By Andrew Duguay
Originally posted on Marketwatch.com
Both businesses and consumers will hit speed bumps in adapting to the new environment
Economic forecasting is challenging in the best of times, let alone during a global pandemic, but there are always scenarios that are more likely than others. We will see some recovery in the second half of the year. Businesses will rebound as stores reopen and shoppers start injecting discretionary spend into the economy again.
The likelihood, however, is that this recovery will not be the more pronounced, so-called V-shaped recovery. It’s unrealistic to presume that an economy and a society, which have endured unprecedented structural and psychological hardships, will emerge on the other side unscathed and unchanged. So what will happen? Here are some likely scenarios.
Weakening demand will impact manufacturing
Manufacturing may be underestimating the challenges that lay ahead because the nature of the challenges has changed. Over the course of the last decade, manufacturing faced a number of stiff economic trials, including what was essentially its own recession from 2015 to 2017. The crux of the challenges then was supply; today, however, the overriding factor is weak demand. Many industries are in a standstill, businesses are shuttering, and consumers are hunkering down — all of which creates ripple effects for industrial production.
Over the course of the next month or two, businesses will reopen, as permitted, and they will hire back some, though not all, of their furloughed employees. Demand will not return in full. Manufacturing will sputter in the wake of global disruptions and anemic global demand.
Expect continued market volatility
Consumer uncertainty and market volatility will persist through the rest of the year. The virus will continue to loom in the absence of a vaccine, even as employees re-enter the workforce and businesses reopen. Consumers will remain wary of their health and job security.
Volatile financial markets will struggle to stabilize as companies attempt to find their footing after budget cuts and layoffs. Businesses and consumers alike will attempt to navigate a new normal, spurred by changing consumer behaviors due to quarantine living and the businesses that restructured their operations to cater to those new needs.
All of which will be amplified by the presidential election, which historically has given consumers pause. Consumers will likely remain tightfisted through the holiday retail season. Fast-moving consumer goods may rebound, but durables and other big-ticket items will flounder.
Impact of credit defaults
An unintended consequence of a strong economy is excessive borrowing. There’s been a long period of prosperity in between recessions in this last decade during which a massive amount of corporate debt was created due to a growing economy and low interest rates.
This environment encouraged a raft of acquisitions, which left many companies overleveraged and vulnerable to a tough economy. A parallel phenomenon took place among consumers, who took out mortgages and opened up credit lines at higher rates. Higher unemployment through 2021 will put pressure on that consumer debt.
These conditions will have a few implications for the remainder of the fiscal year and into 2021. Defaults through 2020 will be elevated but only in certain industries. Foreclosures and consumer loan default rates will creep up, but they won’t rise to catastrophic rates. Credit markets will maintain liquidity, provided the Fed lends sufficient support.
Expect a U-shaped recovery
Experts have been providing forecasts that range from the next Great Depression to an immediate recovery. The reality is that recovery will be somewhere in the middle. Though there is quite a range in between those two forecasts, the likelihood is that we’ll experience uncertainty through the end of the year, followed by a recovery in 2021, driven in part by emerging opportunities and restructuring industries.
Andrew Duguay is the chief economist at Prevedere, an industry insights and predictive analytics company.