Page 8 - ISQ UK July 2020

INVESTMENT STRATEGY QUARTERLY

“ The bigger dangers are not doing enough

to back up the economy in the near term
and ending support too soon. ”

Yet, the relationships between growth, inflation, and the money It will take the economy even longer for GDP to get back to its
supply broke down in the early 1990s. For the most part, the previous trend. Absent a vaccine or effective treatment, the
Fed views inflation as driven by inflation expectations and sectors affected most by social distancing can be expected to
pressures in resource markets – capital, labour, and raw recover gradually. We could have some luck with the
materials. Following the great inflation of the 1970s and early development of a vaccine, but risks to the outlook into next
1980s, the Fed spent decades establishing its credibility as an year appear predominately to the downside.
inflation fighter and was perhaps a little too successful in
keeping inflation low. It has struggled to achieve its 2% inflation One fear is that reopening the economy too soon raises the risk
goal over the last several years. Importantly, the Fed and other of a second wave of infections and a more prolonged period of
central banks around the world have not abandoned their social distancing. More likely, the US has implicitly settled on a
inflation goals. There is no conspiracy to monetise the debt. trade-off between economic activity and a moderate pace of
new infections and deaths.
The pandemic has shifted from a supply shock to a demand
shock. There is excess productive capacity globally. While there Severe recessions usually leave long-lasting impacts on
may be some bottleneck inflation pressures as economies economic activity. Consumer behavior and global trade are
around the world begin to recover and supply chains are unlikely to return to previous patterns. While the recent
adjusted, significant inflation pressures in capital and raw improvement in the economy is welcome, there will be
materials are unlikely. In the US, the labour market is the widest significant long-term damage in some sectors. As Fed Chair
channel for inflation. Labour cost pressures are expected to be Powell noted, the coronavirus has taken a human and economic
mixed, but generally moderate. In the near term, high toll and “the burden has fallen most heavily on those least able
unemployment should keep wage increases in check, although to bear it.”
job losses have been highest at the low end where there wasn’t
much pressure to begin with.

RECESSION AND RECOVERY KEY TAKEAWAYS:
The recession began in February and may have ended in April • As states have relaxed social distancing guidelines,
or May. That would be the shortest downturn on record. That growth has picked up sharply.
doesn’t mean that the economy has recovered; it simply means • Federal support has played a key role in countering
that the economy began growing again. As the downturn was the economic effects of the pandemic.
unprecedentedly large and swift, the initial rebound will be
exceptionally strong and investors have eagerly embraced that • The recession began in February and may have
view. Economists expect that third quarter GDP growth will be ended in April or May – the shortest on record. That
the strongest ever recorded, led by a sharp rebound in consumer just means that the economy began growing again, it
spending. With the ability to spend limited in the downturn, doesn’t mean that the economy has recovered.
savings improved, and that should fuel spending in the near • The pace of recovery will depend on the virus and
term. However, the initial rebound will leave the level of GDP far efforts to contain it, but it will likely be several
below where it was at the end of 2019. quarters before GDP returns to its pre-pandemic
level.
Looking ahead, the pace of recovery will depend on the virus
and efforts to contain it, but it will likely be several quarters
before GDP returns to its pre-pandemic level.

7