Economic Commentary – June 2020

June 15th, 2020, by Chris Davis

Bouncin’ Back

Whilst much of the western world has seen a reduction in Covid-19 infections over recent weeks there are still countries grappling with the virus and its economic consequences. We don’t know when or if we may get a vaccine, but the data suggests that in the UK and Europe the measures taken have reduced the replication rate enough for the lockdown to be lifted. In the US however four states (Texas, Arizona, Florida and North Carolina) appear to be experiencing a sharp rise in Covid-19 cases after lockdown measures were lifted. The pandemic has caused a huge human and economic cost already and a re-emergence would be devastating.

Fast or Slow recovery?

The global economy is suffering from the impact of the Covid-19 virus and an oil price collapse in part caused by the former and a supply control issue between Russia and Saudi Arabia. The combination of the two have caused yet untold economic harm and a liquidity crisis within capital markets. The UK (and EU) also face the uncertainty of Brexit.

In its June outlook the OECD (The Organisation for Economic Co-operation and Development) described the world economy ‘on a tightrope’ with the future ‘highly uncertain’. If another outbreak of the virus is avoided it projects the contraction in global gross domestic product (GDP) to be -6% for 2020 in a synchronised global downturn. This is a marked deterioration from the International Monetary Fund’s prediction last month of -3.8%. If there is to be a second wave of the virus in the autumn or winter, the OECD predict GDP will likely contract further to -7.6%. In both scenarios it predicts the global economy will not be back to the levels seen in 2019 for at least another 2 years. The OECD highlights that unemployment is rising sharply and without a second wave will be 10%+ in the third quarter of this year in most developed nations.

The National Bureau of Economic Research declared that the US had entered a recession in February this year, signalling the end of the longest periods of economic expansion in the country. US GDP declined at a rate of 5% in the first 3 months of the year. Given that the majority of the lockdown has occurred during the second quarter of the year the next GDP figure is expected to be much worse. Expectations are for it to decline at a rate of c20% in the second quarter with the US Federal Reserve (Fed) expecting the 2020 decline to be -6.5%. The latest data release on the US job market surprised many with a report that 2.5 million jobs had been added in May beating expectations that 7.5 million jobs would be lost. Whilst this was a surprise it leaves the unemployment rate at 16.3% (having been 3.1% 12 months ago). Inflation remains subdued with the Fed believing it will be sub 1% for the rest of the year.

Official Chinese economic figures suggest that activity continues to recover, with industrial capacity utilization back to 90% of the pre-Covid-19 level. The May Services Purchasing Managers Indices (PMI) increased to 55 from 44.4 in April, indicating a pick up in activity, albeit it from very low levels. The Chinese politburo has provided targets for local authorities to create 9 million new urban jobs this year. Though the 6% GDP growth target has been dropped in this year’s National Party Congress, urban unemployment is targeted at the 5.5%-6% range. China’s inflation rate fell to 2.4% in May from 5.4% in January. However, food inflation remains high at 10.6% (actually a 9 month low) with pork prices rising for a 15 month in a row.

In the UK GDP contracted 2% in the first quarter, which was better than the 2.5%-3% expected. Inflation slowed to 0.8% in April from 1.8% in January and consumer confidence slumped to the lowest level since January 2009. The latest unemployment data we have is from February when the rate was 3.9%. In April alone more than 856,500 people claimed for unemployment benefits, bringing the total to over 2 million, a 5.8% unemployment rate. This is much less than the 10.6% rate in the spring of 1986 and the 9.9% in the early 1990s, but 2020 numbers don’t include the number of people who have been placed on the governments furlough scheme. As of 7 June. 8.9 million people are currently on the scheme. Combining the benefit claimant count and the number of people on furlough suggests the rate of which the number eligible people who are not working at over 30%! How the UK transitions from the current status quo to the new reality will be crucial over the coming months.

The Eurozone economy shrank by 3.6% in the first three months of 2020, which is the steepest contraction on record. Among Europe’s largest economies, Germany’s GDP contraction was the sharpest since 2009, while France, Spain and Italy economies shrank the most on record. The major economies of the world are grappling with a deflationary environment and contracting growth, increased unemployment, social unrest and global trade tensions. Businesses are changing how they work and interact with staff and their customers. This inevitably requires increased expenditure on lower revenues and consequently lower profits. We expect the upcoming months to be quite challenging for the consumer and the businesses that rely upon them. Despite the gloom, history suggests that we will recover, eventually.

Chris Davis,
Chief Investment Officer

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