As the COVID-19 crisis continues we are making adjustments to our publication schedule. Recovery Watch will be published three times a week. Please click here to subscribe to the newsletter or join Fathom’s regular Recovery Watch Forums and participate in lively discussions with our team and others in the community.
Next forum date: Monday 15 June 2020
Headlines
- Daily new confirmed global cases of COVID-19 continue to edge higher, driven by developments in emerging markets
- Australia’s 29-year recession-free run may be over after a 0.3% contraction in the first quarter
- We expect this Friday’s US jobs report to show a 6.5 million drop in nonfarm payrolls in May, with the unemployment rate rising to 18.9%
- The Congressional Budget Office projects COVID-19 will cost the US economy 3% of GDP over the next decade, highlighting the severe economic damage from the pandemic
Despite a stream of depressing news, major developed market equity indices continue to edge higher. That apparent dichotomy has puzzled many and even offended some. It is too early to tell whether investors are calling it right. For now, substantial fiscal and monetary action, strong performance by technology giants, as well as improving economic and health outlooks in major economic centres suggest recent gains may not be a classic bear market rally. However, downside risks continue to abound. These include the possibility of a ‘second wave’, particularly later in the year, behavioural changes that keep demand weak (even in the face of looser restrictions), and second-round negative effects for businesses and workers from the initial COVID-19 shock. There are potential upside risks too. Principally, these revolve around medical breakthroughs to cure or prevent infection. At the end of May, 121 candidate vaccines were in pre-clinical study, with 10 heading for phase 1, 2 or 3 trials.
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Final PMI readings for May were little changed from their ‘flash’ estimates and continued to point to further declines in activity from April albeit at a slower rate. We have previously questioned the usefulness of PMI data right now, with some respondents likely to be comparing activity versus normal rather than the previous month. Nonetheless, differences among countries appear to stack up. India’s numbers continue to stun, with a services PMI of 12.6 in May following a 5.4 figure in April. At the other end of the spectrum, countries that have imposed less severe lockdowns continue to outperform with the Swedish and US (flash) services PMIs at 40.9 and 36.9, respectively. Meanwhile, China’s Caixin services PMI rose to 55, its highest reading since 2010, suggesting a return to growth for that sector. PMIs have historically tracked real GDP reasonably well, but are not designed to deal with the severe shock the global economy has just suffered. That will make getting an accurate gauge of the economic recovery more difficult than usual. We will continue to make use of high-frequency alternative data, refining our selection on those indicators that have best tracked activity in countries that are further ahead in the recovery process.
The northern hemisphere has just started its summer. In normal times, many in Europe would be looking forward to visits to the Mediterranean. Despite COVID, beach holidays may still be on the cards for some. Many countries plan to open their borders to intra-European travel from 15 June. For tourist hotspots, such a move is perhaps being driven by economics. In Greece, Portugal and Spain, net tourism exports account for 8.1%, 7.3% and 3.8% of GDP, respectively. In Europe, Germany and the UK are large net importers of international tourism, while China is the world’s largest source of travel demand. The decision to reopen borders may not be entirely driven by domestic pressure from sunseekers and the travel industry. German Foreign Minister Heiko Mass has hinted at some altruism in Berlin’s thinking, saying that tourism is important “for the economic stability of the respective target countries”.
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While the north heads for summer, the south is entering winter. We have highlighted negative developments in Latin America. However, Africa appears to have been able to avoid severe COVID-19 outbreaks so far. The continent has 16.7% of the world’s population, yet the WHO says that it accounts for just 1.5% of its cases and 0.1% of its deaths. Admittedly, fewer resources probably means fewer tests, suggesting these numbers are understated. But there are good reasons to think countries there could be more resilient, including demographic factors, with a much younger population and lower rates of obesity than elsewhere. Meanwhile, reduced intra-continental travel may also be helping to slow the spread. Nonetheless, African economies are not immune to global conditions. Recent IMF forecasts suggest sub-Saharan Africa GDP will contract by 1.5% this year, marking its first annual contraction since 1992.
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