Economic Commentary – Oct 2020

October 30th, 2020, by Chris Davis

Tug of war

The global economy has maintained its recovery from the depths of the worst recession since WWII; however, we have not recovered to pre-crisis levels, and the outlook remains uncertain.

The global daily Covid-19 case count rose steadily over the past month, with Western Europe seeing a notable increase. This has led to fears of a second wave and governments responding by implementing further restrictions. In the short-term these will have a negative impact on GDP.


The global economic recovery has been supported by the consumer. Consumers have reduced spending on nonessential items and with social gatherings restricted and many working from home, consumers are not spending as much as they used to on services such as transportation, leisure and travel, clothes and eating out. In contrast, sales at food and beverage stores have risen sharply in March (26.9%) due to some panic buying, as people not only stocked up on groceries but also substituted eating at restaurants with more meals cooked at home and have also increased spending on durable goods.

A surprise has been how well residential homes sales and prices have been during this period, across both in the US and Europe. Mortgage approvals in the UK are at their highest levels since before the financial crisis. The Nationwide House Price Index in the UK increased by 5% year-on-year in September 2020. The latest reading pointed to the steepest growth in house prices since September 2016, with all UK regions experiencing a rise in prices from a year ago. According to Nationwide:

“The rebound reflects a number of factors. Pent-up demand is coming through, with decisions taken to move before lockdown now progressing. The stamp duty holiday is adding to momentum by bringing purchases forward. Behavioural shifts may also be boosting activity as people reassess their housing needs and preferences as a result of life in lockdown”

A key driver of the recovery has been the speed and size of stimulus from central banks and governments, totalling $10 trillion and counting. In general, the announced stimulus measures have three primary objectives:

1. Maintain financial stability;
2. Maintain household welfare and;
3. Assist companies to survive the crisis.

In most countries the focus of the fiscal stimulus has been on supporting the flow of income to households, through wage support to firms, to allow them to maintain employment through the downturn, or as direct payments to households.

The US for example provided an $600 extra weekly unemployment benefit on top of the standard amount provided by each state. These extra benefits expired at the end of July and over the past two months. Congress have been unable to reach agreement on another round of fiscal stimulus, including an extension of enhanced unemployment benefits. These enhanced benefits have been crucial in allowing households to sustain consumption through the downturn. Without these benefits, the outlook for consumption becomes opaque, especially through the next 6 months.

Obviously, a major risk to the recovery is a global resurgence of the coronavirus through the autumn and winter. Whether governments / countries have preventive measures in place to be sufficient to avoid this outcome, remains to be seen. Furthermore, a related concern is that the vaccine may take longer to arrive or be less effective than anticipated.

Another risk that economists highlight is the lingering effects of the virus. Unemployed workers, for example, may see their skills depreciate as they struggle to find new jobs. Some firms who didn’t have enough cash reserves to survive the downturn have gone out of business. Corporate defaults are at 10 year highs. Their exit implies a net loss of productive capacity for the economy. The virus will also leave scars on the balance sheets of households, firms, and the public sector. Any deleveraging that results is likely to be another restraint on spending and growth.

The trajectory of recovery has varied significantly across geographies. The reported rebound in industrial production in China has been particularly impressive, with output now slightly above its pre-Covid level. Rising exports, particularly of PPE and electronics, have been a key contributor to this bounce, and the authorities’ macro stimulus has supported the industrial sector.

“The economic recovery has picked up its pace after the epidemic. In the near future, great uncertainties remain about the overseas pandemic and the US presidential election,”
Wang Zhe, senior economist at Caixin Insight Group.

In the emerging markets excluding China, industrial production fell more sharply than retail sales, with both indicators 5% below their pre-virus levels.

Chris Davis
Chief Investment Officer

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