COMMENT Economists and market analysts all have a toolbox of tips, themes and indices they reach for every time a recession hits, and this time is no different. What is relatively unique this time around is the fact we know a recession is coming. Whether this makes our predictions for the future any more accurate remains to be seen, but it certainly gives more time for speculation on the shape of the recovery.
Generally we start a downturn in a hopeful frame of mind, and this tends to lead to a clustering of forecasts around the idea of a V-shaped recovery. I have never been a strong believer in this view, particularly as the scale of government and central bank intervention has been unveiled. Not only is money that might have been spent on other projects quite rightly being diverted to propping up people and businesses, but there is also the question of how higher levels of borrowing will be paid back in the medium term.
The scale of government support will also delay the collapse of some companies, possibly into 2021. Whether this is significant enough to trigger a double-dip in the UK economy is debatable, but it is certainly enough to support my view that the upswing will be less steep than the downswing.
The Brexit factor
The other major moving part in the debate about how the UK will recover is the question of Brexit. The prime minister’s spokesman has consistently stated that we will not be seeking an extension to the transition period that ends this year. However, I find it hard to believe that this tone will not change over the summer, and our core view is that the transition period will be extended to 31 December 2021. If it isn’t, then a W-shaped recovery for the UK becomes significantly more likely.
While property markets generally behave in similar ways during recessions (with tenant demand reducing, subletting rising, vacancy rates rising and, ultimately, rents falling), each recession has one or two unique characteristics. The global financial crisis was all about debt, and I think we will look back at this crisis and comment that its unique characteristic was the importance of consumer behaviour.
Consumer lag
Just as I started writing this piece, a sizeable package of official data was released on the Chinese economy. What was most notable to me about this data was that, generally, business and governmental activity had bounced back fairly strongly in the month that lockdowns ended in China, but consumer activity in the form of retail sales did not. Similar stories are emerging in the USA, with restaurant reservations not picking up the moment that some states allowed them to reopen, as people clearly remained nervous about going out.
Consumer behaviour will shape the angle of the recovery, whether it be through a rise in precautionary saving or paying down debts, or a surge in spending on treats. While behavioural science received a bad press in the run-up to the UK lockdown, it will play a big part in understanding how and where the economy will recover first.
In the office market there is a lot of debate about whether how and where we work has changed forever as a result of this crisis. I don’t know which school of thought is right in this area, but the answer will in part depend on whether workers are more worried about presenteeism and job security in a time of rising unemployment than social distancing.
Returning to my recessionary toolbox, I talked a lot about garden gate economics during the GFC, focusing on trends such as precautionary saving rates, home delivery pizza consumption and tie sales. I suspect these and other soft metrics will tell us as much about the likely trajectory for the UK economy over the remainder of this year as will the hard economic data.
Mat Oakley is head of commercial research at Savills
