How quickly can we get back to normal?

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Personal Investing

19 January 2021

We examine how economies are coping against the backdrop of the global pandemic.

We’re all familiar with the term scarring when, in the event of an accident, a serious wound causes lasting damage to our skin. But what do we mean by economic scarring?

This is a term that is assuming greater importance as the pandemic continues to inflict more economic pain on our economies. The question many investors are asking is how quickly (or not) can economies return to normal?

In essence, after a shock of this size, economies don’t typically return to what life was like before. Instead, they tend to suffer long-lasting damage because:

  • Households try to restore their finances during times of uncertainty as they become more cautious about life
  • Companies have to rethink costs after a slowdown in economic activity
  • Banks become more cautious about lending to firms
  • Some of the workforce has to undergo retraining – for example, how quickly can unemployed shop assistants retrain as delivery drivers?
  • Governments must often raise taxes following periods of economic stress to make up for lost income

How are we doing so far?

So, in pandemic speak, just how is the patient (the economy) and how are doctors (governments and central bankers) helping global economies to recover this time round?

For the moment, the patient isn’t suffering as badly as might otherwise have been the case because of the extraordinary lengths to which governments and others are going to provide support. In the UK and Europe, households have been supported by generous job furlough schemes. In the US, soon-to-be President Joe Biden is proposing yet another unprecedented relief package of measures to help companies and households alike.

The effects of these measures are having mixed results. For example, while US banks conclude that they are making it harder for customers to borrow, this is challenged by reports of buoyant US housing activity. Elsewhere, other indicators like car and heavy truck sales are holding up better than expected, amid tighter credit conditions and weaker consumer confidence.

It would seem, therefore, that we should give praise to policymakers for applying treatment as quickly and aggressively as they have done. It looks like we may see mild, rather than severe, scarring – particularly as recent vaccine news should encourage everyone to hold on tight as there’s light at the end of the tunnel.

A key question is how much will our society change in a post-vaccine world? While some areas might see pent-up demand (a much-needed holiday perhaps?) we question whether the pandemic has accelerated the structural decline in many businesses. For example, to what extent has online shopping taken the place of the high street? Now that we are all familiar with making conference calls, is there any need to commute regularly?

This change in the make-up of the economy would leave banks with increased bad debts as some businesses go under. As a result, our view remains that central banks and governments must be careful not to withdraw support too quickly.

Remember, the value of any investment is not guaranteed. The value of investments and any income received from can go down as well as up and you may not get back as much as you had originally invested.

Risk warning

Please remember the value of your investment and any income from it may fall as well as rise and is not guaranteed. You may get back less than you invest.

Please note the information, data and any references in this article were accurate at the time of writing. Please check the date of the content if you’re looking for up to date investment commentary or tax-year related information.

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