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August 27, 2020

Fathom’s Recovery Watch – 26.08.2020

by Fathom Consulting.

Subscribe to Fathom’s regular Recovery Watch newsletters for the latest insights into the impacts of COVID-19.

Headlines

  • Rumours about vaccines abound: has China been secretly trialling a vaccine? Does Russia already have one — and is it safe and effective? Is the US about to fast-track the Oxford vaccine, and will that be safe and effective?
  • As things stand, there is no safe, effective vaccine that we are aware of
  • The number of reported cases is picking up again in some countries, but mortality rates are generally falling everywhere, partly because the most susceptible people have already disproportionately been affected, partly because the demographic distribution of the disease is shifting towards younger people who are less likely to be badly affected, and partly because treatments have become more effective over time
  • The stringency of lockdown measures remains high in many countries, but the impact on the economy corresponds more closely to the behavioural response to the virus than it does to policy
  • A V (back to pre-crisis level of global GDP by mid- to late 2021) remains our central case, supported by fiscal stimulus, but it is worth recalling that even in the V, the global economy never recovers to where it would otherwise have been without the virus
  • The pressing risk right now is the labour market: temporary measures are about to be withdrawn, and millions will be stranded unless aggressive new measures are introduced
  • Equity investors are pricing the relative sectoral impact roughly right, although Tesla is doing a lot of work in supporting the US auto sector

The way UK COVID-related deaths are measured has changed. Previously, any person who died having ever tested positive for COVID was scored as a COVID-related death. Now, only those who tested positive in the 28 days before they died are scored that way. The change brings UK measurement closer into line with other countries, and the number of COVID-related fatalities has moved accordingly. Among the major economies, the UK, Spain and Italy now look very similar in terms of their total fatality rates, with France less badly affected and Germany substantially better, and China, Japan and South Korea virtually invisible on the chart below on this metric. The US looks as though it will join the UK and the others at the top in due course and might yet go through those levels. The same might be true for Brazil and other South American countries too.

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GDP collapsed in the first half of the year in most economies, but fiscal support meant that labour income did not collapse to the same degree. Consequently, the labour share of income has surged. Among the countries pictured below, only the UK has data for the second quarter, but that apparent spike in the labour share is likely to be in place in the US and the EA too. There are many factors in play here that account for the differences across countries, ranging from the size of government, the equilibrium unemployment rate, and trends in the prevailing real wage. But the pickup in Q2 is striking. All governments will be hoping that Q3 and beyond will see a recovery in real activity, the denominator in this ratio, as the fiscal support for labour income is gradually withdrawn. Even a rapid recovery in GDP will still probably see many of those currently furloughed or relying on government income support cheques stranded in unemployment. This is now the single biggest concern for economic policy, as recent Fathom research made clear.

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This fiscal support comes at a price. For economies with a credible and independent central bank, that price is manageable, at least for now. But for countries where there are still question marks about the capacity or willingness of the central bank to support fiscal expansion, including the euro area, the price of fiscal support could be harder to manage. The fragility of the sovereign debt issuer in EA economies has picked up sharply as a result of the crisis. That has yet to show up in measures of risk attached to EA sovereign debt, and it might never do so if the credibility of the ECB continues to hold. But the risks of a re-run of 2012 are increasing.

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The pressure on margins and employment globally remains elevated according to our proprietary measure pictured below. The risk of an L is still present through this channel. And there is some evidence (see the reading list below) of corporate ‘zombification’ in Germany.

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On the other hand, electricity consumption in most EU economies including Germany appears to be back close to its pre-crisis level, suggestive of a V.

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Blavatnik School of Government at Oxford University provides measures capturing the stringency of lockdown policies across countries, shown in the chart below. These measures rose aggressively early on in the crisis, eased in some countries subsequently, and have gone back up again most recently, though usually not as far as they went previously. If stringency of policy restrictions on movement were the main determinant of economic activity then these measures would be pointing towards an ‘L’ rather than a ‘V’ (and an ‘L’ remains a realistic risk). However, Fathom research, to be described in detail in our forthcoming Global Economic and Markets Outlook, indicates that it is behavioural choices rather than policy stringency that really matter.

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Equity markets are generally pricing in expectations about future, post-COVID earnings across sectors sensibly. In the UK, leisure goods are outperforming while autos, and travel and leisure have been hit badly. Retailers includes both bricks and mortar (likely to suffer) and online (likely to thrive). The same patterns are repeated in other markets too, with one notable exception.

 

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In the US, the auto sector is top of the league among those illustrated in this chart. But all of that is down to one marque: Tesla. The outlook for electric vehicles with a mass-market offering appears to be extremely rosy.

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Interesting reading

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Datastream

Financial time series database which allows you to identify and examine trends, generate and test ideas and develop view points on the market.

Refinitiv offers the world’s most comprehensive historical database for numerical macroeconomic and cross-asset financial data which started in the 1950s and has grown into an indispensable resource for financial professionals. Find out more.

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