March 16, 2020 Guy Carson



The global economy is coming to a standstill. Entire countries are in lockdown (Italy, France, Spain) and trade routes have been halted (US/Europe). Large scale events have been postponed or cancelled (NBA, March Madness, Australian Formula One, Coachella). Big scale tourist attractions such as Disneyland have shut down.

The good news is the virus will pass. Human ingenuity will likely at some stage provide a vaccine and the world will move on. The trouble though lies in the short term. The economic impact is set to be significant and the world enters the crisis in a precarious position.

This precarious position is a function of the last thirty years of economic management by both central banks and governments. As globalisation accelerated and the manufacturing base of the world shifted from West to East, central banks cut interest rates.

Manufacturing was replaced by growth in consumption. Consumption was fuelled by debt and debt had to rise in order to fuel economic growth.

Household debt globally reached a tipping point in 2007/08 and a financial crisis ensued. The solution that followed was to reduce interest rates to zero and encourage further borrowing mainly by corporations and governments. The result was that overall debt levels continued to rise. To paraphrase Homer Simpson, it really was a case of debt being “the cause of and solution to all of life’s problems.”


Debt on its own doesn’t cause problems but it makes economies vulnerable to external shocks. Covid-19 is potentially one of the largest shocks imaginable. Central banks will react and once again cut interest rates down to zero and undertake quantitative easing. This obviously will not stop the virus and a short term slowdown (and most likely a recession) is secured. What they are hoping is that they can limit the financial damage and spur the recovery.

If too much debt becomes unserviceable then the slowdown will become severe. With limited capacity, unconventional policies will start to take shape. In Italy, the government has suspended all payments on mortgages whilst the country is in lockdown. In doing so the government has to simultaneously bail out the banks. Elsewhere in the US there is talk of bailing out airlines, cruise ship operators and shale oil and gas companies.

The actions of governments and central banks show this is no ordinary slowdown. The world is precariously positioned and a downturn could stay here for a while. Investors should be prepared for volatility in markets and should be looking for advisors who are active and are prepared to think differently about the world.

If you wish to discuss your investment portfolio and find out more about the advisors Southpac partners with please contact Guy Carson at

Disclaimer: The above contains the opinion of the author and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

Guy Carson

Guy Carson is Southpac's Investment Specialist. Guy manages Southpac’s external relationships with investment advisors and banking specialists in client relevant jurisdictions around the world. In addition he works with clients to find the most appropriate solutions for their circumstances.
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