Where are we headed? The experts’ view

The global shock brought about by COVID-19 has been unprecedented in modern times, with its impact being felt across all levels of society. Businesses in particular have been knocked sideways by the subsequent economic tremors, but with varying results. Here, our panel of experts review the macroeconomic fallout, and offer their take on what’s to come as we begin a cautious phase of recovery.

Assessing the economic hit

James Pomeroy, Global Economist for HSBC, believes the facts of the economic shock speak for themselves as the pandemic has taken hold: “The collapse in health and economic activity has been greater than any of us could have imagined, even a couple of years ago,” he states. “It has broken all the charts that we as economists had become used to, and we need to change our axes permanently.”

James’ sense is that it may take until 2022 to see a significant return to ‘normality’, depending on the speed of vaccination globally, and even then, there remains the question of when consumers regain confidence.

“Economies opening up are one thing, but this needs to be followed by a willingness among consumers to spend,” he argues.

“What we have seen in the course of the last 12 months are households, particularly high-income households, accumulating quite a lot of savings. And so far, a lot of that has been spent on houses and DIY. But then what we’ll now see in the next few months is how that changes. Do people go back to bars and restaurants? Do people go back out to seeing their friends, recreational activities, mass events – and how quickly does the willingness to go back to those sort of activities return?”

Services sector bears the brunt – but business overall shows resilience

Although economies and trade didn’t actually stop altogether – people still demanded food and drink, electronics and household goods – UK economist, Liz Martins, pinpoints services as having taken the biggest hit:

“Generally speaking, the more dependent you are on services, the worse the economic experience and the pandemic has been. If you look across the more industrial nations like Poland, we have seen GDP only falling by just under 3%, Germany by over 5%. But at the other end of the spectrum, service-dependent economies like Spain, which fell 11%, and the UK, which fell 10%, show how there’s quite a divergence in performance.

“And yet, European economies and the UK economy have emerged relatively resilient and are hoping for a much better second half of 2021 and 2022. And we see GDP returning to pre pandemic levels for both in the early part of 2022.”

US economist, Ryan Wang, agrees with the trends seen so far, but the USA, he says, has benefitted from a significant fiscal policy stimulus that led to about 75% of the early 2020 falls in output being made up by year end.

“The key question this year,” he says, “is going to be how this plays out and how the re-configuration of goods and services spending for the medium term plays out. Fiscal policy is transitioning to the medium term, to what we know will be a different economy than what we had in the US before the pandemic. Big infrastructure investments are being proposed, and that's meant to set the stage for a long period of growth.”

Asia’s different pandemic story

Fred Neumann, Co-Head of Asian Economics for HSBC in Hong Kong, is enthusiastic about the resilience shown across the region, reflected among both large and smaller business.

“If you think of what occurred,” he says, “we had an outbreak of a virus coupled with collapsing GDP initially last year, but we really bounced back very quickly. And I think by and large, the verdict is that these economies acquitted themselves very well. The financial sector risk was contained, economic growth has returned, and we’ve been managing to keep the virus more at bay than in many other parts of the world.”

Fred adds that China, like the US, is pivoting its fiscal policy towards infrastructural investment and reforms. Meanwhile, emerging markets like Indonesia have been spurred towards a greener recovery, pushing forward with plans to lead the world in electric vehicle battery production.

A mixed picture for SMEs

Staying in Asia, this story of resilience extends to small and medium sized businesses that play a disproportionately vital role in the vast supply chains feeding industry. Fred puts their relative success down to the strength of demand in 2020 for goods, as well as healthy export figures.

Liz suggest that the picture is a little more mixed from her vantage point in the UK:

“If we look at company liquidation numbers globally, they are extraordinarily low, given the year that we've just had. After an uncertain start, support from the UK Government and the Bank of England here really has been game changing. Around £45bn in bounce back loans has been issued, which will have been lifesaving for many. But of course, these companies have taken on a lot of new debts, so there are definitely challenges even with a strong economic rebound.”

All eyes on the consumer

Ryan thinks the outlook in the US is a crucial indicator for how consumer behaviour will eventually influence this rebound.

“In the United States, they've been buying basic necessities like food, but also discretionary purchases such as electronics and home furnishings. Now we're about to see what the effects will be with households going out to all of the leisure and hospitality establishments that they've been staying away from for the past year. And what does that mean to what was previously very robust spending? Do we actually see a bit of a cooling off in these sectors? I think there are more questions than answers.”

Tech will shape the future

In the medium term, the panel agree that digital and tech will also dictate the type of recovery we have. James cites the rapid switch to digital payments that has happened during the pandemic, but also “the younger demographic that is already highly accustomed to using tech in this way for shopping, entertainment and communication.

“We’ll see much more of a digital economy going forwards.”

Fred echoes this point: “Technology is something that levels the playing field, especially if you want to set up on the other side of the world. But the big revolution will now be the export and trade in services, which can be offered online from anywhere.

“A lot has been written about the end of globalisation, but in services we haven’t even scratched the surface of the potential here for global supply and demand. SMEs can play a large role in making the difference.” Their flexibility and dominance in the services sector, he argues, positions them as a vital part of future international trade”.

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