We’re at an interesting point in the recovery. Incoming data releases continue to suggest the early stages of recovery have been strong (i.e. May and June in Europe and the US), but a couple of weeks ago, at least some of the US high frequency data started to wobble a bit. If recovery momentum falters somewhat, it wouldn’t be much of a surprise considering the US Covid-19 case numbers which continue to worsen.
The US hasn’t been the only reminder that this virus (and its consequences for the economy) very much remains a threat. Australia, which had got case numbers down to very low levels, saw Melbourne go back into lockdown this week as the outbreak in Victoria has progressed. Even in the UK, we’ve had a localised lockdown in Leicester.
Against lingering fear of the virus and more generalised worries around ‘second waves’ in the autumn/winter, at least two things are worth noting as far as the global economy goes:
First, fear matters for economic activity. New lockdowns have generally been localised (as in Australia) or partial (as in some US states which have partially re-imposed social distancing measures). This likely lessens the economic impact. However, some recent research supports the view that there is much more to economic damage than government-ordered lockdowns. Household consumption in Sweden was still down 10.7% year on year in April and South Korea’s unemployment rate hit a 10-year high in May in the absence of UK-style lockdowns in both cases.
Second, a second wave of government and central bank policy stimulus may be less impressive than the first wave. Central banks have already cut rates dramatically the world over (where there was room to do so) and rates are at, or close to, lower bounds in developed economies (the Bank of England (BoE) continues to review the case for negative rates). Asset purchase programmes are already widespread. As for fiscal policy, it is will likely be hard to agree to new support packages when government deficits are already at, or heading rapidly towards, double digits as a percentage of GDP. In the UK, the £30bn package of time-limited measures announced by Chancellor Sunak this week was welcome, but the bigger heart of the first wave of fiscal support – the coronavirus job retention (or furlough) scheme – is still set to wind down over the period between August and October.
Despite all this, it is worth recognising that much of the data relating to activity in May and June in the US and Europe surprised to the upside. Over the last two weeks, that has included significantly stronger-than-expected ISM business surveys in the US. Non-farm payrolls and the unemployment rate surprised positively again too. China’s recovery also appears to have remained solid, judging by the strong PMI business surveys for June.
More policymakers have also been highlighting the better-than-feared early stage recovery, from BoE Chief Economist Haldane (“so far, so V”) to the ECB’s Schauble and De Guindos just in the past few days. That does not mean that central banks are anywhere close to reversing course. However, just as fear will likely hold back the recovery, so growing confidence in the early stage of recovery can bolster that recovery through its effects on markets and consumer and business behaviour. However, until any of the following conditions are true: Covid-19 numbers are low and staying low; authorities have proved they can quash any new outbreaks quickly; or a vaccine is ready – and in most of the world, we simply aren’t there yet on any of these fronts – the recovery will remain vulnerable to a resurgence of fear. This recovery is set to take some time yet.
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