Macroeconomic & Geopolitical

March Macro Dashboard

March 2020 – 10 min read
The global economy is in the throes of a recession as it battles COVID-19. GDP growth across the Eurozone and U.K. is set to contract in the second quarter. While China is beginning to lift restrictions, Japan is only beginning to crack down on social distancing as cases rise.

The global economy is in the throes of a recession. While a depression will likely be avoided, the extent and length of the downturn depends on the world’s ability to contain the COVID-19 pandemic. China has begun lifting restrictions and the economy is re-opening, though weaker export demand from Europe and the U.S.—as the virus spreads in these regions—will weigh on China’s recovery. Stricter social distancing measures have been implemented throughout Europe and the U.S., which has led to a sharp deterioration in services industries and is wreaking havoc on labor markets. However, impressive fiscal and monetary stimulus will help cushion the blow to these countries’ economies. If the virus can be contained and restrictions are lifted by 3Q20, a recovery should begin before year-end, but many downside risks weigh on the outlook. Offshore U.S. dollar liquidity also remains top of mind, especially in Emerging Markets, where dollar-denominated debt has only increased since 2008. The call is still out on whether the recovery will resemble one that follows a natural disaster or a financial crisis. If the virus is contained quickly and policies support financial markets through the downturn, it would likely lean more toward the former.

The U.S. is likely currently in recession as it battles COVID-19. Widespread social distancing and store and restaurant closures are decimating the service-dependent economy and leading to record-setting layoffs. The duration and extent of the downturn hinges upon the containment of the outbreak. U.S. fiscal and monetary policy will help, but more spending is likely needed before we see the other side. Elevated debt levels appear to be the principal issue, and focus will be on bridging the near-term liquidity gap affected corporates are now facing. Despite this, the banking system appears to be holding up fairly well, with funding stresses looking contained thanks to Basel III and associated measures. However, these same measures that have kept banks more sound have also pushed more borrowing activity toward capital markets, which may be less prone to benefit from the Federal Reserve liquidity operations.

GDP growth across the eurozone and U.K. is set to contract in the second quarter as country-wide closures span the continent. Business and investor confidence has plummeted on the backs of announced wide-spread shutdowns. The first impact of the crisis was on the travel and services sectors, but manufacturing will likely also take a step back amid weaker global demand and social distancing orders. The duration and extent of the downturn will depend on when the virus can be contained, but large monetary and fiscal stimulus measures should help cushion the blow. Market stress appears contained, and the ECB’s purchase program have significantly decreased credit risk for periphery sovereigns. While corporate leverage doesn’t appear to be a major concern, earnings expectations continue to get significantly marked down and solvency risks will nevertheless rise as containment measures become more prolonged.

COVID-19 is a tale of two cities in Asia. While China is beginning to lift restrictions, Japan is only beginning to crack down on social distancing as the number of cases rises. China’s economy is coming back on-line but is now threatened by weaker export demand as the pandemic spreads through Europe and the U.S. Meanwhile, Japan’s economy is coming into the virus already weak with spending hurt from the consumption tax hike and typhoons in 4Q19. Furthermore, this appears to add a final nail in the coffin of longer-term expectations for the return of inflation. Stimulus measures will be needed, and are expected, in both countries in order to aid their economies. The world looks to China to see if and how the virus is contained as they reopen their cities and economy. As the Federal Reserve opens up its FX swap lines to address the acute U.S. dollar shortage the crisis has catalyzed, risks remain in how the PBOC monetizes its foreign reserves to the extent it needs to, especially as it doesn’t have direct access to these swaps.

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