As many countries look forward to coming out of lockdown, there are various views about how quickly the economy will return to normal. This is of particular importance to investors because stock markets have rallied strongly off the March lows and in some cases have already priced in a return to ‘normal’. The focus has been on forecasts for a strong recovery in economic growth once everyone is let out and can go back to work. Of course, predicting the future following an unprecedented event is always going to be a challenge but we can be certain that the way we live and work during the next year, at least, will only vaguely resemble the past.

The airline industry will benefit from the low oil price, but it only really helps if planes are flying. Airlines are predicting their business won’t be back to normal until around 2023, which is a long way off and presumes no second wave, which itself is almost certain to happen, absent a widely available vaccine or herd immunity, if past pandemics are a guide. Hotels are not expecting a rush of bookings anytime soon, whereas villa rentals could see more demand once people are able to travel. Restaurants are a fragile business at the best of times and many potential diners may well choose to avoid eating in a crowded room whilst wearing a mask, but those restaurants able to offer a takeaway service will suffer less.

Any business that involves a crowd will struggle, such as events like pop concerts, cinemas, football matches or even anything that involves a long queue during normal circumstances such as theme parks or airports. Demand for retail premises was already under huge pressure before the shops were closed and the shift towards online sales has accelerated significantly. Now, demand for office space might never fully recover as tele-working has shown its benefits and will probably be used to split up teams of workers to avoid infections that can shut down an entire business. The debt used to purchase commercial property assets may also become a problem if a high number of tenants continue to struggle with paying their rents and many property funds are already gated.

Then there are the wider implications of massive unemployment. Obviously it is hoped that the majority of people who have been forced to stop work will soon be rehired, but it seems plausible that many companies will want to gauge the level of demand recovery before committing to take on more staff. We can probably expect high unemployment to endure for some time, which is never good for the housing market or for consumer spending in general. If demand does not rebound, perhaps due to fears about job security, falling house prices or the ability to service personal debts, then we can expect to see more businesses collapse. You can see how this could develop into a downward spiral, sometimes described as a doom loop. Credit conditions might be loose but that doesn’t mean people will feel confident enough to borrow and spend, especially as household debt levels in many countries were already high before the virus struck.

Whilst this all sounds very negative, what I am describing is, or at least used to be, a natural part of the economic cycle. A recession is painful for the weaker parts of society but it has the longer term effect of making the economy stronger. It eliminates bad investments as they go bust, it forces survivors to become stronger and more efficient, and it cements the strong position of businesses that are well run with sound balance sheets and a good sense of what people want and need. Where the modern world has changed is that central banks believe they can eliminate recessions and their effects. If you agree to guarantee the debt of the weakest companies and pay the salaries of people who would be laid off, you prolong the economic life of the bad as well as the good. Japan was heavily criticized for keeping ‘zombie companies’ on life support after its bubble(s) burst in the 1990s but other countries have succumbed to the same fate and followed suit.

Returning to my original point, the v-shaped rebound in the stock market appears to be completely at odds with the more likely drawn out impact of the lockdown. Government and central bank stimulus addresses the short term symptoms but does little to address the underlying problems facing the economy – weaker spending power, much higher levels of debt, severely impaired employment prospects and behavioural restrictions that could endure for several years. Things do have a habit of recovering more quickly than we might sometimes anticipate, but if this truly is the worst economic shock in history then we can expect to see some lasting effects which will probably get priced into equity valuations at some point.

Richard McCreery is an investment adviser with over 20 years experience, based in the South of France. Regulated in France by the Association Nationale des Conseils Financiers (ANACOFI), registration N° E004136. ORIAS member 13000050