When will the economy recover?

  • 18 June 2020
  • 10 mins reading time
  • Our analysis suggests that the global economy should start to recover later this year but will take most of 2021 to get back up to speed

  • In the meantime, we need a careful relaxation of virus-related restrictions as well as continued financial support from governments and central banks

  • Investors will have to remain patient as the Covid-19 situation develops and for asset price turbulence to ease

How bad could the economy get?

The chart below, from our investment partners at Schroders, tells the story. We expect more negative economic data to be reported as the effects of the lockdown take their toll. The net effect of this for 2020 seems likely to be a substantial contraction in the size of the global economy of around 5.4%.

To put that into context, the total value of global economic output each year was around $130 trillion in 2017. The total output from the UK was less than $3 trillion, so a 5.4% drop is the equivalent of losing twice the annual output of the UK.

The economic outlook for the UK

The UK economy has been more severely hit by the pandemic than most. The national death rate has been high with only the US and Brazil recording more deaths, but they both have much larger populations. As a result, the UK’s lockdown is set to be in place for longer than most of its western counterparts which, in turn, puts more pressure on domestic economic growth.

The UK economy is facing the added complication of negotiating its post-Brexit relationship with the European Union. This added uncertainty has made investors reluctant to commit money until the situation becomes clearer. As a result of all of these factors, we expect the UK economy to shrink by around 8.5% in 2020.

It’s impossible to predict how the negotiations will develop, but it’s in the interests of both parties to negotiate some sort of trade deal. With that in mind, the chances are that some sort of agreement seems likely.

So the speed at which the economy recovers will depend on how quickly things can return to normal.

U-shaped recovery looking more likely

While we anticipate a good deal of pent-up demand being released as lockdown restrictions are eased, the economy cannot be simply switched on and off. Some industries will come through relatively unscathed, others won’t.

Perhaps the worst-case scenario might apply to travel and leisure companies. For example, “Emirates and Etihad said they believe that it could take until 2023 for passenger demand to return to pre-crisis levels” and that’s assuming government support continues, keeping them solvent in the meantime, according to the May 2020 article, “Airline sector could take three years to recover” published by the British International Freight Association.

Other industries ought to take less time to return to normal. But even those that bounce back fairly quickly could experience a level of demand lower than was the case before the pandemic. This is because the government’s massive financial support package cannot continue indefinitely. The furlough arrangements are being wound down and sooner or later, companies will have to decide whether or not to keep on a full complement of workers.

The government, companies and households are all more likely to want to pay down debt rather than borrow and spend. As a result, our view of the economic recovery is veering more towards a U-shape in the UK. We also suspect that this could be the case for the overall global economy as the US and China grapple with secondary spikes in contagion rates as well as the trade frictions that are on-going between the two countries.

When will the economy recover?

Our analysis suggests that the UK and global economies will start to recover in the latter part of 2020. The rate of recovery will vary across different industrial sectors and could be slowed down by poor management of lockdown restrictions.

On a final positive note, even if there is a resurgence in contagion, we should be better equipped to deal with it. And, at the same time, there are substantial international resources being devoted to the development of an effective medical treatment for the virus. So it seems reasonable to remain optimistic that we could have some sort of treatment to reduce the death-rate in 2021. In the meantime, the social distancing methods have been proven to work and while we wait for a treatment, we must continue to use them.

Implications for investors

The unavoidable truth is that this is a very difficult time for investors. We don’t know for sure how the pandemic and lockdown will transpire. So we are looking to 2021 for the economic environment to improve and for asset prices to stabilise. In the meantime, we are remaining patient and supporting all measures to prevent a second round of virus infections.

Important information

Any views expressed are our in-house views as at the time of publishing.

This content may not be used, copied, quoted, circulated or otherwise disclosed (in whole or in part) without our prior written consent.

Fees and charges apply at Schroders Personal Wealth.

In preparing this article we may have used third party sources which we believe to be true and accurate as at the date of writing. However, we can give no assurances or warranty regarding the accuracy, currency or applicability of any of the content in relation to specific situations and particular circumstances.

Forecasts of future performance are not a reliable guide to actual results in the future; neither is past performance a reliable indicator of future results. The value of investments, and the income from them, may fall as well as rise and cannot be guaranteed and the investor might not get back their initial investment.

Let's start with a free consultation

No fees. No commitment. No obligation to buy. Let's just see how we can help

Tap into some of the finest minds in the business

Our regular newsletters are packed with food for thought. Sign up for expert views and opinions, and choose which areas of financial planning and investment you’d like to hear about.

This site is protected by reCAPTCHA and the Google privacy policy and terms of service apply.

Selected articles