Investment Clock insights

Coronavirus views 15 May 2020 - economic viewpoint


Melanie Baker

15 May 2020

There is a high level of uncertainty around what happens next in the global economy. The Bank of England in their Monetary Policy Report last week decided, for the first time, that the outlook was too uncertain for a central forecast and instead published a scenario. The shape of the recovery will depend of course on how lockdowns are eased and, so far, the answer in Europe is now, but gradually. It will also depend on how bad the ‘scarring’ is – including how many lose their jobs and how many companies close permanently. Policymakers over the last couple of weeks have continued to try to address this. The shape of the recovery will also depend importantly on how much residual fear of the virus remains for households, businesses and governments. The balance of these continues to suggest that the economic recovery will be significantly slower than the fall. 
Damage documented… 
Over the last couple of weeks, we’ve had plenty of evidence of the economic damage being wrought by this crisis. The global composite PMI business survey fell to only 26.5 in April, a record low. US non-farm payrolls fell a record 20.5 million in April, with the unemployment rate leaping to 14.7%. Here in the UK, GDP fell 5.8% over March (despite only incorporating one full week of lockdown). At that pace, it wouldn’t be surprising to see economic output in April fall 15-20%. Inflationary pressure continues to reduce too (not a bad thing for consumers at the current juncture), with recent inflation data lower than expected in the US and China for example. 
…but recovery glimpsed 
Over the past couple of weeks, as lockdowns have been eased across economies, we’ve had more glimpses of economic recovery too. Staying with the UK, higher frequency data, e.g. mobility data has already been picking up signs of increased activity even from the beginning of this month. The Bank of England last week noted tentative signs of a pickup in transactions though payment systems. Evidence continues to suggest that China is experiencing a recovery in activity, albeit uneven. April data showed industrial production running above levels seen at the same time last year. Retail sales continued to record negative growth year on year, but those growth rates are improving. Looking elsewhere this week, it was interesting to see Australian consumer confidence improve sharply in May. Australia further eased its lockdown this week, complete with pictures of crowds flocking to shopping centres. 
A fearful recovery? 
For both Australia and China, there are good reasons to expect a more confident early stage recovery than in the UK, for example. Australia and China have each been reporting a daily average of new COVID-19 cases of less than 25. That compares numbers still in the thousands in the UK. The IMF this week flagged the risky combination of 1) how much earlier European economies are reopening versus China with respect to the virus and 2) that European countries were lagging China/Korea in terms of testing capacity, contact tracing and case isolation. To my mind, that is, for now, a recipe for a more fearful and less vigorous recovery. 
More stimulus on the way 
China is sending clear signals of upcoming fiscal stimulus, the US Federal Reserve is preparing to launch its Main Street Lending facilities, and the Bank of England are likely to announce more QE soon. But venturing into negative policy rates looks unlikely for now and central bankers in both the US and UK have pushed back this week against the idea. What we’ve also seen in the past few weeks are central bankers calling for more fiscal stimulus in the euro area and US. Pressure runs two ways between central banks and governments. Economists often fear governments infringing on central bank independence. In the other direction, central banks have a powerful platform that they seem increasingly willing to use to put pressure on governments to provide more support for economies.

There is a high level of uncertainty around what happens next in the global economy. The Bank of England in their Monetary Policy Report last week decided, for the first time, that the outlook was too uncertain for a central forecast and instead published a scenario. The shape of the recovery will depend of course on how lockdowns are eased and, so far, the answer in Europe is now, but gradually. It will also depend on how bad the ‘scarring’ is – including how many lose their jobs and how many companies close permanently. Policymakers over the last couple of weeks have continued to try to address this. The shape of the recovery will also depend importantly on how much residual fear of the virus remains for households, businesses and governments. The balance of these continues to suggest that the economic recovery will be significantly slower than the fall. 

Damage documented… 

Over the last couple of weeks, we’ve had plenty of evidence of the economic damage being wrought by this crisis. The global composite PMI business survey fell to only 26.5 in April, a record low. US non-farm payrolls fell a record 20.5 million in April, with the unemployment rate leaping to 14.7%. Here in the UK, GDP fell 5.8% over March (despite only incorporating one full week of lockdown). At that pace, it wouldn’t be surprising to see economic output in April fall 15-20%. Inflationary pressure continues to reduce too (not a bad thing for consumers at the current juncture), with recent inflation data lower than expected in the US and China for example. 

…but recovery glimpsed 

Over the past couple of weeks, as lockdowns have been eased across economies, we’ve had more glimpses of economic recovery too. Staying with the UK, higher frequency data, e.g. mobility data has already been picking up signs of increased activity even from the beginning of this month. The Bank of England last week noted tentative signs of a pickup in transactions though payment systems. Evidence continues to suggest that China is experiencing a recovery in activity, albeit uneven. April data showed industrial production running above levels seen at the same time last year. Retail sales continued to record negative growth year on year, but those growth rates are improving. Looking elsewhere this week, it was interesting to see Australian consumer confidence improve sharply in May. Australia further eased its lockdown this week, complete with pictures of crowds flocking to shopping centres. 

A fearful recovery? 

For both Australia and China, there are good reasons to expect a more confident early stage recovery than in the UK, for example. Australia and China have each been reporting a daily average of new COVID-19 cases of less than 25. That compares numbers still in the thousands in the UK. The IMF this week flagged the risky combination of 1) how much earlier European economies are reopening versus China with respect to the virus and 2) that European countries were lagging China/Korea in terms of testing capacity, contact tracing and case isolation. To my mind, that is, for now, a recipe for a more fearful and less vigorous recovery. 

More stimulus on the way 

China is sending clear signals of upcoming fiscal stimulus, the US Federal Reserve is preparing to launch its Main Street Lending facilities, and the Bank of England are likely to announce more QE soon. But venturing into negative policy rates looks unlikely for now and central bankers in both the US and UK have pushed back this week against the idea. What we’ve also seen in the past few weeks are central bankers calling for more fiscal stimulus in the euro area and US. Pressure runs two ways between central banks and governments. Economists often fear governments infringing on central bank independence. In the other direction, central banks have a powerful platform that they seem increasingly willing to use to put pressure on governments to provide more support for economies.

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.