Making Sense Of It All
The coronavirus pandemic and lockdowns imposed by governments have pushed the global economy into the sharpest downturn since the Great Depression of the early 1930s according to data released last week.
Many developed world countries have responded with financial stimulus and support packages of an unprecedented size amounting to 10-15% of GDP. Is it enough? Is it too late?
Jobless claims have surged in the US with millions seeking unemployment benefits as lockdowns imposed to slow the virus wreak havoc on some of the world’s biggest economies. A record 6.6 million Americans filed for jobless claims last week, more than double the 3.3 million that applied for benefits two weeks ago i.e. 10 million job losses in the second half of March, a mass surge in unemployment in the world’s largest economy. These numbers were far higher than economists’ forecasts.
Across Europe the data is similar:
-About 4 million French workers – about a fifth of private sector employees – applied for temporary unemployment benefit
-Spain reported the biggest jump in unemployment in its history with more than 800,000 people losing their jobs last month
In the UK, almost 1 million people have applied for universal credit, a state benefits scheme
Activity in Britain’s service sector slumped severely in March. The Purchasing Managers’ Index fell from 53.2 in February to 34.5 in March “by far the fastest downturn in the service sector output since the survey began in 1996”.
Pantheon Macroeconomics forecast that in the UK, the end of March data alone would cause a 1.5% per cent contraction in the UK economy in the first quarter, but that would be dwarfed by a 13 per cent drop in the second quarter.
Such a slump would be more than twice as large as the 2008 – 09 financial crisis and about double the worst-case scenario the Bank of England imagined could happen after a no-deal Brexit.
Economists forecast even worse data in April, with many predicting double-digit percentage declines in output in the second quarter as vast swathes of the world’s two most advanced economic zones shut down.
The terrible data have led economists to slash forecasts for global growth, which were at about 3 per cent at the start of March. Bank of America now expects a contraction of 2.7 per cent “considerably worse than the 2008-09 recession”.
All eyes will now be on China to see whether its economy rebounds after lockdown restrictions start to be relaxed.
-26% in MSCI index of global stocks since Wuhan lockdown Jan 23rd.
-1.138 Change in U.S. 10-year treasury bond yield since Wuhan lockdown Jan 23rd.
Global interest rates are at rock bottom highlighted by the US Federal Reserve cutting the key ‘Fed Funds’ interest rate over the last 6 weeks from 1.50-1.75% to 0-0.25%
Oil prices have seen an unprecedented wild ride in 2020. Starting the year at above $60 per barrel followed by a decline to below $20 per barrel, an 18-year low as OPEC, led by Saudi Arabia, and Russia broke their 3-year alliance to limit production and supply to the market (so propping up prices) as the two sides failed to agree in new production cuts as the pandemic helped push global demand for oil down by as much as a third. Saudi Arabia subsequently flooded the market with cheap oil inflicting pain on other OPEC, Russia and US producers.
However, President Trump’s claim, at the end of last week, that the oil producers are going to make big cuts in output helped propel crude oil prices above $30 a barrel. Brent, the international benchmark, was up 35% over two days trading.
OPEC meets with Russia this week. Could it also lead to the once unthinkable – the US partaking in a co-ordinated cut with rival producers?
Gold is trading just below $1600 per ounce and the highest since 2013 and this is natural with gold the ultimate ‘safe haven asset’. However, gold is well below the peak of $1900 reached after the 2008-09 financial crisis. In theory, the gold price should be higher. What is holding the gold price back? The fact that investors who own gold (much bought at much lower prices) are forced to sell gold and ‘bank profits’ to offset the significant losses on the equities they hold in their portfolio.
Financial Markets are becoming illiquid is some sectors especially the Corporate Bond markets and especially High Yield or ‘Junk’ bonds. March saw the fastest ever pace of credit ratings downgrades by the main agencies of S&P, Moodys and Fitch. (If a bond is downgraded, a portfolio manager may well be forced to sell that bond). Credit spreads of corporate bonds over US Treasuries is widening significantly in this environment increasing the cost of borrowing for such borrowers.
Emerging Markets – Africa, Asia and Latin America are governments which much less firepower than their developed world counterparts to keep coronavirus at bay and their economies afloat.
Overseas investors have taken $95 billion out of EM stocks and bonds since late January dwarfing the withdrawals that that followed the onset of the global financial crisis in 2008.There is major concern that, as EM economies contract, that they will be unable to meet their financial liabilities, with most EM countries having large bond liabilities often denominated in US Dollars. As the dollar strengthens this debt becomes more expensive to service/repay.
Will this downturn in the global economy be a short or long recession? Might it be short and ‘V shaped’. We hope so but only time will tell.