While the market has debated whether we are facing a ‘V’ or ‘W’-shaped recovery, we believe a U-bend shaped recovery is more likely.
There are a few reasons why we think economies will not return in two years’ time to the same pattern in which they were before the pandemic. This is about more than the Covid-19 virus alone, and has its roots in the leverage-distorted system which was in place prior to the pandemic, which helped to create untenable wealth inequality which, in turn, fuelled populism and a reversal of the globalisation trend.
As always with a crisis, there are reasons why previous trends are accelerated and new trends emerge. The global financial crisis was a good example: economies weakened and then recovered, political parties changed, and some other pre-existing trends accelerated while new ones came into force. The rise of social media, smartphones and technology continued after the crisis, probably helped in part by the low cost of finance and the abundant availability of venture capital. The banking system, however, had to restructure by shrinking balance sheets and reducing staff.
Significant economic turmoil always leads to a change in political parties as new leaders suggest they can do better than their predecessors, and a disillusioned electorate looks for change. The long-term trend of globalisation was also a casualty of the global financial crisis; the current calls to bring jobs home and rising trade tensions are a symptom of this. Against this backdrop, the recent pattern of US unemployment claims is a good example of the view that economic data (having bounced from the lows of the March/April lockdown periods) will take a while to get back to pre-crisis levels.
Paul Brain, head of fixed income, Newton Investment Management.