Fathom Recession Watch 06.05.2020

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Next forum date: Monday 18 May 2020, 3:00pm BST

Headlines

• Global daily new cases down 15% from peak
• April PMIs point to severe contraction across the world
• Brent crude rallies, up 50% over the past week
• US government expects to borrow $4.5 trillion in 2020
• German court questions legality of ECB QE programme

There is more reason to think that the trough in global economic activity is behind us. Last week, we looked at throughput at US airports that troughed in mid-April and is now back to levels seen at the end of March. Alternative data from Google that track the mobility of Americans at different venues suggest something similar. The trough in visits to retail venues and workplaces was on 13 April with activity slowly rising since then. Efforts to relax restrictions across many US states suggest that this trend is likely to continue. However, visits to retailers were 37% below normal levels as of the end of April. Just because we have passed the trough it does not mean that economic activity will return to normal soon.

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We highlighted last week the link between the severity of a country’s lockdown and the quarterly decline in its GDP in the first quarter. Data on car sales add further weight to this view. According to Oxford University, the stringency of the UK lockdown averaged 82 in April, which compares to a 71 figure in the US, with a higher score being consistent with a more stringent response. That helps to explain a divergence in the drop in car sales between the two countries. In the US, car sales declined by 47.9% year-on-year, which compares favourably to the 97.3% decline witnessed in the UK. Likewise, Markit’s PMI surveys point to a divergence, with the US figure in April (26.7) quite a bit better than that seen in the UK (13.4).

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A less acute short-term hit in the US risks a more prolonged economic slump if COVID-19 prevalence remains high. The federal government’s guidelines on social distancing expired at the end of April, and many governors have eased restrictions. This should boost economic activity in the short term versus a counterfactual of extended restrictions. However, the number of new cases remains high in the US, and well above those in Europe. That suggests the virus will circulate in the US at a higher rate for longer, with associated negative health consequences. That could end up delaying the time when a stronger recovery can be established.

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Another factor that will influence the speed of economic recovery from COVID-19 is unemployment. Despite its less stringent response to COVID-19, the US labour market appears to have suffered a similar sized shock to that in the UK. As a proportion of those previously employed, the cumulative number of initial jobless claims (22%) is pretty close to the number of UK workers that have been put on furlough or applied for Universal Credit (24%) since the middle of March.

One key thing to watch is how many of those that have applied for unemployment insurance return to their old jobs. We expect April’s employment report to show a 25 million decline in employment when it is released on Friday. Arguably, however, the more important figure will be the number of unemployed workers that say they are ‘on temporary layoff’. That figure spiked by 1 million in March and will almost certainly account for most of the total increase in unemployment. The greater its share, the better for the US economic outlook, as it would imply that more of those that are currently not working will not end up permanently unemployed, helping to avoid a more drawn out economic recovery.

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Interesting reading

• Acemoglu et al. find that lockdowns based on age would maintain public health with much reduced economic costs when compared to uniform lockdowns
• Evidence that obesity could cause severe COVID-19 disease in younger age groups
• The NY Fed identifies a link between deaths in German towns between 1918 and 1920 and a later increase in political extremism
• The International Energy Agency forecasts a record 8% drop in CO2 emissions this year due to the economic fallout from COVID-19

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

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