LME week: Economies face repression, HSBC says

Global economies will suffer under financial repression for the next two years and possibly longer as they recover from the effects of the Covid-19 pandemic, bank HSBC's chief economist, Janet Henry, told delegates on the London Metal Exchange's metals seminar today.

"We may look back and realise that we've probably experienced the easiest part of the recovery after the plunge in activity we saw in the second quarter of 2020," Henry said.

The reopening of world economies following lockdown restrictions earlier in the year has been aided by huge stimulus measures from central banks and governments, but the pace of improvement in markets is starting to falter and Henry expects this to be a long-term trend.

"Even by the end of 2021, things will still be somewhat subdued," she said. "We're facing a world with rising unemployment and rising debt in the coming two years."

China's economy has bounced back strongly in recent weeks as manufacturing activity has recovered, with a significant boost coming from its first-to-reopen status and the demand for pandemic-related goods and electronics, such as hospital equipment and computers to support the shift to home working. But advanced economies that have a greater reliance on service industries face a more difficult future, with overall spending confidence likely to fall as a result.

Additionally, while it may be unlikely that countries will again enact sweeping lockdown restrictions, there are increasing incidences of localised lockdowns as coronavirus infections increase in numerous regions.

"The easy part was the initial bounce-back from reopening economies and pent-up demand, but we're now seeing localised lockdowns," Henry said. "Even localised lockdowns will have an impact on the markets."

With growing employment uncertainty will come lower consumer confidence and higher savings rates, Henry warned, which will only worsen as government support schemes are phased out.

Central banks have detailed a number of measures they could still take to protect economies, such as more quantitative easing, generous financing schemes and even negative interest rates, but this will not stop what will be a difficult few years to come for world markets.

"For the next couple of years at least, and potentially much longer, this will be a world, particularly in advanced economies, of financial repression," Henry said.

Jethro Wookey