It’s impossible to know for sure what might happen to the economy in the next few weeks and months when we still don’t know what might happen with the spread of the virus across our land.
But it is possible to make predictions and guesses, and last week we heard what the Bank of England expects to happen.
Its initial outlook was bleak – the economy is set to shrink by 14 per cent this year, it warned. However, its outlook for recovery was pretty optimistic, suggesting growth could hit 15 per cent next year, bouncing the economy back to pre-Covid levels by the second half of the year.
Not everyone agrees with that devastating 2020 outlook or sunny growth prospects the year after. So what could be coming towards us and what will it mean for our money?
An elongated U
“I predict that we (along with the whole word) will see an elongated U-shaped recession,” says Sherad Dewedi, manager partner at Shenward Chartered Accountants and Business Advisers.
“We will fall into a recession in the next few months with a modest recovery in spring 2021.
“If the economy will gradually be restarted then any recovery will follow a similar pattern, albeit with a time lag due to consumer and investor confidence. Until we see a tried and tested vaccine, I don’t expect any sort of ‘bounce back’ as other commentators suggest.”
So how can people prepare to weather a lengthy U-shaped recovery? He recommends anyone struggling to pay their bills in the coming months talks to their providers as soon as possible.
“Due to Covid-19, there is a greater level of empathy and understanding and you might find a pleasant response to what you may find an awkward or difficult conversation. Of course, any breathing room sought should be for the minimum period possible.”
A sooner recovery
Shaa Wasmund, a businessperson, author and online business community founder, doesn’t give a letter to depict the recovery but rather a call to arms to emerge from recession.
“My guess, we’ll start to come out of it sooner rather than later. There is significant government investment including quantitative easing in place to ensure this is the case. However, we all have a part to play in this; if we stop spending, the economy will grind to a halt.
“That said, it’s not the time to be foolhardy either. When it comes to our personal finances, my tips would be simple: automate your savings and investing. Don’t leave it to chance. Use apps like Moneybox to automatically sweep up the leftover pennies from your coffee and invest in an ISA instead.
“Call all your credit card companies and try to negotiate 0 per cent interest for the next three to six months. They are much more flexible now than they were pre-Covid-19.
“Check all your monthly subscriptions. If you use them, keep them, if you don’t, don’t. Above all, be intentional with your money. Be conscious of how you are spending it and saving it.”
A possible V
It may feel like there’s little opportunity for optimism but that’s partly because there’s so little concrete information. David Miles, professor of economics at Imperial College Business School and former member of the Monetary Policy Committee, says that a V-shaped recovery seems optimistic but not impossible.
“One factor that would make it more likely is if the virus has already spread further than is generally assumed.
“If that were true it has three positive implications: the fatality rate from the virus (deaths as a fraction of the infected) is lower than generally assumed; the R number that reflects the future spread of the infection will be muted by a degree of immunity in the community; the confidence to go back to more normal ways of living will become higher.
“Right now we know surprisingly little about how far the virus has spread because those tested are overwhelmingly those with symptoms; but the asymptomatic may be very numerous. If they are, the bounce back may yet look like the upside of a V. As data from testing of a random sample of the UK population becomes available over the next few weeks we will learn a lot about this.”
If that were the case, which none of us can know, the pain could be sharp and shocking but the recovery not far off.
A lazy W
David Miller, investment director at Quilter Cheviot, says we didn’t need the Bank of England to tell us we are in recession.
“Commentators like to talk in capital letters; V, U or L. I suspect that the future will be less clear-cut than this and prefer to use the lazy W model.
“That means that we will see a recovery as economies reopen and business restarts, but it is unlikely to be one-way traffic. The idea that we will go back to how it was before with scarcely a backward glance seems unrealistic.
“It is said that people lose their nerve collectively and regain it one at a time. The same goes for the current crisis. Steadily people will consume more than they have been in recent months and businesses will reopen. This will be complicated as interrupted supply chains take a while to put back together.”
His recommendations for investors riding the W are: “Savers should avoid the temptation to hoard cash for any length of time. Inflation may be low now, but is highly corrosive when it comes to maintaining the real value of savings.
“Accept that investment, particularly when interest rates are zero, involves risks. These need to be understood and controlled. Selective investment rather than buying the index is the way forward. The gap between winners and losers will widen with the losers potentially going out of business.”
An uneven U
“The recovery is likely to be slow and patchy and deliver an uneven U-shaped trajectory driven by new technology,” suggests Jeremy Naylor, an analyst at IG.
He thinks some sectors will dive and some will thrive, leading to pockets of the economy that swiftly bounce back. “We can already see pockets of resilience within the technology space and it is likely that this area will see a relatively sharp, V-shaped, recovery.
“New and innovative ways to do business are already developing and the shift online will only speed up. What is less certain and will take many months or even years to recover, will be the areas where the consumer is hampered by the likely long-term need for social distancing. The leisure industry is likely to be the last to see any meaningful recovery and may never recover to where it was before Covid-19.
“Throughout the staggered U-shaped recovery it would be good to remember to continue the long-term goals that every good investor should have and that is to drip feed into your pension, pay down debt, keep improving your family’s wealth and love your neighbour.”
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