Economic Commentary – May 2020

May 26th, 2020, by Chris Davis

Always asking questions?

As humanitarian cost of the Coronavirus continued to mount through April, the global lock down response from most countries has provided an economic shock not seen in modern times. We have all been impacted in this extremely challenging environment and whilst the Covid-19 data from western countries improves, the economic consequence is still being counted. There are still a number of questions that need to be answered.

Is this a dent in the road or a sinkhole for the global economy?

The impact of the pandemic has travelled globally over a number of months. It has transitioned from a Chinese supply/demand crisis to a global supply/demand crisis driven by those countries who have chosen to enforce lockdowns. Global gross domestic product (GDP) fell in the first quarter of the year and is expected to decline over the next two quarters. The International Monetary Fund’s base case is that the global economy will contract by 3% in 2020 (worse than the 2008-09 financial crisis) and that if the pandemic fades in the second half of the year and containment efforts are lifted then with the global economy should grow by 5.8% in 2021, helped by global policy support.

However the timing and containment measures of each country are very different. This suggests a volatile recovery, with real risks of setbacks and breakthroughs at differing times. Should a second wave of epidemic or further containment measures be put in place, economies will be further hampered on their road to recovery.

Forecasting is difficult in these volatile times. Initial estimates of US GDP growth for the first 3 months of the year was -4.8% compared to forecasts of -3.5%, with economists expecting the decline to increase when the final version is completed. Consumer expenditure declined 7.6% in the quarter, with durable goods falling 16.1% and services 10.2%. This is during a quarter in which the economy was functioning normally during January and February. The second quarter of the year is expected to be far worse, with economists forecasting a c40% fall in US GDP. The European Commission expects the Eurozone GDP to shrink by 7.7 percent this year, before rebounding by 6.3 percent in 2021, saying the economy will experience a recession of historic proportions due to the coronavirus pandemic. The latest to release their estimates is the Bank of England (BoE) who predict that UK GDP will fall 3% in the first quarter followed by 30% in the second quarter.

It is clear from the data released that there is going to be a significant deterioration of GDP over the next few months and quarters. The global service and manufacturing PMI (Purchasing Managers Index) data is in severe contraction.

China’s easing of lockdown conditions has boosted its PMI, but growth is still weak (PMI needs to rise well above 50 to indicate robust growth). However it does indicate that when the lockdown measures across the world are relaxed some recovery can be achieved.

Chris Davis
Chief Investment Officer

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