Fathom’s Recession Watch 24.03.20

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Headlines

• Encouraging signs that Italy’s lockdown is having an effect
• Dire European surveys shrugged off by investors
• UK government finally puts in place restrictions on the movement of people, and orders most shops to shut
• US again fails to pass fiscal stimulus package, undoing the Fed’s good work

With testing practices varying considerably around the world, confirmed cases of COVID-19 infection are no longer a suitable yardstick by which to compare the spread of the disease across countries. A simple plot of the number of case fatalities by country may provide a better guide. Looked at in this way, there are signs that after two weeks of countrywide lockdown, Italy has succeeded in flattening the epidemiological curve. The cumulative number of deaths associated with COVID-19 infection rose by 10% yesterday, the smallest increase since the outbreak began.

A number of closely watched surveys of business and consumer confidence across Europe have been published overnight and this morning. Unsurprisingly, they paint a bleak picture. Consumer confidence fell by five points in March, the sharpest fall on record. European PMIs also hit record lows, with the weakness to date concentrated in services rather than manufacturing. Markets have largely ignored these releases. It is now acknowledged that we are facing the sharpest slowdown in economic activity since at least the 1930s. Backward-looking data are likely to become increasingly irrelevant for investors. It is information about the progress of the disease, and the response of policymakers that will be key.

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Yesterday, UK Prime Minister Boris Johnson finally announced that measures would be taken, effective immediately, to prevent all but essential movement of people. The majority of retail shops would be ordered to close. These measures will apply across the country, and are similar to those seen in other European countries.

UK citizens have been accused of failing to take heed of what previously had amounted to little more than ‘gentle advice’ from the government, leading Oxford Professor of Epidemiology David Hunter to write in the New England Medical Journal that Britain’s ‘stiff upper lip’ attitude was posing a grave risk to public health – see today’s reading list. Evidence from the Citymapper mobile phone app suggests that, as of yesterday, the number of journeys undertaken in London, and indeed in other major UK cities, was running at around 25% of normal levels. That may sound low, but it is orders of magnitude higher than the number of journeys made in other European capitals, and indeed in the US. With many business-to-business firms, including Fathom, discovering that they can function reasonably effectively from their own homes, it remains to be seen whether the COVID-19 pandemic will have a permanent effect on the office rental sector. Office REITS have already been hit hard.

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Faced with what amounts to a ‘sudden stop’ in economic activity, economists are more or less united in their insistence that the case for massive, immediate fiscal stimulus is overwhelming. Many governments are coming round to that view. Substantial packages have already been announced across Europe, though it is likely that more will be required if our ‘L-shaped’, worst-case scenario for the global economy is to be averted. The US, however, remains a standout. Last night, Democrats in the US Senate blocked a bill that would provide stimulus worth at least 6% of GDP for a second time. Equity investors have become increasingly frustrated by the delay, with the S&P 500 closing lower yesterday, despite the Fed’s promise of ‘unlimited QE’.

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Reading list

• An excellent repository of articles about medical research into COVID-19
• An Oxford-based epidemiologist criticises the UK government’s response to the crisis
• A group of eminent economists argue, unsurprisingly, that externalities arising from one’s decision not to isolate create a role for government in the COVID-19 outbreak
• Journalists at the New York Times find that US voters are becoming less partisan in their attitudes to the virus
• On the risk that public anxiety about COVID-19 will fuel a long-term economic downturn

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.