July/August/September 2020

V for Victory and the shape of the recovery

Analysis from Dr John Ashcroft on the global social and economic impact of Covid-19

What shape will the recovery be in the UK..? It’s a V, it’s always a V…

We are at the stage in the economic cycle when questions are raised about the shape of the recovery. Pick a letter from the alphabet and make the case. Jerome Powell, Chairman of the US Federal Reserve, suggests the American recovery will follow a ‘Slow V’. The association of shape and speed adds to the confusion. For many, the Powell vision suggests a U. At best it offers a slow bend. A slow U bend perhaps?

The recovery in the UK will be V shaped. Recoveries in the UK always are, at least since 1948 when decent records began. The economy has been in lockdown since the end of March. The impact has led to a shock to output in the second quarter of just over 20%. Retail sales are down by almost 15% compared to the prior year. Manufacturing activity has contracted by almost 30%. Construction activity was down by almost 40% in the first two months of the quarter.

Service sector activity, has fallen by around 20%. The leisure sector including accommodation and food, has been decimated, as the lockdown continued over the period. The shock to output would have led to a dramatic increase in unemployment but for the introduction of the government furlough scheme. Rishi Sunak is the most popular member of Cabinet. Little wonder, the Chancellor of the Exchequer is paymaster to over 10 million people. Almost 9 million are on the furlough scheme. The cost to Treasury is greater than that of the NHS.

Into the third quarter of the year, more sectors of the economy will be released from lockdown. Pubs, restaurants and hotels will re-open for business. Social distancing restrictions will be relaxed. All sectors of the retail trade will be back in business. Our baseline recovery scenario is modelled by sectors. Each sector will recover at a varying rate. Overall, the economy will be down by 20% in Q2, 10% in Q3 and 5% down in the final quarter of the year. We expect UK GDP to fall by almost 10% in 2020, recovering by a similar amount next year.

The unemployment rate is set to rise by December, unless the furlough scheme is extended to accommodate the output gap. Businesses will have to contend with three key challenges as the return to work continues. First, the impact of the Covid Era. Social distancing, PPE and consumer nervousness will impact on retail, travel, leisure and entertainment. The shadow of spikes and a second wave will remain an ever present threat.

Second, the recession impact, job insecurity, rising unemployment, investment cuts and the impact of lower spending, will inhibit the recovery as in any cycle.

Third, the impact of digital disruption. The covid experience has accelerated in three months processes which were expected to take years. Online sales, accounted for over 30% of all retail sales during lock down. Penetration in the food sector moved from 4% to over 10%, a structural shift which will not be reversed. The threat to the high street is becoming more acute as over one in three transactions are lost online.

Flexible working, working from home and teleconferencing, will change the work life balance and the ‘nature of work’ for many. Agile team working is now the norm. Microsoft Teams and Facebook Workplace will challenge the development of Basecamp, Slack and DropBox. Zoom has become the darling of the stock market, increasing in value by almost 400% since the start of the year to a market cap of over $70 billion dollars. Office planners are going cold on ‘hot desking’. It’s not good to share, remain Covid aware.

There will be winners in recovery…

Government investment will lead to expansion in transport, infrastructure and telecommunications. The ‘greening’ of the economy will lead to an expansion in decarbonisation and alternative energies. In the property market, warehousing and logistics will provide the opportunity for expansion, as traditional retail and commercial faces the challenge of AI and Digital disruption. And of course, online trading will provide the opportunities in digital marketing. Amazon has set the benchmark in User Experience and User Journey which all will have to follow. Payment apps, including Paypal and Square have moved to all time highs. Jamie Dimon’s message that cash is trash applies to retail transactions as well as investment advice.

So what shape will the recovery be..? It’s a V, it’s always a V … but as in any recovery, there will be winners and losers …

Dr John Ashcroft

Dr John Ashcroft specialises in economics, strategy and financial markets. He is author of

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