June Macro Dashboard
The stakes are high this summer. The economy has begun the long climb back to more normal levels of activity, and investors continue to measure the damage from the massive shock against the unprecedented government response. The initial bounce has been substantial as many European countries and parts of the United States have made significant progress in containing COVID-19, and physical constraints on activity have been lifted. However, economic activity remains depressed, and the IMF has already revised its forecast for this year’s GDP contraction from -3.0 to -4.9%. Moreover, recent COVID-19 outbreaks in several American states and key Emerging Markets mean that uncertainty remains high, with limited lockdowns still possible.
Nevertheless, amid very noisy data, early measures of U.S. and European consumption show a better-than-expected rebound from the ample fiscal and monetary support. This is both a strength and a weakness of the economic outlook, as so much depends on the continued income support by the public purse. Yield curves have begun to steepen slightly, even if very low rates suggest much more concern. Risk assets remain vulnerable to bad headlines, but have rallied sharply to reflect this better news and seem to be pricing in a second half where government support continues, the disease can be managed and a vaccine is on the way.
In the U.S., unprecedented levels of fiscal support and reopening measures have led to a faster-than-expected rebound in consumer spending and aided loan repayments, particularly among lower-income individuals. Pent-up demand, low mortgage rates, and shifting consumer preferences have boded well for the housing market and the auto sector. The labor market, following the upward surprise in May, continues to improve. While it will be a long road to the pre- crisis unemployment rate, it is encouraging that higher-wage jobs have held up better, as the higher-income cohort makes up a larger share of total spending. However, downside risks weigh heavily on the outlook. Markets, which have correctly priced in the faster-than-expected rebound in activity, are now implying a much more tempered outlook. There are also concerns that new COVID-19 hotspots could emerge, leading to more restrictive measures or weighing on consumer sentiment. And finally, uncertainty remains about the size of another fiscal stimulus package.
In Europe, lockdowns have managed to contain the virus spread and EU economies are reopening. The economic damage inflicted by these policies has however been sizeable. For economic activity to return to pre-COVID levels (our definition of a V-shaped recovery), industrial production and sales still have a lot of road to travel. Furthermore, the effective public support has (fortunately) contained unemployment and bankruptcy increases so far. The full extent and transiency of the economic damage has thus not shown yet. Early signs of improvement, combined with the better-than-expected policy response both at the national and EU levels, are encouraging, and markets seem to have taken note, with European markets outperforming U.S. counterparties, which is rare. If one looks for them, a long list of worries is readily available, including a potential second wave of contagion and Brexit.
China’s economy continues to recover, driven by domestic demand and government support, while weak global activity is keeping a lid on the rebound, as it weighs on new orders, particularly at factories. While improving economies outside of China will aid China’s recovery, rising trade tensions with the rest of the world or a renewed trade war are downside risks to the outlook. Japan’s recovery continues to lag, as it was hit by the virus later and entered the crisis already in contraction.
While higher-frequency data had shown some improvement in June, retail, recreation, and workplace mobility has begun to stabilize at low levels. However, massive fiscal and monetary support should help aid a rebound in the second half of the year. In South Korea, exports are improving, indicating global earnings growth may be on the road to recovery. Outside Northern Asia, however, signs of life are more tentative; growth in Thailand, Indonesia and India remain subdued while Malaysia experiences deflation.