The pandemic may finally be past its peak but markets are no longer frontloading a rapid economic recovery as the realization sinks in that the exit from COVID-19 might be messy.
Amid all the government plans and timelines for a return to normality, there’s a parallel rethink among investors about just how cautious consumers will remain beyond the lockdowns - even as restrictions on movement, travel and large gatherings ease.
In the parlance of those trying to predict likely rebound shapes, a hoped-for “V” appears to be morphing into a “tick,” or the Nike “Swoosh,” depending on how you depict a sudden collapse in output followed by only gradual, slow recovery.
Judging by the European Central Bank’s latest survey of professional forecasters, the consensus in Europe appears to be heading towards a “tick” - a pattern described by the bank as “flat and elongated recovery” from the end of the second quarter that takes some time to get back to pre-pandemic levels.
That means the economy will remain damaged for longer and the official cost of nursing it through the pain will rise.
In effect, just dating the start of the recovery from the lifting of lockdowns alone - as investors have done while driving a 25% bounce in world stock markets - may understate the lingering economic hit.
The sideways drift in equities as we enter May speaks to that, even as the trajectory of the virus slows and allows moves to restart frozen economies to pick up pace.
Italy, the European country hit earliest and hardest by the pandemic, began phased reopening on Monday and plans suggest less than 5% of its economy will be locked down by June.
Hong Kong on Tuesday detailed the reopening of gyms and cinemas. Germany’s state of Bavaria aims to partially restart tourism this month. California plans to unlock more shops and South Korea is due to open schools next week.
HSBC’s average timeline from countries that have announced an easing of restrictions suggests partial reopenings will last about four weeks.
But the bank stresses that many countries are still much further away from permitting large gatherings or reopening crowded venues. Plans in Denmark and Ireland do not see lockdowns being fully lifted until August.
“The psychological impact of risk aversion setting in cannot be understated,” HSBC economist James Pomeroy wrote on Monday.
“Until people feel safe returning to places where large crowds are prevalent – such as public transport, bars, restaurants and many recreational venues - consumer spending in this part of the economy is likely to remain subdued.”
“The sector that will be last to return is international tourism,” Pomeroy said.
PSYCHOLOGICAL DISTANCING
Underlining the point, a survey by Ipsos Mori released last week showed that even after restrictions are fully lifted, more than 60% of Britons would be uncomfortable returning to bars and restaurants, using public transport, or going to a large gathering such as a sports event.
More than 40% would still be reluctant to go to the shops or send their children to school and over 30% would be worried about going to work or meeting friends.
A YouGov/CBS poll taken in the United States late last month showed 71% of Americans wouldn’t feel comfortable going to a restaurant or bar if free to do so right away. Some 85% said they wouldn’t get on a plane now even if they could.
And China’s experience already shows that lingering tail of public wariness toward services and gatherings.
Even though it began lifting lockdowns in March and industrial activity rebounded, it saw little or no rise in consumption that month and restaurant sales fell even further, according to statistics monitored by HSBC.
Even by late April, traffic congestion data showed China’s main cities were still 10% to 20% below normal.
Despite relatively light restrictions in Sweden compared with the rest of Europe, the wider public remained almost as cautious about going out and restaurant sales still fell some 70% from last year.
An analysis by Barclays of weaker-than-expected European growth numbers for the first quarter suggests households were already adjusting their behavior in advance of official stay-at-home orders.
Even though this behavior prompted Barclays to downgrade euro zone output forecasts to minus 10.1% for the year, numbers from the United States and France showed spending fell much more than income, lifting savings rates that may help fuel a recovery.
ALL PRICED IN?
Despite the sharp bounce in MSCI’s all-country world stocks index, it has only regained about half its peak-to-trough collapse from late February to March 20 and equity volatility on Wall Street remains stubbornly above 30% - more than twice pre-pandemic averages.
JPMorgan’s standing assumption is that global earnings will recover but still end next year about 20% below pre-crisis outlooks. Sector by sector discrimination is clear, with technology stocks an obvious winner and leading the pack higher.
Credit markets have healed, but largely on overwhelming central bank and government support.
Stock market bears such as TS Lombard believe policymakers can’t stop the cycle and the economy will remain in recession longer than the lockdowns.
Optimists such as Morgan Stanley reckon the “V” still holds for industry, even if consumption returns with a lag after the lifting of restrictions.
But all agree public confidence as well as testing, tracing, treatments and ultimately a vaccine are required for economies to heal completely.
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