6 minute read
It’s easy to focus on the negatives in the sea of news about the coronavirus crisis. Here Jim McCormick outlines his good news stories and finds reasons to feel more upbeat about the outlook.
Global growth forecasts revised down to -3.2%
Global equities are struggling, risk sentiment is low, fixed income assets aren’t a good hedge and concern for emerging markets is rising. As the coronavirus crisis enters its fourth calendar month, the mood remains understandably downbeat. (For more on expected performance of fixed income and equities, read this.)
And the only way to describe the growth shock from the coronavirus crisis is that it’s nothing short of horrific. Our economics team updated their forecasts and now expect a significant decline in 2020’s global gross domestic product (GDP) 2020 to - 3.2% year over year. It would be the largest annual drop in global GDP on record. Clearly, the decline in GDP is concentrated in the second quarter, but the team also has doubts about the pace of the recovery thereafter.
Let’s get down to the good coronavirus news…
Clearly, there is a lot of bad news out there. Rather than add to it, let me offer a few slivers of good news. I’ll start on policy, which was much quieter by recent standards last week, with new announcements coming out in more of a trickle than the usual flurry. The great news? The massive efforts by central banks to clear dysfunction in markets are clearly working. That said, normal market functioning does not mean we have returned to normal, but it certainly helps (see last week’s blog for more on this).
The great news? The massive efforts by central banks to clear dysfunction in markets are clearly working.
Good coronavirus news: Policy
Coronavirus policy in the US
The US Federal Reserve (the Fed) announced they would temporarily exclude Treasuries and reserves held at the Fed from banks’ Supplementary Leverage Ratio (SLR). The US team sees this as a pretty big deal for funding and Treasury markets and assumes it will likely be made permanent. This also continues a broader theme of an easing in regulations for banks in order to cushion the double blow of damaged balance sheets and lower yields. On a nearer-term perspective, the US dollar funding shortage prevalent just a few weeks ago for example, has flipped to a large dollar surplus — a clear sign that these central bank policy moves are working.
On a nearer-term perspective, the US dollar funding shortage prevalent just a few weeks ago for example, has flipped to a large dollar surplus — a clear sign that these central bank policy moves are working.
Coronavirus policy in the Euro Area
In the Euro Area, there were no flashy headlines, but much talk about region-wide aid and lending programs. It is increasingly clear this crisis will be a make or break moment for whether the Euro Area can achieve further integration. The repercussions for markets of success or failure will be huge. Some small hurdles have already been cleared, most notably Germany’s long-standing reluctance toward deficit-spending at the national level. Other hurdles are still present. The next step is use of region-wide lending/loan facilities and we think the Euro Group will approve some measures on this front at its 7 April meeting. Full mutualisation of any Euro Area debt is a very high hurdle for sure, but even here chances are increasing.
Good coronavirus news: Using China as an anchor
Over the last couple of weeks we’ve been using China’s economic response to the coronavirus crisis as an anchor for the rest of the world. Not just because it’s the only anchor we have against this novel virus, but also because it’s giving us hope. Here’s why:
Learning lessons from improved growth in China
The performance of China’s purchasing managers’ index data in March is encouraging. The combined official/Caixin composite survey rose to 50 up from 28 in February. Judging from higher-frequency activity data it is clear China’s growth remains well below pre-crisis levels. But given China was the first country to feel the impact of coronavirus, its cycle — from draconian-levels of lock-down to partial re-opening and the pattern of growth coinciding with this — is at least a partial model for other countries.
When is recovery for the rest of the world plausible?
The rest of the world is at least six weeks behind China in terms of virus trends and by most estimates the level of social distancing has been less severe. But some recovery in the vicinity of May is plausible (Chart 1). Interestingly, in a survey we recently sent clients, many investors felt that a return to more normal conditions by June felt likely.
Chart 1: PMI data in China has rebounded sharply. Can we expect the same for the rest of the world? We think yes
Good coronavirus news: Better news in Europe and the UK
The next few weeks should see some better news in Europe in terms of virus rates
Our estimates and modelling suggest:
- Italy’s daily mortality rate peaked and could be running at about 1/3rd this level within the next week.
- Similar peaks in Spain, France and Germany should be seen in the coming days.
- For the UK, a peak is likely by the middle of the month.
These thresholds are by no means sufficient for social restrictions to end. Indeed, in the last few days most European countries were announcing extensions of current policies. That said the model may also be able to infer more about the true effectiveness of confinement over the next week and that may be key for projecting a point when a phased end to those confinement measures might become possible. Data on recent new hospitalisation rates in Italy are encouraging.
The US remains a big elephant in the room
It is hard to model the country as a whole given the various timing and levels of social restrictions. But New York City is clearly the hardest hit and its distancing strategies have been loosely similar to those in Europe. Our model is very preliminary, but a peak in a few weeks is likely.
The trends we’ve seen in China’s PMI data are one of, in our view, the metaphorical lighthouses on the stormy cliff’s edge.
China’s PMI rebound is a lighthouse
At the moment, these small slivers of better news are nowhere near sufficient enough to turn the market mood. But they do matter, at least at the margin. The best we can all do at this stage is tell it like it is. And the trends we’ve seen in China’s PMI data are one of, in our view, the metaphorical lighthouses on the stormy cliff’s edge. Stay tuned for more.