Fathom’s Recession Watch 26.03.2020

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Headlines

• More staggering economic statistics as INSEE warns French economy running 35% below normal levels of activity
• US $2 trillion fiscal support package set to become law on Friday
• Nine euro area nations call for the creation of a ‘coronavirus bond’ with mutual liabilities
• COVID-19 deaths look to be slowing in the UK, as evidence suggests people began to restrict their movements two weeks before the country was put in ‘lockdown’

Evidence continues to mount that we are set to receive a stream of dire economic statistics over the coming weeks and months. The French statistical agency, INSEE, warned this morning that the French economy was currently operating at around 35% below normal levels of economic activity. Yesterday, it was reported that the UK Department for Work and Pensions had received close to half a million applications for Universal Credit over the past nine days. It is likely that most, if not all, of these individuals will recently have become unemployed. As many as 5% of UK respondents to a YouGov poll published on Tuesday said that they had already lost their job as a consequence of the COVID-19 outbreak. If true – and estimates of the proportion of the adult population previously in employment recorded by the survey match the official data almost precisely – then this would be consistent with a drop in employment of close to 3 million. Not all of these people will have become unemployed, in terms of the ILO definition, and many will not be eligible for benefits.

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A severe contraction of global economic activity during the first few months of this year is already priced in to most, if not all financial markets. It ought to matter relatively little to the US stock market whether today’s data show 2 million new jobless claims in the week to Saturday just gone, or 3 million. Either number would be an order of magnitude different to anything that has been seen before. What matters now is evidence on the spread of the virus and on progress towards a vaccine or a cure, and the fiscal largesse of governments around the world. And here the news has been a little more positive.

Daily mortality statistics show early signs that the epidemiological curve may have started to flatten in the UK. Yesterday, Professor Neil Ferguson of Imperial College suggested that the current outbreak might reach a peak within two to three weeks, leading to fewer than 20,000 deaths. In common with other countries that have imposed so-called ‘lockdowns’, timely data from Citymapper suggest that the people of London, and other major cities in the UK, began voluntarily to reduce their movements before the restrictions were imposed.

The US Senate yesterday voted unanimously in favour of a $2 trillion fiscal support package, leading the S&P 500 to rally for a second consecutive day – the first time that has happened in more than a month. If the bill passes a vote in the House of Representatives on Friday, it will be signed into law by President Trump. Elsewhere, nine euro area nations, including France, Italy and Spain, yesterday called on Germany to abandon its opposition to a so-called ‘coronavirus bond’.

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One reading of recent movements in corporate fixed income markets, with spreads on both A and BBB rated debt rising some 300 basis points over the past month, is that investors see close to an evens chance that the global economy is set for another financial crisis on a par with that seen in 2008/09.

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That assessment sounds broadly right to us. In our Global Economic and Markets Outlook for 2020 Q1, finalised just over a week ago, we set out three scenarios for the global economy, attaching: a 40% weight to a V-shaped recovery; a 30% weight to a U-shaped recovery; and a 30% weight to a L-shaped recovery. How have recent developments changed that assessment? As we explained in our first global Recession Watch Forum held on Monday, it now seems that the initial impact of COVID-19 on the global economy will be much larger than we had assumed. That is because more European countries have imposed aggressive restrictions on the freedom of movement, and temporarily shut down more industries, than we judged likely at the time. But these restrictions do appear to be slowing the progress of the disease. So, while the initial shock may be larger, the actions that lie behind it make a V-shaped recovery more likely in our view. At the same time, we have increased the weight we attach to our more severe risk scenario, making the outlook somewhat bimodal. In the event that COVID-19 returns with equal or greater vigour once restrictions that are holding back economic activity are lifted, then a severe financial crisis will be very hard to avoid. Our new fan chart for global growth is reproduced below.

Interesting reading

• Writing in the Atlantic, Ed Yong sets out how, in his view, the pandemic will play out
• In a technical paper, written before the COVID-19 outbreak, Eli Fenichel argues that centrally planned social distancing may lead to worse outcomes than a fully decentralised approach because it ignores the benefits of allowing those who have become immune to circulate freely
• In an FT opinion piece, former ECB president Mario Draghi declares that we are at war, and argues passionately for a massive, and coordinated effort to fight the disease

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