After record declines the PMI surveys for June suggests that a rebound is underway. But then this was expected. And doesn’t alter the outlook of a long and uncertain recovery. The chances of substantial job losses and preventing a flare-up in infections as the economy open up will be among the key challenges. Look no further than the US which has already seen some of the states reimpose restrictions as the second wave continues to intensify.
Last week was a bit of a reality check – the largest ever monthly drop in the UK GDP, signs of a second wave in the southern US and a bout of market volatility. At least numerous indicators point towards a bottoming out of economic activity across much of the world. The road ahead has opened up for a run at a recovery.
Last week, several economies reopened without a material evidence of a spike in infection rates, well, so far. That said, the northern-southern hemisphere divide in the number of cases continues to widen, leading some (incl. the Fed) to believe that there might be a second wave. Two risks resurfaced – escalation of US-China trade tensions and disruptive Brexit. On the activity front, data for May suggests that the worst might be behind us.
The easing of lockdown restrictions, and with it the economic recovery, looks set to be taken tentative step by tentative step. Witness South Korea having to reintroduce some distancing measures. Meanwhile data is putting more colour on the enormous scale of the economic damage. No surprise that the Bank of England is envisaging the worst downturn since 1706. Even worse than the “Great Frost” of 1709.
April has been a month of contrasts. Multi-year low prints on economic activity in both the US and the Euro area, with worse to come, on the one hand. While equity markets continued to push higher from their late-march lows, buoyed by unprecedented monetary and fiscal stimulus. Markets will always run ahead of the economy. The question is, with so much uncertainty on the pace of recovery, have they overdone it?
A negative oil price, pint-sized PMIs and spiralling government spending all point towards a new world order. And while the accuracy of survey-based indicators has diminished, consumer demand has clearly collapsed and firms are going out of business. Although the governments have been swift to act, it doesn’t come without a price.
New data and economic forecasts paint a dire picture – prepare for the worst economic downturn since the Great Depression. More countries are gradually lifting restrictions and some 86 candidate vaccines are being developed around the world. But we are still far from a clear exit strategy.
The first A.C. (After Covid!) PMI and labour market data confirm the scale of economic and social disruption. Central banks asked commercial banks to cancel dividends and share buybacks to boost their capacity to absorb losses and support lending. Financial and commodity markets are volatile, but grasp the profundity of events.
Amid new rules limiting people’s movement and closing non-essential businesses, data has begun to emerge highlighting the severity of the downturn. PMI indices in the UK, US and EU have all recorded historical lows. Unemployment applications are breaking all records. Fitch, a ratings agency, downgraded the UK sovereign debt, citing the impact on the public finances and the economy.
Coronavirus has now spread to 104 countries. The Italian government took exceptional measures to put in quarantine 16 million people living in 14 provinces in North Italy, it also announced restrictive measures covering the whole country. The Fed made an emergency 50bp rate cut, but this failed to put a floor under the falling stock market. Oil prices have plunged following OPEC’s failure to cut output, resulting in a price war between Russia and Saudi Arabia.
