Economic recovery can begin sooner than expected, is likely to happen more quickly once the worst of the pandemic passes, and will probably be stronger than most people expect.
This was the message brought to SA this week by London-based UBS chief economist Paul Donovan.
One of the main reasons for his rather optimistic view is that people are bound to adapt to the challenges brought about by Covid-19 quite quickly, as they have adapted to previous crises.
We have in fact already adapted. Donovan has been visiting SA for several years as a guest of Sasfin to do a series of presentations to its clients, but this presentation had to be streamed from his office in London due to travel restrictions. And it felt quite normal, after only a few months of Zoom, Teams, virtual meetings and webcasts.
In addition, says Donovan, the quality of available data about the impact of the pandemic is simply “terrible” – and most predictions based on bad data are bound to be flawed.
He cites inflation figures as an example. “How do we measure the price of a restaurant meal if the restaurant is closed?”
He points out that conducting surveys during a pandemic is difficult and that figures obtained this way – such as GDP, inflation and unemployment – must be treated with caution, since people and companies tend either to refuse surveys or give unreliable answers.
Then there’s the fact that the current situation is unique.
The big change
Never before in modern times have governments taken deliberate steps to shut down their economies and lower their GDP.
“We need to be careful [about using] traditional models for economic forecasts; it is not going to work,” he says.
“This is a very unusual economic cycle. It has been an abrupt process, not a bubble bursting or a gradual change in the economic cycle.
“We went from a normal economy to virtually a total lockdown and back to near normal [in the UK at any rate] within the space of three months. The reaction of consumers and companies is likely to be very different from how they have reacted in the past.”
Donovan predicts that we will see the strongest quarter-on-quarter growth ever in the third quarter of this year, as figures for the second quarter will reflect the weakest growth ever recorded.
He bases his prediction on his view of a strong recovery in spending by consumers and companies.
He maintains that overall income declined by no more than 15% in Europe and the US, but that spending declined by up to 35% during these months. “What happened to the money? People saved it. There was not much else they could do with it. People are emerging from the lockdown with a large pool of savings.”
Donovan predicts that people will spend these “forced savings” over the next few months, treating themselves after the lockdown despite their promises to themselves to keep on saving.
He says it happens time and time again. “I think it will be treated as a tax rebate. Figures from US tax rebates in 2001 and 2008 show that people spent the extra disposable income. People would say they are not going to spend the money, but save it. It was spent within six months.”
Donovan forecasts that the bulk will be spent on consumer durable goods, such as furniture and electronics.
“It is not enough for a new car, and increased spending on food and clothing is unlikely.”
Companies are also likely to increase spending to rebuild their inventories, which had been quite low going into the crisis due to the disruption in the supply chain when China went into lockdown.
Replenishing low inventory in warehouses by buying components or finished products will give the economy a short-term boost. Firms are likely to increase inventory to above normal levels as a buffer in anticipation of possible future disruptions in supply.
While expecting strong economic recovery in the second half of 2020, Donovan says it will not be enough to repair all the damage, and the level of GDP is likely to be significantly below that of 2019.
Long-term beneficial changes
On a positive note, Donovan identified long-term beneficial changes in the global economy due to the pandemic.
“I will argue that the pandemic accelerated structural changes that already existed in the global economy,” he says.
“The first is the focus on the environment and sustainable production, with companies looking at localised production and shorter, simpler supply chains. The pandemic has accelerated this.”
The second is that the big changes associated with the so-called 4th industrial revolution have been accelerated as well. These include increases in online retail sales, increased adoption of a flexible working environment with people working remotely, and governments taking a bigger role in the economy. “It has happened,” says Donovan.
“Overall, the longer-term situation is nothing new, we expected these changes to happen. They happened much faster. It is bad news, it is disruptive, and people lose jobs. Some jobs go down in status and some go up. It would have happened, it is happening quicker.
“Over the long term, these changes will make the economy more efficient and more productive and people will adjust to it.
“Pessimism in times of crisis are common, because people find it difficult to look beyond the immediate [of what] is happening around us. But we underestimate people’s ability to adjust,” says Donovan.
He mentions the extremely negative predictions following the US 911 attacks and the earthquake and tsunami that hit Japan in 2011 as examples, very few of which actually came true.