Although countries with a high number of Covid-19 cases and those relying heavily on tourism, trade and exports are being hugely affected by the pandemic, its’ important to remember this is a global crisis affecting countries worldwide. Analysts are predicting that the global economy is estimated to shrink by over 5% this year, with emerging markets and the euro area potentially suffering the most as they struggle to return to economic prosperity.
The main method to support economies are stimulus packages from central banks. Some of their main responsibilities include maximizing employment, stabilising prices, and monitoring interest rates. Two main strategies to adhere to these responsibilities are Open Market Operations and Quantitative Easing.
Open Market Operations involve the buying and selling of debt securities, and Quantitative easing is more complex and involves the use of reducing rates to increase borrowing and stimulate the flow of money. As you can see from the below chart, the amount of securities purchased has risen exponentially since the middle of March in the US and at the same time various rates have decreased to nearly 0%.
Lending rates and Security Purchases
Clearly the Federal reserve in the US is buying masses of debt securities to release cash into the economy and many other countries are following suit. As you can see from the chart below, the federal reserve’s balance sheet went from $4.173 trillion to $7.094 trillion since the beginning of the year which is nearly a 70% increase in debt.
Federal Reserve Balance Sheet Trends
Even though government funding has reached record highs, many companies are still struggling as a result of reduced cash flow. Naturally, this is creating a more competitive environment for individuals looking for jobs and reduced competition for large businesses that could be prospecting acquisitions of smaller struggling businesses for a fraction of their worth in normal conditions.
The Impact on Savings
One of the consequences of the current situation has interestingly been a surge in savings. Many individuals are now keeping over 33% of their disposable income as shown by the below chart, either aiming to build up an emergency fund or simply unable to spend as much due to the reduction of leisure activities available.
Increases in Savings as a % of Disposable Income
Source: Bureau of economic analysis
This reduction in expenditure means that there is also a reduction in the flow of money to businesses from consumer spending. Many retail stores are temporarily closed and promoting online sales to desperately avoid this slow period turning into permanent closures. A reduced willingness to spend reflects a halt in the economy and reduced consumer confidence. As certainty increases, it is anticipated that spending will also rapidly increase again.
Opportunities – Mortgage Financing and Refinancing
The Bank of England (BoE) base rate sets the level of interest all other banks charge borrowers. The global contraction has forced the UK Government to take drastic steps and they have slashed the base to 0.1%, warning that the pandemic will result in a “sharp and large” economic shock. The base rate is currently 0.1%!
This rate has a direct impact on what you pay for borrowing money and what banks pay you for saving money with them. Arguably, there are better places to place capital rather than holding saving in a bank if you are looking for growth rather than security but regardless of this, borrowing has never been cheaper.
Now is a great time to check your mortgage rate and look into refinancing options!
Lending is complex and financial institutions are conducting more sophisticated due diligence, however, there Is a good chance that you can save more through borrowing at a cheaper rate. Please let us know if you would like to have a conversation with one of our mortgage specialists to see if we can help.