Economic Recovery: is the worst still to come?

After 18 months of turmoil, it’s no surprise coronavirus fatigue has set in. Just as the outbreak looks to be under control, a more virulent strain starts a new wildfire of contagion, and all progress is lost. These days, any positive sign of declining infection and economic recovery is magnified by people hoping for a return to normality. But this optimism could be risky. There are still many uncertainties that could impact people, businesses and the broader economy. All of which could have long-term implications for assets and investments.

Economic rollercoaster

The steep decline in economic output during the various lockdowns was always going to prompt an upswing in activity when the restrictions were reversed. Instead, economic growth has plummeted and surged since the pandemic started. As a result, we saw an upswing in April (estimated GDP growth of 2.6%) after falling 1.6% in the first quarter of 2021.

But it would be naïve to think the only way is up. Even if the UK government has decided to open up the remaining parts of the economy still subject to restrictions on July 19, the lingering effects of the lockdowns continue to ripple throughout society.

The end of furlough

The tapering of the furlough scheme has recently started, adding new burdens on under-pressure businesses. The scheme was designed to avoid mass lay-offs during the enforced shutdown of whole industries. By and large, it has managed to underpin employment during the pandemic. But the full effect of the pandemic on businesses and employees is yet to become apparent. Companies that were operating with government support until now will have to lay off staff if they can’t get back to profitability.

Looming redundancies

The knock-on effect of these redundancies is a labour market with fewer competitive jobs, more people out of work or in lower-paid employment unable to pay mortgages or taking out risky loans to cover bills.

Overheated from a prolonged stamp duty holiday, the property market is the next domino in the chain. Defaults or forced sales from the newly unemployed could send the market on a downward trajectory of negative equity and declining prices (prices already started to dip in June). This would also limit consumer spending, which is beginning to feel the inflationary pinch. Lower spending reinforces the recessionary pressure, and the economy returns to a downward cycle.

A forecasting fog

In this climate of uncertainty, business forecasting becomes very difficult. The risk to equity markets increases, with values dropping to reflect this. Bond yields increase to reflect increased counterparty risk. The effect of consumer and business pressure puts banks under pressure too. This could result in cost-cutting, job losses, and concerns about the security of cash on deposit.

Each of these outcomes is feasible on its own, but the snowball effect magnifies the impact of them all. The UK government has decided to proceed with a substantial roll-back of Covid-19 restrictions. By its own admission, the government expects cases to rise sharply. While vaccinations are keeping hospitalisation numbers down, the inevitable rise in illness and the long-term effects of the disease will impact productivity, jobs, and businesses with less support as furlough is wound down.

Covid-19 mutations

The UK may be using its vaccination success to throw its doors open again. Still, the rest of the world remains at risk, incubating potential mutations that could reset the clock if one of these new strains can circumvent the vaccine.

Brexit hangover

Brexit hasn’t helped either. Staffing for some low-wage jobs primarily undertaken by migrants is under pressure as Covid-19, and the Brexit changes have kept many of them away. Companies are finding it difficult to both import goods and export them for sale. The cost of doing business outside of the UK has gone up substantially. “Almost a third of businesses that trade with the EU have suffered a decline or loss of business since new barriers to trade were introduced on January 1,” according to a survey by the Institute of Directors.

Optimism or realism?

Being optimistic about the future is not wrong. But it can be damaging to assets or investments if the optimism is bereft of realism. Recession is a real possibility. It may not be likely in the short term while the economy is being shored up with billions of borrowed pounds, but the pressure built up during the repeated lockdowns and prolonged restrictions will need an outlet.

Prudent portfolio investment

Considering these possible outcomes, it is prudent to ensure your portfolio is balanced and includes investments that hedge against the possibility of a recession. With inflation on the rise and interest rates at historic lows, there is little reason to hold cash. Instead, an alternative form of legal tender in the shape of gold coins can be used as a hedge against a potential economic decline.

The gold standard

Gold has held its value for centuries and usually rises in times of uncertainty as investors flock to safe-haven assets with an excellent track record. When stock markets are in turmoil, the gold price often increases, and this hedge gives balance to an investment portfolio. Since the pandemic, investment gold had touched new all-time highs, settling back when the vaccines were approved but finding more support as new waves have rocked both near and far shores. At close to £1300 today, gold has nearly doubled in price over the last five years.

A tax-efficient investment

Gold is free of VAT, and legal tender coins like the Gold Britannia or Gold Sovereign are free of capital gains tax. It can also be invested in a SIPP to ensure your pension portfolio isn’t at risk of the vagaries of the stock market.

The world may look in much better shape today compared to the unprecedented situation we found ourselves in last year. Still, there is a long way to go before the economic and social shockwaves become mere ripples in history.