Low-risk sectors with a lower shock persistence include agriculture and professional services, the latter boosted by the work-from-home movement. High-risk sectors include transportation and indoor recreational activities.
Vanguard posits that a rebound in aggregate demand will take longer than a recovery in supply due to uncertainty about when people who've been economically impacted by the lockdowns will recover their incomes, along with lingering fears of taking part in face-to-face activities.
“The latter may not fully dissipate until a vaccine or therapeutic treatment is found, or until the virus has been eliminated by suppression or herd immunity,” according to the report. “This will likely extend a full recovery well beyond 2021.”
Vanguard praised policy responses to the virus as being “impressively bold and swift,” and it sees monetary policy staying loose well into next year, with further fiscal support being likely.
“The burden of the resulting increase in public debt should be lessened by current extremely low financing costs. Inflation will likely remain subdued given the prolonged period of excess capacity,” Vanguard said.
But while Vanguard believes that governments have appropriately responded by propping up their respective economies, it offers that productivity could be lower for three reasons:
• Company bankruptcies or the inability to service loans due to impaired cash flows could take many years to recover from.
• People who lost jobs during the pandemic might lose skills or become permanently disconnected from the labor force.
• Airlines, commercial real estate and other industries might never recover their former size, and redistributing those activities to other sectors where demand has been reallocated could take a long time.
Regarding the financial markets, Vanguard appears to be cautiously optimistic. That is, as long as investors remain realistic about the current realities.