The mechanical recovery
Data increasingly confirm that the global economy is on the recovery path and past the trough in activity. High frequency, e.g. mobility, data has been suggesting that for several weeks. Business surveys – to generalise – have improved, although most remain at weak levels.
Last week also saw a massive positive data surprise, with the US unemployment rate falling and the number of jobs (payrolls) rising, when sizeable moves in the opposite direction had been expected. Logically, however, all of this is consistent with the steps taken in major economies to ease social distancing measures. In other words, we are likely seeing the more ‘mechanical’ part of the recovery as activities not allowed before are now permitted, all helped, of course, by a supportive policy backdrop.
Not out of the woods; policy support still needed and still being provided
Conditions in the global economy are, of course, still far from normal and it remains important that policymakers continue to provide ongoing support as economies reopen and that they do not wind back that policy support too early. Although lower than expected, the US unemployment rate, at 13.3%, is still higher than at any point during the financial crisis. The global composite PMI business survey measure improved sharply, but at 36.3 is at around the levels reached at the trough of the financial crisis. The UK’s record GDP fall (-20.4%M in April), was also another reminder of the huge economic hit from this crisis.
As the recovery gets underway, there remains much uncertainty…
…about the ultimate strength and shape of that recovery. One of the key determinants will be ‘scarring’ and the degree of longer lasting damage that has been done. It is far too early to judge the degree of permanent job losses and detachment from the labour force from the data we have so far. Unemployment rates in Europe are likely to rise as firms reassess their labour force needs beyond furlough schemes. In the US, (high) unemployment rates are likely to fall as employees on temporary layoff are re-hired. Until the data are ‘cleaner’ the damage will be hard to assess. One important element we have had some evidence on is the degree of damage that has been done to household finances, at least in the US. In April, the personal savings rate jumped to a whopping 33%, reflecting fiscal support to households and, as seen in other countries during lockdowns, a drop in spending. That suggests some US households will enter this recovery period with their finances in better shape and considerable spending power. However, much still depends on re-hiring and continuation of fiscal support, e.g. more generous levels of unemployment benefit.
Another key determinant of the recovery will be fear
When the recovery is a fearful one - COVID numbers remain high, where there is no effective treatment/vaccine, when there is a risk of lockdowns being re-imposed, a risk of policy backstops being withdrawn and with all of these implying higher risks to job security – then that recovery is likely to be held back, particularly in terms of consumer spending. Australia remains interesting to watch, where new COVID case numbers remain at very low levels. Recent survey data has suggested a sharp improvement in Australian consumer confidence back to more ‘normal’ levels already. Economies like the US and UK are still a long way off such a position with respect to the virus.
Still adding support
With all this as a backdrop, policymakers are still adding support to the economic recovery. The ECB increased the envelope for asset purchases in their Pandemic Emergency Purchase Programme last week. This week, the US Federal Reserve said that they would not be reducing the pace of asset purchases further and published a median profile for policy rates showing the Fed Funds target range staying at 0- ¼ % in 2021 and 2022. The Bank of England decision is scheduled for next week, where additional asset purchases are likely to be announced. Over the next weeks, we are likely to hear more on the shape of another fiscal package in the US and the European Recovery Fund. It is important that we see progress on both.
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