightingale, Client Advisor,
UBS AG, Jersey Branch
1, IFC, St Helier, Jersey JE2 3BX
Tel: 01534 701173

© UBS AG, Jersey Branch, is authorised and regulated by the Jersey Financial Services Commission for the conduct of banking, funds and investment business.

• This advertising feature was first published in the April/May 2020 edition of Businesslife magazine

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