The Four Rs: Reopening, Reclosing, Risk & Recovery
The global economic recovery remains intact due to massive fiscal and monetary stimulus measures. However, rising COVID-19 cases and geopolitical tensions are weighing on consumer spending and the outlook. Infection rates have risen in parts of the United States, Europe and even Hong Kong, leading to the reintroduction of containment measures and greater concerns among consumers. Retail sales are weak in Europe and much of Asia, while high-frequency data show the pace of consumer spending in the U.S. moderated in July. Manufacturing is improving, though industrial production remains well below pre-crisis levels. Income replacement in the U.S. has been massive and key to the spending rebound, while effective furlough schemes in Europe have kept unemployment rates and bankruptcies low. Policymakers are readying new spending plans, such as the EU Recovery plan, the fourth U.S. fiscal spending bill and China’s infrastructure spending. Meanwhile, geopolitical risks have returned as the U.S. election approaches and tensions with China worsen.
In the U.S., after a quicker-than-anticipated rebound in consumer spending in May and June, rising COVID-19 cases and uncertainty over a fourth fiscal spending bill have led consumers to slow the pace of spending and activities. However, other sectors such as autos, housing, and manufacturing continue to improve. While the labor market could weaken temporarily over the summer, fiscal stimulus should be enough to support incomes and drive overall spending higher if Congress delivers as expected. Industries such as energy and financials, and services-oriented sectors such as leisure, hospitality, entertainment, bars, and travel, may take longer to recover. New growth drivers should keep the U.S. economic recovery intact—even if it is a wavy path forward.
European authorities’ response to the pandemic has been fast, appropriate and effective. In stark contrast to what happened after 2008, monetary and fiscal policy have been extremely accommodative and well transmitted in all parts of the euro area, hence preventing the credit crunch that pushed EU economies into deep recessions a decade ago from materializing. Still, consumer confidence and retail sales remain close to their lows in Europe. This is a rational reaction to the unprecedented level of uncertainty prevailing on the EU outlook. Policymakers and laymen know very well that policy support remains crucial. The Recovery Fund has been approved and will provide a crucial respite for beleaguered EU economies. However, government support in the form of job retention schemes, loan guarantees and payment holidays, to name a few, will be gradually withdrawn, starting in the fall. The impact on unemployment and firms’ viability can only be negative; the question of “how negative?” lingers, and the economies remain in limbo.
China’s economy recovered faster than expected in the second quarter, largely supported by robust credit expansion and government spending. Consumer spending, on the other hand, lagged. High-frequency data in China was more mixed in June than in previous months, but the economy continues to lead the global recovery. Japan, which saw a later entry into the crisis, has begun a more modest recovery aided by massive fiscal support. Government stimulus checks to individuals helped boost spending, while weak global demand together with elevated precautionary savings is weighing on the manufacturing sector. Bankruptcies in the region appear limited for now, but concerns of rising COVID-19 cases in areas such as Tokyo and Hong Kong, floods, a potential income cliff in the fall and rising geopolitical tensions keep uncertainty over the outlook elevated.