Economic Prospects for Recovery from Covid-19…What Shape Recovery?

Wall Street says one thing ‘High Street’ says another.

The world is still in turmoil – Covid-19 is still wreaking havoc with both the wealth of the world economies and the health of its people.

There is no sign of an imminent vaccine. As a Financial Planning Practice we believe in the mantra that we, and our clients, should ‘plan for the worst but hope for the best’. Planning for the worst would suggest flat or even declining economic activity and no material investment growth in the short and medium term or even some further losses. Nevertheless, and always the optimist, there has been much speculation in the press and on media as to how the economies of the world will cope, and how, if and when, there will be a return to previous levels of economic activity.

  • Many commentators have suggested a V shaped recovery; one where after the initial shock things get back to normal quickly.
  • Others have suggested a W shaped recovery; where confidence grows and wanes and then grows and wanes a few more times.
  • Some doom-mongers even suggest an L shaped no-recovery; the good times are over and the world will be forever poorer.

We subscribe to none of these. We think that the recovery will be K shaped.

Many people, predominantly those already well off, will benefit financially from recent events,  while for others the virus will leave a permanent devastating scar on their immediate and long term future. This phenomenon is being borne out in practice. Whilst the USA, the German and Japanese stock markets have returned to somewhere near the September 2019 levels, other less rich countries have seen their stock markets suffer with the UK amongst the worst affected.  The cynics and the disadvantaged have already noted that there is a dislocate between Wall Street [Problem? What problem?] and Main Street [in crisis] with retail and hospitality business closures and whole industries, airlines and holidays virtually left abandoned.

The impact on society could be immense. A large ‘underclass’ of people with no jobs, no livelihood, no income and no prospects could well give rise to social dysfunction and a collapse in law and order. This is recognised by governments throughout the developed world offering subsidies, grants and various forms of job protection schemes. No developed world government will want unrest. It is interesting to note that, even amongst conservative voters, successive recent surveys indicate that taxes on the wealthy and high earners will have to rise to meet the increasing costs of running health, transport and other public services and, probably more importantly,  provide support for those who cannot support themselves.  

So our clients should potentially expect to see tax rises, a removal of exemptions, reliefs and allowances; not necessarily immediately but in 2021 or 2022 at the latest. Although no government official has made any comments as to what steps will be taken or who will pay more, some of the options could include;

  • An increase in the highest rate on income tax to 50 percent or even higher
  • Increases in capital gains tax to match income tax rates
  • Increased Corporation Tax
  • A reduction in higher rate tax relief on pension contributions seems almost inevitable
  • Restricting or removal of Business Property Relief
  • A wealth tax

Our clients can also potentially expect to see

  • Interest rates on savings collapsing; indeed NS&I have already announced the virtual elimination of any interest payments on its accounts and a cut in the premium bond prize money. Building societies and banks, will shortly cut their savings rates now the competition from the government has gone.
  • Dividends may well be reduced and, for the many businesses accepting help from the government, there may even be a requirement for dividend suspension.
  • Potential reductions in house prices as first time buyers and the less secure fail to be offered mortgages and / or deposit requirements are increased.

We may shortly reach a position where those with money can expect no investment return whilst mortgages become expensive or even unavailable.

Our duty of care is to our clients.  

First and foremost …. we urge our clients to look after themselves, their health, and their own financial requirements. We think that financial planning in this environment is even more critical than before and it is crucial that your advisor spends time with you and reassure you, that even with zero investment returns, your future is protected … and if it isn’t, to consider what steps you need to take to protect yourselves.

‘The darkest hour is just before the dawn’

To those of my generation, we  attribute this to the Mamas & Papas, our children attribute this to Emmylou Harris, but its origin dates back to 1650, to the English theologian and historian, Thomas Fuller. Irrespective of whoever you attribute this proverb to, the fact is that humankind has great resilience, fortitude, and an immense ability to overcome a crisis. There will hopefully be a vaccine; the world will get over this virus; and our freedoms returned to us. But there will be a new normal and the world will change.  In our summer economic commentary we stated that in our opinion, ‘One thing is certain, we are in the midst of a social and economic revolution; changes to the way we live and behave that would normally take decades, happened instantaneously.  Policy statements from the UK and European Governments would suggest that a Green Recovery is on the table, and both are serious about changing society.’ We look forward to a UK where we live healthier lifestyles, where buildings are more energy efficient, where we cut the amount of commuting, enjoying cleaner air and reclaiming all that ‘lost time’ …. and we invest in greener and more environmentally friendly, infrastructure.

Stay Safe, Stay Well.

Simon Gould  ( / 02922 525354)

This article has been written for information purposes only and does not represent personalised advice.

The value of investments can fall as well as rise and are not guaranteed.

Past Performance is not a guide to future performance.

Article published: 06/10/2020

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