On 15th April, Grace did a podcast for marketing week to discuss what brands should and shouldn’t do in the wake of a covid 19 related economic shock. The below outlines what Grace said about the economy and where it’s likely to go from here:
What are we seeing in current economic indicators and what do they signify?
We have seen some really scary figures: The FTSE has lost around 30%, 1.4 million new claims for unemployment benefit, and a number of other leading indicators that economists watch carefully – because they’re closely correlated with economic performance – are now at levels not seen since 2008.
Added to that, many listeners will also have seen the UK government’s worst-case-scenario figures that came out yesterday. The OBR said that if lockdowns last for 3 months the economy could shrink by as much as 35% in Q2 of this year.
Now, these are all very alarming figures, and they make very worrying headlines.
But, and I want to stress this point, it’s important to realise that these developments in the economy are not unexpected.
As soon as our government and others around the world made the decision to enforce lockdowns, they made the decision that the economy would shrink.
By definition, if businesses are closed, and people can’t buy things that involve leaving the house, a huge chunk of economic activity stops. This will absolutely produce the indicators we have seen.
So why is that important? Well firstly because it means that by themselves, these indicators don’t actually tell us much that we didn’t already know. The country is in lockdown and the economy is partly closed.
And the other reason why it’s important is that, knowing these effects were coming, the government has set up a number of schemes – furlough, loans, guaranteed incomes – to try to ensure that people and businesses emerge from lockdowns not much worse off than before.
And some very reputable economists have looked at the UK government package and said that its one of the best around. Joe Stiglitz – he’s a nobel prize winners in economics, described our government’s coronavirus package as world class a few weeks ago.
The best-case scenario is that these packages enable the economy to simply pause until a vaccination or huge scale up in testing is possible. Then, once lockdowns are lifted, the economy restarts again.
But the longer lockdowns go on, the longer all these economic indicators remain way below “normal” levels, the more likely it is that things happen during lockdowns which have lasting effects.
In that case, the economy will continue to suffer even after lockdowns are lifted.
How likely are we to fall into recession and what “type” is it likely to be?
We’ve looked at, analysed and compared, three different forecasts by reputable economists.
2 of them came out yesterday: OBR, and the IMF. The other was back at the end of march by Bloomberg economists – which some listeners will have seen I talked about on my linkedin page.
What’s really interesting is that they all point to broadly the same pattern for the economy.
That is a huge hit to GDP while lockdowns are in place, but a pretty swift bounce back once they are lifted. All 3 forecasts broadly agree that we’ll likely be back to where we were at the end of 2019 by the end of 2021 or early in 2022.
And you may think its strange that they all have the same pattern… but there’s a reason for it. It’s because this has been the pattern with other pandemics in the past.
So, going by SARS in 2002, Hong Kong Flu in 1968, H2N2 Asian Flu in 1958 and Spanish Flu in 1918, let’s call it the “pandemic type” of recession – it’s one where the economy follows a v- shape.
There’s a dramatic fall while the pandemic is in progress and then a bounce back afterwards, whereby there is a huge release of pent-up demand for all kinds of things.
The argument goes that if consumers incomes are protected, but their spending curtailed, because they cant go out during lockdowns, there’s going to be a whole range of things they want but haven’t bought. When lockdowns are lifted, they will go out and buy them.
It is a fairly optimistic scenario, but it could well happen.
Take Next for example. They are a good barometer, because they’re typically one of the biggest retailers in our bricks and mortar shopping centres. And their market is ordinary families – everyone really.
They recently switched online shopping back on and the site had to close back down within hours because it was overwhelmed with orders. That’s the pent-up demand right there.
So yes, one optimistic possibility is that we could be, at the end of next year, looking back on all of this with a great sense of relief that we beat it.
Of course, the risk – as all the forecasters explicitly recognise – is that this one won’t be like the other pandemics. That – perhaps because lockdowns are more widespread or longer lasting – it will instead develop into a different type of recession and last longer.
The worst-case scenario, is a financial crisis of the type we had in 2008. That one was an L-shaped recession, where the recovery was very slow, and it took 5 years to get back to recover to get back to where we were before.
Thankfully, our research suggests that a financial crisis is not hugely likely. Investors clearly have withdrawn some funding for investment, but the banks that most people and businesses rely on are in much better shape than they were in 2007. Memories are fresh, and balance sheets are healthier.
It’s also true that across history, financial crises are not frequent. The typical OECD country sees one every 43 years. We aren’t due another one yet.
So, if the best case scenario is a v-shape, and the worst case is an l-shape, the middle scenario, is a u-shaped recession. This is where the recession lasts longer than is usual for a pandemic, but does recover within a few years. This one is more likely.
Here the most likely cause of after effects from lockdowns is that things happen during the lockdown period which create a deficiency of demand – and the most obvious of these is job or income losses, and their knock effects.
So, some firms who already had a shaky balance sheet will close – and Debenhams is a good example here – they were struggling beforehand, and they’ve applied for administration during the lockdowns.
And there will be effects on other firms too – who won’t make headlines, or even close, but will more quietly scale down, and part company with some employees.
It’s also likely that other jobs, in perfectly healthy firms, might be lost because the government packages doesn’t work properly in some places. And this wouldn’t be for lack of trying – its clear the chancellor is trying to do all he can.
The issue is that an extended lockdown over many months is absolutely unprecedented. The government will be using new and untested policies which in places may not be successful.
Many economists look at these kinds of job losses and argue that they will have knock on effects. The argument goes that the first round of company closures and firms will lead to more.
It’s because because people who were previously working aren’t any more, and they have less money to spend. This means there is reduced demand for other things, in fact less demand for everything – and this demand effect means that other sectors contract too, and other firms close, other people lose their jobs.
And this effect reverberates throughout the economy creating a “multiplier effect”, which makes the original “shock” of the virus and the lockdowns much worse.
Unfortunately, the UK is due one of these demand-deficient recessions. Over the long course of history, they arrive once every 10 years or so, and its been 12 since the last one.
You can read what Grace said about how marketers should react here.