Photo: Bloomberg
Our outlook for the global economy remains bright. However, there is a chance that the economy has been permanently impacted by the Covid-19 pandemic.
What we can say from current data is that it is too early to say.
On the one hand, unemployment data is clearly a cause for concern and consumer confidence has understandably taken a hit. Yet, this is coupled with tremendous pent-up demand and elevated savings rates across the world’s major economies.
Meanwhile, we have seen a broadening out of the recovery in markets, with equities in particular moving beyond the initial surge in technology stocks to now embrace value, small caps and cyclicals.
For China, the first quarter of 2021 saw a rebound in consumption which we expect to continue thanks to higher incomes, better labour market conditions, and draw-down of 2020’s excess savings. However, if monetary policy was to be tightened too early this could pose a challenge for longer term growth targets.
Globally, many of the hardest-hit industries are in what we might call the ‘close-contact’ services sector, like hospitality or services that deal with products that are ‘consumed at the point of production’.
In principle, as economies continue to open up it should be possible to increase the supply of these services relatively quickly. However, much depends on how flexible labour markets are and whether fiscal support schemes have succeeded in keeping establishments viable.
In this scenario, it would be reasonable to expect a strong bounce back of ‘close-contact’ industries although it is unclear if they will be able to make a full recovery to pre-pandemic levels. We might expect the hospitality industry — restaurants and bars for example — to return to pre-pandemic levels pretty quickly, whereas travel-related activity — such as airlines, hotels and office space — may never recover their pre-pandemic trend.
In addition to changes in the composition of the economy, the shortening of supply chains in the future makes deglobalisation another key theme that could impact the outlook. Although this may be a concern for some, global supply chains are more flexible than they seem.
We may see global trade disintegrate into three blocks: Asian trade bloc centred on China, European trade bloc and the American trade bloc centred on the US, Canada and Mexico. This said, we would not expect these changes to have a large impact on costs and therefore consumption.
Even if the composition of the world’s economy has been transformed by the pandemic, that does not necessarily equate to a permanent backwards step in its overall ability to generate growth.
While some sectors may have suffered — think travel and leisure — others have thrived through lockdown and are now well positioned to take up the slack. Remotely-delivered goods and services will remain a permanently larger share of the economy.
Markets are getting increasingly worried about inflation. If the supply response is strong, then inflation should remain well contained.
But some are beginning to worry that central banks, particularly the Fed, may let the economy run too hot for too long, causing inflation to rise.
If that happens, then equities will continue to do well so long as rates remain where they are. But if markets start to price in a large, or sooner-than-expected rise in rate, the investment environment would get a lot trickier.
Although risks remain and the economy will likely see some permanent changes following the pandemic, we are optimistic on the outlook for the recovery and growth.
Shamik Dhar is chief economist at BNY Mellon Investment Management
