April Macro Dashboard
The global economy is experiencing a shock unlike we’ve ever seen before, and long gone are the tales of a V-shaped recovery. Looking ahead, the recovery will be differentiated and gradual. As seen in China, while the return to offices and manufacturing can experience a faster snap back, retail, auto sales, and leisure/hospitality are seeing weaker resumptions. This trend will likely hold true in other regions as they lift restrictions at varying times. While China is the first to enter the recovery phase, many European countries will likely be next, followed by the U.S., U.K., and Japan—following a similar path to that of the virus’s spread. Markets remained bifurcated, seemingly pricing in more than one view of the outlook. While it appears the rest of 2020 is largely expected to be lost from an earnings perspective, one thing is clear: central banks are no longer just providers of liquidity as they also now expand into the territory of backstopping corporate, and even sovereign, risks.
The U.S. economy has fallen rapidly into the steepest recession in recorded history. The path forward will be gradual and is fraught with downside risks. The labor market is in a dire situation with unprecedented millions of Americans filing for unemployment insurance. Layoffs, shutdowns, and wariness among consumers is dragging down overall retail sales, despite a large surge in spending on groceries and necessities. Meanwhile the housing market is hurting from almost nonexistent demand, but limited supply, low mortgage rates, and pent-up demand will keep the housing market well positioned for a recovery once restrictions ease. Many states have announced plans to lift restrictions. But without a widely available vaccine or effective treatments, social distancing will voluntarily remain and, combined with a higher personal savings rate, keep the recovery on a gradual path, rather than a V-shaped recovery. Banks have largely gone blameless this crisis amid a much more capitalized banking system, but the situation on the ground is much less homogenous than the aggregate tier 1 capital statistics may suggest.
The European economy is experiencing a very sharp contraction. While flash PMIs suggested continued deterioration in economic conditions in April, announced plans to lift restrictions in some European economies is shining a dim light on the path forward—however the roadmap varies by country. The road to recovery will be differentiated and gradual, as timelines to lift restrictions differ from country-to-country. Without a vaccine, social distancing measures will keep a lid on consumers’ return to store fronts and leisure/hospitality activities. That said, the risks from the corporate sector appear limited; it is much less levered and more liquid than in the past. A coordinated fiscal response is in preparation but it will take time to be crafted, as is usual in the Union of 27 countries. In the meantime, focus will be on the ECB to provide bridge funding through the crisis.
The path forward in Asia diverges greatly. China’s economy, after contracting by a record 6.8% Y/Y in Q1, is on the path to recovery. While there has been a quick recovery in the return to offices and within the manufacturing sector, the recovery in retail and leisure/hospitality is lagging, suggesting the hopes of a V-shaped recovery are gone. While weak external demand will weigh on the recovery, China is less reliant on the world to grow than was historically the case. Indeed, China appears unique in the regard that positive earnings growth is still expected for the year. On the other hand, Japan only implemented a country-wide state of emergency in mid-April, and the worst impact on the economy is yet to come. Weaker domestic and external demand will reduce production and consumer spending. Overall, as the U.S. dollar continues to strengthen, scope for additional capital flight could be an issue, especially given the sizable stock of U.S. dollar denominated corporate debt in some parts of the region.