The economic scars post-Covid will run deeper – and last longer – than you may think

This will define the 2020s in the way that recovery from the banking crash of 2008 and 2009 defined the 2010s, writes Hamish McRae

We may have to wait a long time to see a complete economic recovery from Covid-19 (Getty/iStock)

Last year was a great year for US investors, but a pretty iffy one for UK ones – unless they had the foresight to buy American stuff. But what now?

How will the fiscal and monetary boost unwind? And how deep are the long-term scars of the world economy post Covid-19? Global markets have had a bumpy few weeks so if ever there were a time for trying to take a really long view of investment it must be now.

A really long view? How about a century or so? For the past 66 years the Equity Gilt Study has looked at UK investment returns going back to 1899 and US ones to 1925. It was started by London stockbrokers de Zoete & Bevan and carried on by Barclays after it took them over after the “Big Bang” reforms of the 1980s. it has two key messages for investors. One is that over a long period equities will give better returns that bonds or cash. The other is that the key to getting high returns is reinvesting dividends. That way you beat inflation by a decent margin.

So with dividends reinvested, US equities have given an average real annual return of 6.9 per cent since 1925, whereas US government bonds have given only 2.7 per cent. In the UK the real annual returns since 1899 are 4.9 per cent and 1.4 per cent. True, these calculations assume you don’t pay tax or investment management charges, so actual returns would be lower.

Also there have been longish periods when asset prices have plunged. The 2000 to 2010 decade was poor for UK equities, for even allowing for dividends an investment barely broke even. But anyone investing for a pension might have a time horizon of 40 years, so it is reasonable to say that good and bad decades will probably even out.

But what now? There has been the huge bull run of shares in the US, particularly tech ones. There has been the widespread disruption from the pandemic, with the winners and losers from that. And there has been the massive fiscal and monetary stimulus, unprecedented in peacetime, ploughed in by governments to try to keep their economies going. The study this year has a series of articles looking at four big questions investors, and indeed all of us, must face.

First, how will the stimulus unwind? The US has put in the biggest boost so it faces the greatest challenge. Barclays thinks the balance of probability is that it will manage to get back to more normal borrowing and interest rate levels in an orderly way, but acknowledges the possibility that it may not.

Europe, it thinks, will have an easier exit, largely because the scale of the boost it has given has been much more limited. However it raises the possibility that Europe will become more like Japan, where bad debts are just rolled forward, “extend and pretend”, and the economy stagnates. Maybe populist pressures will burst out if Europe suffer serious disruption as a result.

That leads to question two: does debt matter? Barclays notes that many people think it doesn’t anymore. But maybe that will be the moment when it suddenly does. Maybe this does not matter so much for solid developed economies, but it might very much for emerging ones. (And those of us old enough to remember the UK going to the IMF for a bailout in 1976 certainly feel a chill.)

Third, there is the sectoral impact: the devastation of the travel and tourism business. The study thinks that there will be long-term scars, as travel recovers only slowly. Those scars will be deepest in economies that rely heavily on tourist revenues to support employment and activity. Global mobility will decline, and emerging economies will be particularly hard hit.

Finally, there is the shift to online working, the end of the commute. The conclusions here are straightforward. There will be a shift in land use, with city centres struggling to repurpose office space with housing, with houses preferred over flats, and with suburbia flourishing. Office space will drop by one-fifth, and paradoxically people may spend more time commuting, because they will make more short trips in cars to different locations, instead of a regular trip to a central office.

My overriding readout from all this is that the scars will be deeper and the recovery take longer than many people think. This will define the 2020s in the way that recovery from the banking crash of 2008 and 2009 defined the 2010s. If that sounds depressing, particularly for people early in the careers, consider this.

On the very long view, encompassing – for the UK – both world wars and the great inflation of the 1970s, people who work hard, and save and invest wisely, can protect themselves against grave disruption. I can’t believe that anything will happen in the next couple of decades that will be as bad as the events of the first half of the last century. There is a lot of comfort in the very long view.