Investment Clock insights

Coronavirus views 24 April 2020 - economic viewpoint


Melanie Baker 

24 April 2020

The incoming economic data retains its power to shock (economists at least). Even though we know that incoming data will be bad, it is still quite something to see the numbers as they increasingly reflect the economic damage from this crisis. This week’s flash PMI business survey data reached new record lows across multiple countries. The UK’s composite PMI indicator (which spends most of its time between 50 and 60, hit 12.9 (in the financial crisis it bottomed at 38.1). IHS Markit, who compile the data, reported that around 81% of UK service providers and 75% of manufacturing companies reported a fall in business activity. 
Although the business survey data in the euro area was as bad as in the UK, social distancing is being eased cautiously in some euro area economies. Within a couple of months, we may see some sharp rebounds in these survey measures (which ask whether things have improved or worsened, not by how much). However, it is likely to be much longer before the actual level of activity in the UK or euro zone returns to pre-crisis levels. For now, we have pencilled in a recovery trajectory for most economies where activity reaches those pre-crisis levels in the second half of next year. That would be much earlier than in the financial crisis, helped by a rapid and strong policy response. However, it assumes that, until governments, businesses and the public no longer see the virus as a threat – likely at the point where there are effective treatments and/or a vaccine – activity levels will struggle to return to ‘normal’. 
Meanwhile, economic policy remains supportive, with the US’ $484bn (2.3% of GDP) small business package about to pass. That package includes a welcome boost for the Paycheck Protection Programme which had already run out of funds. That package incentivises re-hiring as activity resumes. 
At the time of writing, the outcome of this week’s EU leaders’ videoconference – where the idea of an EU recovery fund was due to be discussed – wasn’t known. However, even if there are few concrete new developments, a message of solidarity is needed. At this time of global crisis, the euro area could do without resurfacing worries about euro area unity, worries around the willingness to engage in burden sharing and, as a result, concerns around future political risks in some of the areas of the euro area most hard hit by this virus.

The incoming economic data retains its power to shock (economists at least). Even though we know that incoming data will be bad, it is still quite something to see the numbers as they increasingly reflect the economic damage from this crisis. This week’s flash PMI business survey data reached new record lows across multiple countries. The UK’s composite PMI indicator (which spends most of its time between 50 and 60, hit 12.9 (in the financial crisis it bottomed at 38.1). IHS Markit, who compile the data, reported that around 81% of UK service providers and 75% of manufacturing companies reported a fall in business activity. 

Although the business survey data in the euro area was as bad as in the UK, social distancing is being eased cautiously in some euro area economies. Within a couple of months, we may see some sharp rebounds in these survey measures (which ask whether things have improved or worsened, not by how much). However, it is likely to be much longer before the actual level of activity in the UK or euro zone returns to pre-crisis levels. For now, we have pencilled in a recovery trajectory for most economies where activity reaches those pre-crisis levels in the second half of next year. That would be much earlier than in the financial crisis, helped by a rapid and strong policy response. However, it assumes that, until governments, businesses and the public no longer see the virus as a threat – likely at the point where there are effective treatments and/or a vaccine – activity levels will struggle to return to ‘normal’. 

Meanwhile, economic policy remains supportive, with the US’ $484bn (2.3% of GDP) small business package about to pass. That package includes a welcome boost for the Paycheck Protection Programme which had already run out of funds. That package incentivises re-hiring as activity resumes. 

At the time of writing, the outcome of this week’s EU leaders’ videoconference – where the idea of an EU recovery fund was due to be discussed – wasn’t known. However, even if there are few concrete new developments, a message of solidarity is needed. At this time of global crisis, the euro area could do without resurfacing worries about euro area unity, worries around the willingness to engage in burden sharing and, as a result, concerns around future political risks in some of the areas of the euro area most hard hit by this virus.

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.