Commercial Insights - Macro background: Unlocking the Lockdown
May 2020
5 minutes to read
What we know
Governments continue to boost fiscal support measures. March saw the initial flurry of additional spending pledges designed to prop up stalling economies around the world, but further programmes continue to be announced. In the US, the Senate has recently passed a $484 billion stimulus package, with $300 billion used to replenish the Paycheck Protection Programme (PPP), colloquially known as the small business fund. Germany has released an extra €10bn of spending to boost unemployment payments and cut sale tax on restaurants and cafes. The UK Treasury is looking to raise £180 billion in the next three months, which is more than quadruple its prior borrowing plans of circa £39 billion. In short, government largess has not reached its limits. Meanwhile, furlough payments will now be eased out, rather than abruptly halted, after the initial June 30th end date.
Interest rates: even lower for longer. After a period of volatility, government bond yields have found a floor in many global economies, even if only temporarily. Almost all central bank decisions this year have involved interest rate cuts, or at least maintaining rates at historically low levels. In most major economies there is now little scope to go further using conventional measures, although China was able to reduce key interest rates during April. Many monetary authorities have now resorted to unconventional measures, such as the purchase of public or private securities, or the reduction of counter-cyclical buffers. Against a more normal economic backdrop, these measures would be considered extremely expansionary.
"Lockdown scenarios around the world were always going mean short-term economic indicators paid a heavy price."
Economic indicators have been predictably dire. Lockdown scenarios around the world were always going mean short-term economic indicators paid a heavy price. A case in point, official statistics from China, one of the first countries to adopt strict containment measures, show a first quarter contraction in GDP of almost 7%. Data remains too historic to matter in many other countries. The latest official UK GDP growth estimates showed a 0.1% expansion in the three months to February, demonstrating that COVID-19 influences were yet to be felt. There are significant question marks over the quality of certain types of economic data at present, especially those that involve an element of surveying or questionnaires. Consequently, we are also analysing other types of indicators to get a better sense of economic momentum from country to country.
What we expect
Unlocking the lockdowns: a very gradual process. Parts of Asia are returning to a degree of normality, with employees back at work (but subject to strict testing measures) and elections held recently in South Korea. Some European countries are now easing measures, albeit extremely gradually. As a flurry of weak first quarter economic growth estimates roll in, pressure will build on governments around the world to go further and faster. Implicitly, an uncomfortable balance between public and economic health must be reached. We expect that while more countries will soon join those that have already begun to lift restrictions, the return to a previous ‘normality’ will be measured in months and quarters, not weeks.
An intense debate on the shape of recovery. The latest round of economic data will focus minds on the road back to economic growth. At present there is a noticeable divide between banking and financial institutions, which currently predict a sharp rebound, and others forecasting a slower recovery. To be sure, almost all forecasters envisage a deeper decline in global growth for 2020 than the 0.5% contraction seen in 2008 during the GFC. In the UK, forecasters have re-evaluated growth at lightning speed: during March, the UK Treasury’s consensus for GDP growth in 2020 was 0.8%, but by April it had dropped to -4.7%. More positively, the consensus for 2021 is for GDP growth of 4.3%, albeit with unemployment pushing out to 5.3%, from 3.8% at the start of 2020. On most economic metrics, the range of forecasts is now extremely wide, reflecting the number of elements that remain essentially guesswork: the rate at which lockdown is eased, the time until widespread testing can take place, or the impact of second-round effects. Our sense is that growth in the UK will be slower-paced than the more optimistic proponents of ‘V’ shaped recoveries hope for, and will be complicated by questions around transition from the EU.
What we question
How long will it take to ‘normalise’? Disruption of this scale naturally raises the question of a return to normality. Will international air travel rebound at scale? Has the shift to contactless payments hastened the decline of cash? Will workforces return to formal workplaces? Will our reliance on online shopping become even greater? Looking to the nearer term, we can point to a degree of ‘new’ normality already returning to parts of Asia. Although it is very early days, offices and leisure facilities are beginning to reopen in China and South Korea, albeit with understandably cautious measures in place. The UK may broadly follow this path, but the many nuances in the characteristics of different countries, such as their politics or healthcare systems, make conspire to make such generalisations impossible. Timings, at the very least, will be different.
Not a typical crisis, not a typical outcome. Traditional crises and their knock-on effects into real estate are normally driven by a mix of i) undercapitalised banks ii) overleverage iii) over supply iv) sentiment. However, this is not a normal economic crisis. Will unprecedented government and central bank action limit the impact on negative sentiment, supporting a quicker recovery, or will there be a slew of credit events as a result, creating a feedback loop? There is also a fundamental question over the extent to which behavioural shifts, ranging from how firms operate supply chains to consumer spending patterns, become entrenched, and what longer term impacts these evolutions may bring.