July 9, 2020

Fathom Recovery Watch – 08.07.2020

by Fathom Consulting.

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Next forum date: Monday 13 July 2020


  • Daily new cases continue to rise, concentrated in the Americas
  • UK chancellor to unveil further support measures later today
  • Brazilian president Jair Bolsanaro has tested positive for COVID-19
  • The US formally submitted its intention to withdraw from the WHO

“So far, so V” was how the Chief Economist of the Bank of England, Andy Haldane, reported incoming data for the UK since May. He has been criticised for that sunny view as it relied heavily on novel data series that do not have a track record of accurately predicting economic activity. But the (out-of-date) hard data too point to an initial strong bounceback from sharp April falls. Euro area retail sales rose by 17.8% in May, following a 12.1% plunge in April. That left total sales down 5.1% year-on-year. While still a large gap, it was better than the consensus forecast (-7.5%) among economists polled by Reuters. On average across countries in the chart below, sales recovered two-thirds of their falls from February. Meanwhile, in some, including Denmark and Germany, retail sales were back above their February levels.

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It is clear from these figures that there was pent-up demand in May. The question is whether that represents a one-off spending spree following weeks of lockdown, or is evidence that consumers will have less psychological scarring from the recent epidemic than some had feared. It is hard to be definitive, but daily untested data, of the kind referred to by Mr Haldane, continues to point to recovery. Average visits to retail and recreation stores have continued to rise through June, with average visits per day improving at a faster rate in June than in May. How well that translates into retail sales remains to be seen but with previously much-used metrics such as PMIs providing little insight at the moment, and official retail sales data heavily delayed, it appears likely that both policymakers and market observers will continue to make use of alternative data series.

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Part of this strong consumer rebound reflects large fiscal support packages that protected workers’ pre-crisis wages. One key risk is that support will be withdrawn too quickly. Indeed, the OECD recently warned that furlough schemes should be wound down in order to encourage a reallocation of labour from industries that are unlikely to exist in our new normal. However, with re-openings still fresh in Europe and on pause in the US, it is still too early to judge which industries are viable in the medium term. It seems premature to withdraw fiscal support already. Indeed, it is one way the world could quickly move from a V-shaped recovery to a U, or L. Governments appear to be erring on the side of caution. News reports from DC suggest the Trump administration is aiming to deliver another package, worth $1 trillion dollars, by August. That should help to support economic activity given headwinds from rising new cases.

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As the US shows, another key risk to a V comes from the virus itself; in particular, a further sharp increase in cases that prompts a return to national lockdowns. The US may be closest to that risk among the large economies. However, as we have previously outlined, the increase in new cases stateside is concentrated in states that never had a large outbreak to begin with and so this should be considered a further continuation of the original outbreak, and not a second wave. The current situation looks pretty dire. However, if these states follow the same pattern as those worse hit during the initial outbreak, or that of countries in Europe, then the situation may end up looking a lot better a few weeks from now.

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There are threats of rising cases internationally, too. Part of Australia has returned to a six-week lockdown, after a spike in cases in Melbourne. Meanwhile, Israel has also reversed course after successfully navigating its ‘first wave’ following an uptick in community transmission. Both examples highlight the difficulty of completely suppressing the virus indefinitely and suggest that it is still too early for judgments about which country has most successfully managed this health crisis.

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To close on a different note, UK pubs officially re-opened this past weekend. Despite warnings of chaos, there was little sign of disobedience in my local. Indeed, I enjoyed a pint of Guinness in the beer garden with not much fanfare. However, you do not need to be a sworn officer of the law to realise that alcohol and social distancing are not perfectly matched. New cases in the US tend to be concentrated among the young and it seems likely that indoor bars have played a part. Indeed, New York postponed the re-opening of indoor eating and drinking following spikes in the US south and west. Such bans are likely to curtail some amount of pleasure that makes life worth living, but they are not necessarily a death knell to the economy. In the US, spending on accommodation and eating and drinking services represents around 2% of GDP. That figure pales in comparison to the cost of the virus on economic activity so far. Shut down the bars to save lives and the rest of the economy? Maybe, but let me get another Guinness first.

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