Similar to what happened after the Global Financial Crisis (GFC), many investors shied away from risk once the Covid-19 pandemic hit the global markets. However, unlike the GFC, the current crisis is one of supply and demand shock. As a result, the global markets are being squeezed from two sides.

At the start of the pandemic, Covid-19 led to a reduction in goods and exports, thereby interrupting supply chains to Germany, where I am based, and other parts of the world. However, what caused economies to tumble was the halt in manufacturing across many parts of the world due to lockdowns and consumers limiting their purchases to essentials only. This has led to a recession in many countries, including Germany where the ifo Institute is predicting a contraction of between 7.2 per cent and 20.6 per cent this year.

We will only know how hard each country is hit once we have completely come out of the pandemic. It is still too early to make precise predictions on the extent of the impact however, in many countries, there are indications that the slump might be worse than during the GFC.

Many of the lockdown measures implemented led to trips being cancelled, restaurants closing and retailers shutting their shops. This in turn led to many companies making far less or no money at all. At the same time fixed costs such as paying rent and employees' salaries didn’t go away.

In the worst case, this will lead to some companies going bust, resulting in less tax revenue. However, many countries in Europe including the UK have also pledged huge support packages, most significantly paying for furloughed staff, on top of facing increased healthcare costs. All this is paid for by taking on larger amounts of government debt.

So what happens next? Unlike the GFC this shock does not originate from an ailing system, but has an external cause. To withstand the crisis, there is no reason to fix the system. For the economies to recover, we need to contain the external cause.

Debt to GDP ratios will be higher, but they will also fall again as soon as economic growth picks up. Then banks will be also willing again to pass on the low interest rates to investors and the property market can return to ‘the new normal’.

Further information

Contact Savills Research