Investment Clock insights

Coronavirus views 29 May 2020 - economic viewpoint


Melanie Baker

29 May 2020

Among more signs that activity has bottomed and is starting to pick up from very low levels, we’ve also had more ‘do whatever it takes’ moments from (fiscal) policymakers and several reminders that some of the factors that weighed on growth pre-crisis are still very much with us. 
Past the trough? 
We are still very much in the midst of a very sharp and deep global recession, but as more countries ease social distancing measures, the data too are looking more consistent with us starting to move past the trough in activity. The path up will be slower and less sure than the path down, but the upward slog should be starting. The PMI business surveys in the US and Europe have started to improve. The May euro area composite, for example, rose from 13.6 to 30.5 and in the US from 27.0 to 36. These are still, however, very low levels. You’d normally translate a PMI below 50 as being consistent with output still falling, albeit at a slower pace, although translating business surveys into levels or growth rates for activity is especially hazardous at present (business surveys ask whether conditions are better, for example, not by how much). Turning to higher frequency indicators, the latest set of mobility data from Google, for example, look consistent with some improvement in retail/consumer services activity in the US and major EU economies (while still being well below pre-crisis levels). 
More ‘do whatever it takes’ policymaker moments 
Policymakers meanwhile continue to remind us that this is no ordinary recession with the scale of response to this crisis. The IMF estimated that in just over a month to mid-May, governments had added another $1 trillion in global fiscal support (for a total of $9 trillion). Since then, policy announcements in China, Japan and the EU are among those worth highlighting. After the National People’s Congress, the shape of Chinese fiscal stimulus became clearer, with infrastructure spending (both ‘new’ and ‘old’) set to be a key element. Japan’s cabinet have just approved a $1.1 trillion fiscal package – similar in headline size to the package in April at a whopping 20% GDP. Meanwhile, the European Commission has now put forward its Recovery Fund proposals, outlining a €750bn package, most of which would be grants not loans and funded by Commission borrowing. This proposal still needs the agreement of the member states and therefore has quite some way to go, but if this proposal gets through in something like the current form it would mark a significant step forward in terms of burden sharing and therefore in potentially reducing euro break-up risk. 
While economists disagree on the exact amount of stimulus likely from these policy initiatives, the policy support coming through globally, or set to come through in the recovery phase, remains large and is a key reason why activity levels are likely to recover faster than they did after the financial crisis. 
Pre-crisis throwbacks with the potential to weigh on recovery 
At least two other factors that weighed on growth in 2018-19 meanwhile have been back in the news too. The impact of enhanced uncertainty around both is likely to be swamped by the effects of COVID-19, but may weigh on recovery – and particularly the willingness of companies to invest – in the recovery phase: 1) the revival of US-China tensions and 2) Brexit trade deal uncertainty, with the negotiations not going well so far and the extension deadline fast approaching (the two sides are supposed to agree by the end of June whether extend negotiations beyond the end of the year). 
The shape of recovery remains very uncertain 
The recovery will continue to depend on factors including 1) how lockdowns are eased (gradually); 2) how bad the ‘scarring’ is – including how many lose their jobs and how many companies close permanently (uncertain, with policy actions likely preventing a significant degree of scarring, but also meaning some will be delayed rather than avoided); and 3) how much residual fear of the virus remains (in Europe, case numbers continue to trend down. But, without a vaccine/effective treatment and with the virus very far from being stamped out, governments, businesses and households will likely remain somewhat cautious). 

Among more signs that activity has bottomed and is starting to pick up from very low levels, we’ve also had more ‘do whatever it takes’ moments from (fiscal) policymakers and several reminders that some of the factors that weighed on growth pre-crisis are still very much with us. 

Past the trough? 

We are still very much in the midst of a very sharp and deep global recession, but as more countries ease social distancing measures, the data too are looking more consistent with us starting to move past the trough in activity. The path up will be slower and less sure than the path down, but the upward slog should be starting. The PMI business surveys in the US and Europe have started to improve. The May euro area composite, for example, rose from 13.6 to 30.5 and in the US from 27.0 to 36. These are still, however, very low levels. You’d normally translate a PMI below 50 as being consistent with output still falling, albeit at a slower pace, although translating business surveys into levels or growth rates for activity is especially hazardous at present (business surveys ask whether conditions are better, for example, not by how much). Turning to higher frequency indicators, the latest set of mobility data from Google, for example, look consistent with some improvement in retail/consumer services activity in the US and major EU economies (while still being well below pre-crisis levels). 

More ‘do whatever it takes’ policymaker moments 

Policymakers meanwhile continue to remind us that this is no ordinary recession with the scale of response to this crisis. The IMF estimated that in just over a month to mid-May, governments had added another $1 trillion in global fiscal support (for a total of $9 trillion). Since then, policy announcements in China, Japan and the EU are among those worth highlighting. After the National People’s Congress, the shape of Chinese fiscal stimulus became clearer, with infrastructure spending (both ‘new’ and ‘old’) set to be a key element. Japan’s cabinet have just approved a $1.1 trillion fiscal package – similar in headline size to the package in April at a whopping 20% GDP. Meanwhile, the European Commission has now put forward its Recovery Fund proposals, outlining a €750bn package, most of which would be grants not loans and funded by Commission borrowing. This proposal still needs the agreement of the member states and therefore has quite some way to go, but if this proposal gets through in something like the current form it would mark a significant step forward in terms of burden sharing and therefore in potentially reducing euro break-up risk. While economists disagree on the exact amount of stimulus likely from these policy initiatives, the policy support coming through globally, or set to come through in the recovery phase, remains large and is a key reason why activity levels are likely to recover faster than they did after the financial crisis. 

Pre-crisis throwbacks with the potential to weigh on recovery 

At least two other factors that weighed on growth in 2018-19 meanwhile have been back in the news too. The impact of enhanced uncertainty around both is likely to be swamped by the effects of COVID-19, but may weigh on recovery – and particularly the willingness of companies to invest – in the recovery phase: 1) the revival of US-China tensions and 2) Brexit trade deal uncertainty, with the negotiations not going well so far and the extension deadline fast approaching (the two sides are supposed to agree by the end of June whether extend negotiations beyond the end of the year). 

The shape of recovery remains very uncertain 

The recovery will continue to depend on factors including 1) how lockdowns are eased (gradually); 2) how bad the ‘scarring’ is – including how many lose their jobs and how many companies close permanently (uncertain, with policy actions likely preventing a significant degree of scarring, but also meaning some will be delayed rather than avoided); and 3) how much residual fear of the virus remains (in Europe, case numbers continue to trend down. But, without a vaccine/effective treatment and with the virus very far from being stamped out, governments, businesses and households will likely remain somewhat cautious). 

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