We believe several factors will hinder the pace of recovery. On the consumer front, the economic damage that the virus has wrought – particularly with respect to employment and earnings — will have lingering effect. Even beyond the income hole created by temporary or permanent job losses, consumer behaviour will be changed. In our view, the re-opening of economies will not mean a quick return to “normal” — social distancing practices, ongoing concern over health, and the desire for greater precautionary savings will partially offset the release of pent-up demand.
On the business side, increased uncertainty over the outlook, post-crisis overcapacity (particularly in hard-hit sectors, e.g. airlines, hotels, energy), and high debt levels will restrain the rebound in capital spending. While output will surely bounce as the lockdowns are lifted, the case for a strong and sustained consumer- or business-led recovery is limited. In the UK, US, Euro area, and Japan, we expect large increases in real GDP in Q3 and Q4 (recouping a good portion of the output lost in H1) to give way to progressively smaller gains through 2021 — resulting in an “italicised V” or “swoosh-shaped” recovery (in China, the return to pre-virus levels is seen earlier).