Sarasin & Partners' four features of the post-Covid economy

Key themes to look out for beyond Q2

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Subitha Subramaniam, chief economist at Sarasin & Partners, looks at the four trends investors can expect to see in a post-pandemic world.
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Step down in growth

Deep recessions impair balance sheets and lower growth potential. Since 1990, the US economy has emerged from every recession to grow at an incrementally slower pace. 

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Subdued spending

Assuming Covid-19 will impact the normal functioning of the global economy for the next 18 months, this is a lengthy disruption that will reshape consumption and investment. 

Projections suggest it will take three years for the US economy to recover lost output and four years for the UK economy to regain 2019 levels.

Firstly, lost consumption in the first half of 2020 will not be recouped in subsequent quarters. As lockdown eases further, there will be some pent-up demand, but lingering health concerns will significantly reduce this impulse.

 Instead, the rebound in Q3 and Q4 will primarily be driven by a resumption in activity. 

Households will maintain high levels of precautionary savings and this will suppress consumption growth in 2021. Meanwhile, business investment will remain weak as uncertainty prevails. 

Retail, hospitality and leisure sectors are likely to suffer material impairments to their business models and will need to adapt to provide low-contact environments. 

In contrast, investment in technology, telecommunications, logistics and health systems will likely receive a boost. 

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Move to fiscal dominance

If the GFC forced the world’s central bankers to adopt financial repression, the 'no-fault' Covid-19 recession is likely to push them deeper into repression’s embrace and closer to the world of fiscal dominance. 

The key pillars are likely to be interest rate repression, banking sector regulation and re-domestication of savings.

In advanced economies, government schemes to support income and lending are expected to increase debt-to-GDP ratios by roughly 20%-30%, exceeding conventional thresholds of 100% of GDP in most cases. 

The key issue for the medium term is if and how this debt will be repaid and the impact of these strategies on growth. 

We expect orthodox measures reducing debt burdens, such as running primary budget surpluses and privatising government assets, will be rejected. Instead, heterodox measures will be embraced.

 Specifically, we anticipate greater co-ordination between monetary policy and fiscal policy and expect the lines between monetary policy and government debt management to become increasingly blurred. 

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Walled gardens materialising

In the post-GFC era, slow growth and widening inequality have propelled many populist governments into power, with a mandate to 'level up' the 'squeezed middle'. 

The populist response has been to retreat from globalisation and turn economies into walled gardens. This trend will accelerate in the post-Covid world, with the contours of this metaphoric walled garden including a trade wall, a technology wall, and an immigration wall.

Growth in global trade has been slowing since the GFC and President Trump's tariffs have accelerated this downtrend over the past two years. 

Covid-19 is likely to cause a further deceleration in trade as multinationals re-evaluate long China-centric supply chains. 

Firms will likely build greater supply chain resilience through geographic diversification of suppliers and by increasing local content, while governments are likely to mandate local production in critical industries. In time, growth in global trade is likely to run well below growth in GDP.

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Walled gardens materialising (cont.)

Meanwhile, US-China relations have shifted to strategic hostility. In the US, there is bipartisan consensus China does not abide by global rules and will threaten the liberal order if it remains unchecked. 

Thus far, Trump has forged bilateral alliances to curtail China's economic power. But in the post-Covid era the US may abandon its unilateral approach in favour of a 'coalition of the willing'. 

As the US intensifies efforts to assert US technological supremacy and limit Chinese access, China will likely respond by de-Americanising its technology imports. 

The technology ecosystem we have today will likely bifurcate into two ecosystems that eventually become mutually incompatible. 
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Walled gardens materialising (cont.)

Finally, levelling-up policies, which seek to reduce inequality, are gaining strength globally. 

Populist leaders believe rampant globalisation and migration have exposed lower skilled workers to relentless competition from cheaper labour and played a key role in real wage stagnation. 

In a post-Covid world, immigration is likely to be curtailed, to ensure jobs that return after Covid are not lost to cheaper migrants. 

Only with a firm border in place can levelling up policies, aimed at those who have done less well after the GFC and those more vulnerable after Covid, be successful.

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Subitha Subramaniam, chief economist at Sarasin & Partners, looks at the four trends investors can expect to see in a post-pandemic world.

Covid-19 has brought the world to a standstill and disrupted every facet of our lives. Our best guess is these disruptions will continue at least until the summer of 2021. 

But what kind of economy will emerge in its wake and what will the ensuing landscape look like?

Deep recessions meaningfully change economic outcomes. After the Global Financial Crisis (GFC), central banks embarked on financial repression - which included the aggressive suppression of interest rates, increased regulation of banks and ringfencing of capital markets.

While this boosted asset prices, it accentuated the prevailing wealth and income inequity, fuelling a movement in favour of policies aiming to 'level up' those who fared less well post-crisis. 

The scale and duration of the Covid-19 disruption will likely accelerate many of the long-term trends already underway - financial repression, walled gardens and levelling up - while bringing forward new ones.

The gallery above shows four features we can expect to see in the post-Covid world.

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