Schroders chief economist Keith Wade says the current downturn is following the path of the eighties downturn: “People have yet to really acknowledge that this recession is going to be much longer and much deeper than first expected.”
But Wade says this recession is unique as it is not a recession to correct interest rates like previous slumps, but a recession based on the inability to control the economy with monetary tools.
He says: ““No one is willing to look more than one quarter ahead because this isn’t an inflationary cycle, it’s a full-blown banking crisis.
“So far banks across the world have written off about £820bn ($1.2 trillion) but some reports estimate that worldwide write-offs could reach as much as £2.1 trillion ($3 trillion), this is why investors are so wary: we may not even be halfway through the write-offs yet.”
As a result, Schroders says this recession could particularly fierce. Wade says profit earnings are now sliding with price indexes as institutions choose to hoard money and cut dividends. “The equities market has become myopic because we don’t know whether we will see any more banking write-offs,” he says.
But Wade says he isn’t completely bearish. By looking at the Shiller profit earnings, which is derived using 10-year rolling averages, he says there is an end in sight: “Using the Shiller ratio, we have predicted 15 per cent annualised returns by 2020,” says Wade.