The Week: Living with uncertainty

Uncertainty has become a fact of life in recent years. The IMF’s recent assessment of the state of the global economy makes things little clearer.

  • The pandemic will see global growth fall by 4.4% in 2020.
  • Longer term, growth should recover to a pace of around 3.5% per year.
  • There is still significant uncertainty around these figures.

We now have an approximate cost for the global pandemic: $28 trillion over the next five years. This was the IMF’s frightening assessment of the impact of Covid-19, along with a prediction that the pandemic would shave 4.4% off global growth in 2020.

This represented a small revision higher for 2020 from an initial assessment of a fall of 5.2%. The IMF said this small note of optimism was down to developed economies recovering from lockdown measures more quickly than initially expected. Longer term, growth should recover to a pace of around 3.5% per year.

The risks to this assessment are finely balanced. On the one hand, progress with vaccines or effective treatments would allow the global economy to re-open and activity to resume to pre-pandemic levels. On the other, if the virus mutates, progress on treatment or vaccines stalls or is slower than expected, then the outcome could be considerably worse than expected.  

There is another problem. Even if a vaccine were found tomorrow, would ‘normal’ life resume? There is considerable debate about whether life after the pandemic will return to the way it was before or whether there will be a ‘new normal’, where we commute less, work from home more, live lives more focused on well-being than profit and ambition.

This will affect whether companies will benefit from pent-up demand: have consumers permanently lost their appetite for exotic holidays and fancy gadgets? Or is it the case that we will all spring back to normal consumption patterns once we know theIn pandemic is over and our jobs are secure?

It is also clear that there may be a new world order. China has the infection under control and that gives it the capacity to grow once again. It is likely to turn in positive growth for 2020, albeit at a substantially reduced rate. In contrast, Western economic growth is likely to be weighed down by the debt burden left by the crisis. It is difficult to see how this balance of economic power doesn’t reshape the geopolitical order to some extent.

As the IMF says: “The uncertainty surrounding the baseline projection is unusually large. The forecast rests on public health and economic factors that are inherently difficult to predict.” From the pandemic, to Brexit, to the US election, investors have had to learn to live with uncertainty in recent years. There is no sign of certainty re-emerging.