Jeff Lewis, director of Edinburgh based IFA RobMac, summarises his thoughts on the economy and sees positives signs.
“We are currently seeing a rapid bound in economic activity, with month-on-month data showing a sharp bounce. However, we will have to be patient to see the ‘landing zone’ for the economy over the summer months and into the autumn.
Making assumptions on the basis of the data we have seen so far is premature, and the year-on-year economic comparisons serve to remind us that we still have a long way to go to recover back to where we were at the start of the year.
We expect there to be pent up consumer and corporate demand, but this may be tempered by ongoing concerns over the pandemic and, from a consumer point of view, heightened uncertainty over employment prospects as companies make adjustments to their cost base to reflect their perceptions of the ‘new normal’ on their business prospects.
Central banks have, at the macro level, averted a public health crisis developing into a financial crisis. They have done enough in the short term, in combination with unprecedented fiscal measures such as furlough schemes, to stabilise financial markets while the economy has been in an induced coma.
Liquidity has overwhelmed lingering market fears over the pandemic, weak economic data, political noise and more recently social disorder amidst ongoing tensions related to both racial and income inequality. The economic path looking forwards is difficult as governments attempt to balance the need to restart economies whilst managing a public health emergency.
When economies were closed down, it was much like flicking a light switch off; reopening those economies will be more like turning a dimmer switch. We continue to recall the comments of a US strategist, who said “reopening is not recovering” and while low interest rates and generous government lending schemes may extend the life of some zombie companies, we are likely to see excess capacity removed, particularly in the service-based economy that has been hit hardest by the lockdowns.
Confidence is important and having been told to ‘stay at home’ for the past few months, consumers now need to be confident enough, in the absence of medical remedies, to resume their previous habits and at this point in time it remains unclear if consumers are willing or able to return to their old ways.
There is no doubt we are in a recession, but the equity market view still appears to be one of a relatively short sharp shock and a subsequent rebound, while bond markets and industrial commodities appear far more subdued.
The response from the authorities in size and scope has been swift and aggressive, but appears to have led markets to price in a swift recovery and to look forward to 2021 as a normal year, ignoring the very weak economic and corporate data in the short term. Monetary and fiscal policies will mitigate some of the harm, and indeed could boost the eventual economic recovery.”
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