- Marcus Brookes
- 06 May 2020
- 5 mins reading time
There are three potential scenarios for the economy
If we keep doing the right things, we could see a sharp recovery in 2021
On Monday 4 May, I joined my colleagues Steve Mann and David Ryder at a live online event discussing our investment perspective on what’s happened so far this year, and how we see the next year or two. You can view the event on demand by clicking here. In the meantime, I’d like to take this opportunity to summarise my views on the economic outlook.
The human factor
First and foremost, the pandemic has inflicted a terrible human tragedy. The importance of the financial and investment aspects pale by comparison. More than 250,000 people worldwide have lost their lives so far.
This is why the priority is, and must continue to be, human health. With this in mind, it’s pleasing to see unprecedented financial resources being released to support healthcare systems at home and abroad.
It’s no surprise, then, that the first phase of dealing with the pandemic can be summed up as survival tactics. This phase has entailed social distancing and the provision of substantial resources for healthcare services, on the one hand. On the other, there has been financial support for homes and businesses. This is designed to make sure that there will be ready demand and supply of what people need and want after the lockdown.
The second phase relates to what sort of recovery we can expect.
Shape of the recovery
We’ve seen a very sharp drop in economic activity and, as a result, in the share prices of most companies. The FTSE All Share Index, for example, fell by more than 35% between the beginning of the year and its low point on 23 March. It has since staged a partial recovery but remains more than 25% below its price at the beginning of the year.
The question now is, how long will it take for economic activity to recover and bring asset prices back up. There are three possible outcomes:
Relatively quick recovery giving a V-shaped pattern in economic growth and asset prices (i.e. a sharp fall followed by a sharp rise)
A slow recovery giving a U-shaped pattern
A second bout of contagion leading to a W-shaped pattern.
V for victory?
The situation we are in is unprecedented, so any predictions have to be taken with caution and on the understanding that new information will emerge every day.
With that qualification in mind, I’m cautiously optimistic of our experiencing a V-shaped recovery. There are two main reasons for this.
Firstly, contagion rates have steadied and are, in general, no longer increasing at the alarming rates of recent weeks. This allows us to start easing the lockdown restrictions and carefully crank economic activity back up.
Secondly, policymakers in governments and central banks acted far more quickly this time around than they did in 2008 during the financial crisis. Very favourable borrowing rates, government-supported furlough programmes and massive spending packages have all been instigated within weeks as opposed to months or even years.
V for vigilance!
But here’s the challenge as I see it. We need to be data-driven and patient when relaxing the lockdown measures. The more vigilant we are in this respect, the better the chances of our avoiding a second wave of contagion before a treatment can be found, distributed and administered.
I suspect that, as well as health management, the data will show the need for further financial husbandry. In other words, governments and central banks will need to maintain or possibly increase the financial support that they are providing.
We are expecting the first part of the “V” to bring a 7% drop in the size of the UK economy in 2020. But if a healthy combination of patience and financial support are maintained, we could be looking at an economic expansion of around 10% in 2021. But please note my use of the word “if”. It can be achieved, but we need to keep doing the right things.
These are the views of Marcus Brookes, Chief Investment Officer of Schroders Personal Wealth, as at the time of publishing.
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