UBS Head of Global Wealth Management Tom Naratil discusses the U.S. economy amid the coronavirus outbreak.
Over the past week, the U.S. government has enacted measures that mark an important step forward in tackling the coronavirus crisis, including its economic impact.
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While they are welcome, those measures are also unlikely to be sufficient in the medium to longer term. The virus is a bigger challenge than most predicted. It is not a textbook disaster or financial crisis.
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It is a pandemic that requires targeted steps for those most affected – individuals and their loved ones who will suffer from the disease and need our empathy and support.
It also requires a timely ‘shock and awe’ fiscal response worth perhaps greater than one trillion dollars – or a meaningful single-digit percentage of US GDP. Anything less may not be effective in mitigating the economic headwinds posed by the virus and keeping the US economy on a positive longer-term trajectory.
In particular, muscular measures are needed to ensure the coronavirus does not derail economic confidence.
According to our UBS survey of roughly 1,900 US investors and 700 US business owners, conducted on March 7-13, respondents’ short-term optimism is subdued due to the coronavirus, but longer-term sentiment has held up relatively well.
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Seventy-seven percent of investors still describe their longer-term outlook for the US economy as optimistic. By contrast, 39 percent are optimistic on the short-term outlook, versus 68 percent in our prior survey between December 26 and January 7. Thirty-three percent of business owners would increase hiring if the outbreak subsides, versus 14 percent who would decrease. That would change to 26 percent who would hire more if the outbreak grows, versus 24 percent who would downsize.
These longer-term figures are also important in the short term because they mean investors and businesses will be more likely to invest, hire, and expand operations in anticipation of a future recovery.
To maintain that economic confidence, an additional mix of tax cuts and other incentives will likely be needed, both for companies and for individuals. The White House and Treasury are already acknowledging the urgency with new fiscal measures proposed yesterday.
A meaningful response must also take into account the unprecedented nature of the coronavirus. That means concentrating more on the non-traditional infrastructure or ‘infrastructure 2.0’ that is required to counteract it.
Fiscal measures should include financial assistance for a broad range of related initiatives, but with a greater focus on less traditional areas like health care, education, and technology, which will continue to come under further strain. Pandemic-resilient infrastructure will be critical in preserving both the short-term and long-term safety of the population.
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According to our most recent survey, U.S. investors agree. Forty-nine percent support spending on targeted infrastructure like medical facilities as part of a policy response, versus 29 percent who approve of spending on general infrastructure such as transportation.
This rises to 68 percent in favor of increasing hospital and care capacity and 55 percent in the case of telemedicine.
Overlaps between potential stimulus and needed infrastructure are multiplying. America’s health system needs funding for coronavirus testing and containment, as well as for medical facilities and intensive care units.
Schools are embarking on the biggest distance learning experiment in U.S. history as students switch to studying from home. Many American workers are trying to do their jobs remotely but may not have the right technological set-up to do so, especially in the case of smaller businesses and rural and tribal areas.
In many cases, remedies exist. However, individuals and organizations need more funding to produce, scale, and implement them.
Intensive care units require more beds and space – if necessary, through portable facilities.
Telemedicine should also help with testing and containment. Distance learning infrastructure is available through Google and other providers – but, local school districts and universities need guidance rolling it out across large populations.
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American workers and companies with substandard internet access and Wi-Fi may need additional resources to fix them.
In all these areas, expanding high-speed broadband networks will further ease access to digital solutions and level the technological “have/have-not” divide.
Such infrastructure wouldn’t only be useful on a one-off basis. It would help create more capacity, flexibility and equality in American health care and education that will benefit the economy in the long term.
It would also help American workplaces adapt to the challenges of the digital age and take advantage of possibilities opened up by remote working.
Despite the importance of infrastructure 2.0, policymakers also shouldn’t overlook the gaps present in the traditional variety.
The world’s airline infrastructure is facing harsh financial conditions as travel declines and flights are canceled. The federal government should be ready to work with the US airline industry as well as other sectors facing extreme hurdles such as energy. Municipalities may experience added stress due to the virus, and funding for long-term infrastructure projects shouldn’t vanish as a result.
Passage of a significant infrastructure bill would also give business owners a major confidence boost and spur plans to increase hiring and expand investments.
Smaller measures would lack that punching power. It would also give business owners and Americans generally – who by large margins favor infrastructure upgrades all over the country – inspiration that Washington can get results on a major bipartisan initiative at a time of crisis.
This would also support investors’ and business owners’ longer-term sentiment, continued job growth from small and medium enterprises, and sustainable growth in the US economy.
Another reason why robust fiscal measures are so important is that monetary policy has less ability to mitigate the economic fallout. The Federal Reserve has a formidable crisis playbook and can use this to address the significant effects on markets and financial activity.
It has already moved decisively to cut rates, initiate asset purchases, and inject greater liquidity into the financial system. However, unlike in 2008, the financial sector is less central to the turmoil. Importantly, after announcing significant monetary policy moves on March 15, Chairman Jerome Powell also observed that the Fed does not have the tools to reach individuals and small businesses directly.
Following the recent plunge in markets and other factors, U.S. lawmakers appear determined to treat coronavirus as a crisis and structure policies accordingly. That is necessary and welcome progress.
Meanwhile, the crisis continues in ways that are difficult to project. For its next policy iteration, the U.S. government should consider even bigger and more innovative initiatives like infrastructure 2.0 that are more tailored to the full range of issues at hand.
Tom Naratil is President of UBS Americas and Co-President of UBS Global Wealth Management.
