How does this recession compare?

The contraction described by incoming statistics in the UK and wider world these last few weeks has few, if any, peers. The bald statistics are certainly staggering. We have to go back to the Great Depression to find anything in the UK’s statistical memory that would compare. Even then, the 12% bite taken out of the UK’s third quarter output of 1921 is less than half of the percentage chunk taken out of the second quarter of this year by the coronavirus crisis. However, the numbers alone leave much of the story untold. When thinking about the effects on businesses, consumers and investors we need to take many other factors into account.

Remember, most recessions can be seen as a sort of corrective force. A painful but necessary adjustment to a part of the economy that had become out of shape. Often this can inform the pace of recovery from the contraction. For instance, the last crisis left a huge stock of mostly unwanted homes in the US for the economy to work through and a financial system to substantially reorganise among many other things. These factors dragged on the global economy’s ability to rapidly recover. This is not the case this time – most of the world’s major economic actors were actually in notably decent health as the crisis struck. In one sense, there was no urgent need for a recession. However, the pandemic forced the world’s governments into putting large portions of the global economy into a kind of suspended animation in order to contain the spread of the virus. This has largely resulted in the recession we see today, but is also informing a much brisker than normal recovery from those lows.

Just as the second quarter registered record breaking declines in output for many of the world’s major economies, the third quarter will likely see some of the fastest ever quarterly rises. Freed from the need to preserve some form of moral hazard and armed with a freshly inked playbook from the great financial crisis (and indeed many other recessions and depressions of the past), policy makers around the world have responded with impressive and unprecedented vigour. Once we get to the other side of this crisis, a true assessment of the damage will focus on the cumulative bite taken out of output rather than just the shocking descent. Our hunch is that the factors outlined above will likely relegate this recession well down the list of economic cataclysms of history when that more complete context is available. None of this is to argue that there are no challenges ahead of course, there are plenty. The above is simply to caution against automatic despondency based on an output number that may mean quite a lot less than often advertised.

For would-be investors trying to translate these gigantic moves in global output into the moves they see in the world’s stock and bond markets, the major problem is the anticipatory nature of capital markets – an issue that’s always existed. The downturn that the mainstream economic data is now telling us about is ancient history for capital markets. The world’s stock markets bottomed back at the end of March, looking beyond the slump to a rebound that was yet to start. Developed world shares, with significant regional variation dependent on sector composition, are now above where they started the year as a result.

The reality for would be investors is that these financial market spasms are an unavoidable part of investing. If we could reliably predict recessions, they would not exist – it would not just be investors hopping out of the way, but businesses, governments and consumers too. However, if these recessions and downturns are part of the tax for investing, the longer term rewards have proved well worth it for those who have persevered. These rewards do not accrue to those who can see the future better than others, it is a simple function of diversifying efficiently to gather up the proceeds of humankind’s ongoing ingenuity and restlessness.

We do not know who will have the next great idea, or which country that person or group of people will come from. However, a close study of history tells us that we would be unwise to bet against our species having any more good ideas on how to do more with less. From the humble shipping container, through to the excel spreadsheet and the current advances in AI and robotics, the rewards accrue to those who would take the risk of owning the world’s companies and lending to them. This driving force of financial markets returns has historically far outweighed the infrequent, albeit hair raising dips, by many orders of magnitude for those able to stick with it for years rather than months.

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*This article is for information purposes only. It is not intended as a product offer or investment advice.