Governments should implement shutdowns of specific sectors instead of ordering a complete lockdown, says Stefan Gerlach, chief economist at EFG Bank in Zurich, in an interview. Overall, chances are that the economy will bounce back quickly, but only partially.
Stefan Gerlach, the Swiss government has just revised its growth forecast. Is the worst in terms of economic performance behind us?
The temperature seems not the same in all parts of hell. Many governments have revised their forecasts from awful to merely very bad. 2020 won’t come across as a great year by any measure.
Do you expect a further improvement or rather a slowdown to the recovery?
It very much depends on whether another lockdown will be needed. Lockdowns are blunt tools that have a dramatic impact throughout the economy. What we need is a more tailored approach, whereby you shut down specific sectors that contribute disproportionally to the spread of the disease. This would allow us to keep other parts of the economy open.
«The sad fact is that there is too little social distancing, including here in Switzerland»
But if the rate of contagion gets too high, some kind of emergency brake in the shape of a complete lockdown might be needed. This would be very unfortunate.
The sad fact is that there is too little social distancing, including here in Switzerland.
How exactly is a lockdown hurting the economy? And what about the effects on banking?
The risk is, if the pandemic continues for much longer, that the slowdown in sectors such as tourism will feed through to the whole economy. That may result in rising bankruptcies and non-performing loans. These are not rapid processes, but if the pandemic continues, it will become an issue at some stage.
Is there a risk that a second wave will be more detrimental to Eurozone growth than the first wave, a key factor for the Swiss recovery?
Not necessarily. It all depends on which countries are affected most. Germany has done reasonably well so far.
«The full recovery may take much longer»
One risk is that was Italy to have a dramatic increase in cases, that could trigger rising bond spreads, potentially cause a sharp and sudden move in the Swiss franc. That would impact on the Swiss recovery. But this is not the most likely outcome.
What will the long-term impact of the crisis be?
The bulk of the economy will recover, but some sectors may only do so very gradually. Thus, the economy may bounce back quickly, but only partially. The full recovery may take much longer.
Looking at the Swiss data on infections in May and June, I thought a resolution of the pandemic was in sight and that the economy might be back to normal in the autumn.
Well, not so. With social distancing not being adhered to, the disease is quick to recover and that prolongs the epidemic. So, it looks like a longer-term process, I’m afraid.
Wouldn’t you think that the outlook for a longer-term problem should impact the valuation of stocks?
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