Investment Clock insights

Coronavirus views 1 May 2020 - economic viewpoint


Melanie Baker 

1 May 2020

After last week’s business survey data, it was the turn of GDP numbers to remind us of the economic damage being wrought by the current crisis. In France, GDP declined in Q1 by the most in a single quarter since 1949. For the euro area as a whole, output fell 3.8%Q. Earlier in the week, the US also recorded negative GDP growth – though showing less of a contraction in activity than in the euro area, likely reflecting later lockdowns. What in normal times would be an awful set of GDP numbers, is now just the prelude for something more awful in Q2 (which will reflect more weeks of lockdown). 
There were more plans published for, and announcements of, easing social distancing in parts of Europe this week. That is positive news for the economy but not in a straightforward way. 1) Social distancing isn’t being abandoned – just eased, gradually. 2) The strength of the recovery depends on the degree of economic scarring that is taking place now – how many are losing their jobs outright; how many companies don’t reopen; what kind of balance sheet damage is being inflicted. A lot of economic policy support has been directed to these concerns. 3) Just because the government tells businesses and households that they can now do something, doesn’t mean that they will. Governments can’t just switch economic activity on again. While fear of the virus remains, the recovery will lag. Among other things, many households will worry about their job security, which itself will hold back spending. In the European Commission sentiment surveys this week, we saw sharp increases in unemployment expectations. 
Again, China data this week were a reminder that the path of recovery everywhere is likely to be an uneven one. China’s manufacturing PMI business surveys deteriorated a bit in April, having bounced strongly in March as China’s lockdowns ended, pulled down by weak external demand. Meanwhile the services survey suggested some parts of the services sector are seeing falling activity, despite lockdowns having ended. 
In the US, it was interesting to see the personal savings rate rise sharply in Q1 as consumer spending fell ahead of incomes. Temporarily more generous US unemployment benefit should help support incomes somewhat in Q2. Higher household savings would be helpful in supporting future spending, but much will depend on how many workers are re-hired in the recovery and to what degree virus worries constrain consumer behaviour. 
As for economic policymakers, the past week saw central banks in focus with US Fed Chair Powell and ECB President Lagarde both giving press conferences. The ECB provided more support for the recovery in the shape of more generous terms for one of its facilities and the introduction of a new liquidity facility. The sense from both central bankers was that we are still in the middle of the economic battle and as more action is needed, more will be taken. 
Economic policymakers remain – rightly – focused on winning the current battle against the economic effects of the coronavirus, but that doesn’t mean that it isn’t important to look further ahead. At the end of last week, the US Congressional Budget Office (CBO) produced a set of preliminary US fiscal forecasts, projecting that the US deficit will hit 17.9% GDP in 2020. It is already fair to wonder when pressure for spending cuts and austerity will rear its head again across many countries. Too soon and that will be a serious problem for this recovery where fiscal policy is doing the heavy lifting, facilitated by central banks keeping down borrowing costs.

After last week’s business survey data, it was the turn of GDP numbers to remind us of the economic damage being wrought by the current crisis. In France, GDP declined in Q1 by the most in a single quarter since 1949. For the euro area as a whole, output fell 3.8%Q. Earlier in the week, the US also recorded negative GDP growth – though showing less of a contraction in activity than in the euro area, likely reflecting later lockdowns. What in normal times would be an awful set of GDP numbers, is now just the prelude for something more awful in Q2 (which will reflect more weeks of lockdown). 

There were more plans published for, and announcements of, easing social distancing in parts of Europe this week. That is positive news for the economy but not in a straightforward way. 1) Social distancing isn’t being abandoned – just eased, gradually. 2) The strength of the recovery depends on the degree of economic scarring that is taking place now – how many are losing their jobs outright; how many companies don’t reopen; what kind of balance sheet damage is being inflicted. A lot of economic policy support has been directed to these concerns. 3) Just because the government tells businesses and households that they can now do something, doesn’t mean that they will. Governments can’t just switch economic activity on again. While fear of the virus remains, the recovery will lag. Among other things, many households will worry about their job security, which itself will hold back spending. In the European Commission sentiment surveys this week, we saw sharp increases in unemployment expectations. 

Again, China data this week were a reminder that the path of recovery everywhere is likely to be an uneven one. China’s manufacturing PMI business surveys deteriorated a bit in April, having bounced strongly in March as China’s lockdowns ended, pulled down by weak external demand. Meanwhile the services survey suggested some parts of the services sector are seeing falling activity, despite lockdowns having ended. 

In the US, it was interesting to see the personal savings rate rise sharply in Q1 as consumer spending fell ahead of incomes. Temporarily more generous US unemployment benefit should help support incomes somewhat in Q2. Higher household savings would be helpful in supporting future spending, but much will depend on how many workers are re-hired in the recovery and to what degree virus worries constrain consumer behaviour. 

As for economic policymakers, the past week saw central banks in focus with US Fed Chair Powell and ECB President Lagarde both giving press conferences. The ECB provided more support for the recovery in the shape of more generous terms for one of its facilities and the introduction of a new liquidity facility. The sense from both central bankers was that we are still in the middle of the economic battle and as more action is needed, more will be taken. 

Economic policymakers remain – rightly – focused on winning the current battle against the economic effects of the coronavirus, but that doesn’t mean that it isn’t important to look further ahead. At the end of last week, the US Congressional Budget Office (CBO) produced a set of preliminary US fiscal forecasts, projecting that the US deficit will hit 17.9% GDP in 2020. It is already fair to wonder when pressure for spending cuts and austerity will rear its head again across many countries. Too soon and that will be a serious problem for this recovery where fiscal policy is doing the heavy lifting, facilitated by central banks keeping down borrowing costs.

For professional clients only, not suitable for retail investors. Please note that this is a fast moving environment and markets and impacts on portfolios are changing. Opinions contained in this blog post are represent views of the author at time of writing. Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice. Portfolio holdings are subject to change, for information only and are not investment recommendations.