Fathom’s Recession Watch 30.03.2020

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Headlines

• Warnings of a longer period before return to normality: three to six months in the UK
• Macro data continues to tank – revised fan chart for global growth
• New, hopeful take from Imperial rapidly reversed
• Trump signs $2.2 trillion stimulus package into law
• Equity investors starting to think they can see the top of the hill

Details

Governments around the world including the UK have issued increasingly dire warnings about the likely length of the period of disruption, and those warnings have been underscored by the news that the UK Prime Minister, Secretary of State for Health and Chief Medical Adviser have all contracted COVID-19.

Meanwhile, the uncertainty surrounding the number of fatalities we should expect continues to grow. The study from Imperial College referenced last week pointed to over half a million deaths in the UK if no action were taken: reducing to half that number with the less restrictive interventions that were in place in the UK two weeks ago. The Chief Scientific Adviser indicated that the introduction of more stringent controls on movement would reduce the total number of COVID-19 related fatalities to below 20,000 in a good scenario. That figure, translated into fatalities per million inhabitants, is pictured in the chart below, which serves to illustrate how much further this crisis has to run in such a ‘good’ scenario: the UK has barely started to climb the hill, whereas Italy is already half way up.

Refresh this chart in your browser | Edit the chart in Datastream

Then, last week, another study out of Imperial College indicated that if the number of deaths per head of population could be contained in the way it was in China, then the total number in the UK need not exceed 5,700 (lower than the initial Imperial estimate by a factor of nearly 100). But the author of this report has since reversed engines and indicated that it is already too late for the UK to adopt the Chinese containment strategy, so the likely number of fatalities here will far exceed 5,700.

Meanwhile, global fear about the virus, as captured in the number of articles referencing it, remains high but has fallen slightly from its peak of a few days ago: early signs that fear may have peaked, for now.

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Interestingly, there is evidence from the US that the total number of fatalities this year occurring for any reason is substantially down on previous years, so far. That is likely to be because of the reduction in travel, the improvements in hygiene and possibly other factors relating to stress, all of which are positive side-effects of the measures taken to control the spread of COVID-19. Those positive side effects are likely to be in place in other countries too.

Nevertheless, the negative macroeconomic impacts are huge and are just starting to trickle through into the data. Early signs here are disheartening: Singapore reported a 10.4% contraction in GDP in the first quarter (interestingly, before that quarter is over), while INSEE reports that economic activity in France is down by a massive 35%, and South Korean department store sales fell by 21% in February. The chart below illustrates the impacts on the level of GDP that we expect to see in Singapore and South Korea in our central case. Data so far suggest these are in the right ballpark even if the timing might be slightly different.

Moreover, high-frequency evidence that Fathom has collected (more to follow for other EU nations) suggests that electricity consumption in Italy is down by between 22% and 25% on previous years over the last couple of weeks. This will reflect industrial electricity usage; household consumption might well have increased.

Macroeconomic damage of that sort of magnitude has already been priced into equity markets, which were waiting for signs that the policy response would be of a similar magnitude. With President Trump signing the $2.2 trillion relief package in the US, those signs are now coming through. Equities have posted a modest recovery over the course of last week as a result.

Refresh this chart in your browser | Edit the chart in Datastream

Refresh this chart in your browser | Edit the chart in Datastream

And pressure on margins appears to be easing slightly, according to Fathom’s proprietary measure. Investors are starting to feel that they can perhaps see the top of the hill now ,even if we have not yet reached it. We are concerned, however, that the ‘top’ they see is only the brow of this foothill, and that the real top remains far in the distance.

The bottom line is that we have revised our global growth forecast down substantially this year, increasing the weight we attach to both the V and the L shape at the expense of the U-shaped recession, the middle case, and increasing the short-term hit in all cases. The new fan chart is shown below.

Interesting reading

• https://www.zerohedge.com/markets/here-breakdown-12-trillion-fiscal-and-monetary-stimulus-pledged-date
• https://www.wsj.com/articles/coronavirus-pushes-some-emerging-markets-to-brink-of-default-11585388004
• https://www.nielsen.com/us/en/insights/article/2020/covid-19-tracking-the-impact-on-fmcg-and-retail/

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. Since we finalised our forecast on 17 March, a number of major economies have placed more severe restrictions on movement, and imposed a temporary shutdown on more industries than we had thought likely. This more aggressive action has caused us not only to anticipate an even sharper contraction in economic activity in the first few months of this year, but to increase the weight we attach to a V-shaped recovery. At the same time, we have also 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.