“The only thing we have to fear is fear itself”. The phrase, first uttered by Franklin D. Roosevelt almost 90 years ago, might appear a little tone deaf today in the context of a deadly pandemic. But from an economic point of view, it is very pertinent.
Because while the former US president may have been referring to the potential for policy dithering in the wake of the Great Depression, it’s another type of fear – consumer fear – that will play a crucial role in determining the success and pace of the Covid-19 recovery.
Our view is that the economic recovery will occur in two stages. The first phase will be sharper, and look more ‘V-shaped’ in terms of the level of GDP, as supply comes back online with the lifting of lockdown restrictions. We’re already seeing evidence of this in Europe, especially in Germany and France.
But the second phase will be far more stretched out as demand recovers more slowly, and it is this second phase that I am concerned with in this article.
Overall, our forecast points to a contraction of about 10% in 2020 in both the UK and euro area economies.
And it is the ‘fear factor’ – or, more specifically, a general hesitancy to engage in pre-pandemic levels of human interaction and social activity – that will delay demand getting back to where it used to be. Ultimately, those activities and sectors that are perceived as more risky – such as retail, recreation and the arts – will experience lower demand than others.
Now photos of crowded beaches and central nightlife districts, and of celebrating sports fans and illegal raves, might give the impression that some people, increasingly, are throwing caution to the wind. But, more generally, people are still holding back. This is partly in line with the government restrictions that remain across Europe but also due to the fear factor that continues to nag as the Covid-19 pandemic continues to rage and accelerate elsewhere in the world and as localised secondary outbreaks begin to flare up closer to home.
To help us calibrate the magnitude of this fear factor and whether it will vary over time, we can use survey data. One such consumer survey covering non-essential shopping in the UK, by polling company YouGov, is illustrated below. What it shows is the scale of the challenge because while a majority appear ready to venture out and spend, a significant minority still do not.
How comfortable are you doing non-essential shopping?
Source: YouGov survey of 3,231 adults conducted on 15 July.
That at least 40% of people today might still be fairly or very uncomfortable about the prospect of going out to do non-essential shopping is a big deal for the economy as businesses often operate on narrow profit margins. Even a 10% drop in footfall/customers would make some businesses unviable. So it’s no wonder Europe’s government leaders are so worried about the outlook and are encouraging people to get back out there and spend!
Fear of engaging in economic activity that might involve travelling and mixing with other people is not the only lingering sense of dread hanging over societies. With furlough and job retention schemes coming to an end, job fears are also rife. We estimate that up to 15% of furloughed workers in the UK, for example, could lose their jobs in the coming months.
Aside from the likely negative impact on spending as people lose their jobs and incomes are reduced, worries about what might lie around the corner could also persuade many of those still in employment to save more and hold back on some expenditure. As a result, any pent-up demand effect might not be as strong as it could be.
How long will the fear factor last?
So when will the fear dissipate enough for people to feel more comfortable about returning to normal – or pre-pandemic – levels of activity? The answer to that depends on whether one of three things happen, and when:
- Covid-19 is eliminated from society via effective lockdown and test and trace measures.
- Herd immunity is reached in the population.
- An effective vaccine or therapeutic treatment is discovered and made widely available.
The first two appear unlikely to happen any time soon. But there has been some promising news on the third front. The ‘Good Judgement Project’ in the United States, which has identified people that tend to get forecasts correct more often than not (dubbed ‘Super-forecasters’), have begun asking these individuals when they think a vaccine will be widely available. Their optimism that a vaccine will be found sooner rather than later has grown significantly in the last three months.
Hopes for vaccine next year grow
When will enough doses of FDA-approved Covid-19 vaccine(s) to inoculate 25 million people be distributed in the US?
Source: Vanguard, Good Judgement Project, 15 July 2020.
In sum, the Covid-19 fear factor will likely be with us for some time yet and will likely drag on economic growth and corporate profits. So there are likely to be plenty of bumps along the road, even though the outlook for a vaccine appears to be more encouraging.
As such, expect markets to stay volatile and for investment conditions to remain uncertain and challenging. So think long term, be diversified and stay disciplined.
Author: Shaan Raithatha, economist for Vanguard Europe. To find out more contact your financial adviser.
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