Fathom’s Recession Watch 20.03.2020

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Headlines

• US initial jobless claims rose by a near record amount last week; they could rise by three million this week, indicating the negative shock to the US economy could be the largest on record
• The governor of California ordered the state’s 40m residents to stay at home. New York could be next. It is worse affected than the Golden State, with 60 people in every 100,000 people in Manhattan alone already infected – one of the highest rates in the world
• Combined economic output for both states is almost $5 trillion, or around a quarter of US GDP
• Many central banks around the world have eased this week – the Bank of England cut its interest rate to 0.1% and upped its QE programme by £200 billion while the Fed increased dollar swap lines with more central banks
• Reports suggest that the UK will announce wide-ranging measures to support businesses and workers later today
• Global deaths from coronavirus topped 10,000 with reported mortalities in Italy now higher than China

California normally accounts for almost one-fifth of all US jobless claims. The state’s governor has said that initial claims totaled 40,000 on Sunday, and doubled to 80,000 by Tuesday. If you average that over a week, it is consistent with initial claims in California alone spiking to 525,000 – a level that is entirely without precedent. Based on an upward trend, and the recently announced lockdown, the risk is that the final figure ends up higher. Across the states for which we have data, claims so far this week are running at a rate that is 15 times higher than they were in March last year. That figure is consistent with a rise in jobless claims from 281,000 to around three million next week. That would be the largest such increase by a factor of more than ten.

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If it comes to pass, that would be consistent with the unemployment rate increasing by around 2 percentage points in a single week – a figure that is more than double the largest ever monthly increase in the unemployment rate. For what it is worth, that scale of increase is consistent with reported figures coming out of Ireland. According to Okun’s Law, that sort of jump would normally be associated with GDP being 4% below potential. However, investors would be wise to not extrapolate and think that this recession will be orders of magnitude worse than that in 2008/09. This downturn is unusual in how easy it is to see ahead of time. As a result, businesses are likely to move forward with lay-offs much more quickly than normal, suggesting that increases in unemployment will be heavily concentrated at the beginning. With financial support and effective control of the virus, both of which are hugely uncertain, many of these lay-offs could prove to be temporary. Another reason for cautious optimism is that since the recession is so widely anticipated, policymakers should, in theory, be able to respond to it better. Indeed, fresh measures on both fronts and their associated price tags seem to be getting bigger by the day. Whether they will be enough to prevent widespread bankruptcies that could feed on themselves and lead to a U or L-shaped recovery, it is still too early to tell.

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Chinese Premier, Li Keqiang, said that the majority of the country’s citizens are at low risk of the coronavirus and called on the country to return to normal. China’s ability to relax restrictions while preventing a second wave of cases will be closely watched and should help to understand how long strict limits on movement are likely to stay in place in other badly affected areas. If the country is able to restart its economy while keeping its caseload close to zero, it would be a strong signal that the global economy could be heading for a V-shaped recovery.

Eight NBA teams have tested their players for coronavirus, with ten of them testing positive. That is a 8% infection rate. Almost all have been reported as being asymptomatic. If you drag that across US as a whole, it is consistent with 27 million infected Americans. There are plenty of reasons to think that NBA players would be more susceptible (travel extensively and come into contact with a very high number of people). Nonetheless, it suggests the total number of cases is much higher than official figures suggest. That is the bad news. The much better news is that this would imply the mortality rate is much lower than official figures suggest and that countries could reach herd immunity sooner than is currently anticipated.

Interesting reading

https://www.resolutionfoundation.org/app/uploads/2020/03/Doing-what-it-takes.pdf (“Less than one-in-ten of those in the bottom half of earners say they can work from home, making it much harder for them to protect their incomes in the face of social distancing measures”)

https://link.springer.com/content/pdf/10.1007/s10393-014-0963-6.pdf (Reaches very similar conclusions to us. The economic arguments for acting fast and doing whatever it takes are overwhelming)

https://voxeu.org/content/mitigating-covid-economic-crisis-act-fast-and-do-whatever-it-takes (Further calls for strong decisive action)

Fathom forecast scenarios

Economic forecasting is difficult even at the best of times. It is particularly difficult today. At Fathom, we think in terms of scenarios and seek, wherever possible, to downplay point forecasts. A severe contraction in global economic activity through the first half of this year is inevitable – we are facing what French economist Pierre-Olivier Gourinchas has referred to as a ‘sudden stop’, something the global economy has never experienced before. But how long will it last? In our Global Economic and Markets Outlook for 2020 Q1, we set out three scenarios. The first was a V-shaped recovery, in which the number of cases peaks within months and begins to decline, allowing activity by the end of this year to return to normal levels. The second was a U-shaped recovery, where the virus continues to spread, depressing activity until a vaccine is found, but the economic and financial market infrastructure remains in place to deliver a strong rebound when that occurs. The third was an L-shaped recovery. If we are not sufficiently fortunate that either science or nature delivers the first of these, then massive government support will be required to avoid the third.