The economic fallout of Covid-19: why this isn't the beginning of the end

27 April 2020 | Markets and Economy


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By Peter Westaway, chief economist and head of investment strategy, Vanguard Europe.

With Covid-19 infection curves flattening in Europe and in some cases turning, it's not unreasonable to suppose we might be near the end of the beginning of this crisis.

However, there is still a long to travel on before we get to the beginning of the end, which is something to bear in mind when considering how global risk assets have bounced back in recent weeks, recovering some 30% to 40% of their Covid-19 losses. The FTSE All-Share index is still down some 24% from its February peak. But shares globally are up by about a third since their trough and the S&P 500 is now down only 13% in sterling terms, implying that the Covid-19 bear market may have already ended1.

But has it really? Certainly, the collapse in the oil price would suggest otherwise and when you think through the potential economic fallout that the crisis might yet bring about, there's very good reason to remain cautious. Given the viral risks that remain and the economic dislocation we foresee, it's all the more reason to maintain a balanced and globally diversified investment portfolio.  

We now expect some degree of permanent scarring in the global economy as a result of this pandemic. What this would mean is a permanent loss of productive potential.

So not only do we think that it will be well into 2021 before economic activity gets back to normal, we also now think that this new normal could be a few percentage points of GDP lower than would have been the case before. In short, we envisage a ratcheting down in the trajectory of economic activity due to the many firms that will go out of business, increased structural unemployment and disrupted supply chains.

How might that look in practice in Europe? The performance of other economies further down the road of this crisis provides some clues as to the likely trajectory of recovery.

The following chart shows a pattern in China that I expect to see here as the lockdown measures are slowly relaxed and our economies move back to normal. In this respect, we've already seen some very preliminary opening up in Austria, Spain, Italy and Denmark in the last week, with small shops and some schools opening. France and Germany are looking to follow in early May, while the UK will review its social distancing strategy on 4 May.

The first point to note from the chart below is that the recovery is likely to be very slow. The second point is that there will be big differences across sectors. So although Chinese steel production here is now only about 5% below pre-virus levels, it is taking much longer for cinema revenues to recover.

China manufacturing leading recovery but face-to-face sectors lag

Source: Baidu, WIND, Vanguard ISG
Notes: Data for daily increase in cases as at 22 April 2020; data for steel reinforcement bars and cinema tickets sales as at 11 April 2020.


In the following chart, we've taking this further by trying to capture what this means in terms of the speed of recovery for the different sectors of the UK economy where, typically, the larger the current estimated impact on GDP, the slower the return to normal is likely to be.

So real estate, accommodation, transport and arts sectors have been hit hardest and will likely be the slowest to get back to normal, either because governments will hesitate to reopen them quickly or because consumers will be reluctant to indulge in face to face interactions while the virus is still potentially around.

How the impact and persistence of the Covid19 shock will vary by sector

Sources: Vanguard Investment Strategy Group, Bloomberg. Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.
Notes: Data as at 22 April 2020.


Our base case sees the lockdown measures beginning to come off in Europe in the coming weeks, with track and tracing – possibly app-based –becoming widespread and consumers very slowly returning to their old normal. In this scenario there would be periodic flare-ups of the virus but these would be well contained.

But the risks to this scenario remain high. Covid-19 infection rates are still rising in some big countries like Russia and Brazil, while growing political pressures, especially in the US, risk lifting social distancing measures too quickly. And in Asia, where this pandemic crisis began, we've seen some evidence of secondary waves emerging, as in China, or of new cases building where the Covid-19 virus previously appeared under control, as in Japan and Singapore.

As such, it could be a long time yet before the full ramifications feed through the global economy.


1 As of the market close on 22 April.



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