An unstoppable force meets an immoveable object: The figures reflecting the Coronavirus impact on the real economy are staggeringly bad – they represent an immoveable object. Yet global equities are up over 20% from their March 23 trough – technically a new “bull market” – on hitherto unimaginable levels of monetary and fiscal stimulus, which represent an unstoppable force.
Kleinwort Hambros: Economic outlook
Immovable objects – the economic data
US: The US unemployment rate is close to 20%, almost double the peak rate during the 2008-09 recession. This follows the loss of over 33 million jobs in March and April, reversing all the 22 million jobs added to payrolls since 2009. The International Monetary Fund (IMF) expects US GDP to contract by 5.9% in 2020.
UK: The UK’s flash composite purchasing managers’ index (PMI) for April plummeted to 12.9 from 36 in March. This is the lowest figure on record. The composite index accounts for both manufacturing and services activity, and anything below 50 heralds a contraction in the economy. Moreover, retail sales crashed by 5.1% in March, the largest decline ever recorded. IMF: -6.5% in 2020.
Eurozone: The Eurozone’s composite PMI also crashed to an all- time low of 13.5 in April, about half the 25.7 consensus estimate. In Germany, half of all companies are using a government scheme that pays 60% of workers’ salaries when they are temporarily laid-off. In France, the business climate index fell to 62 in April, the lowest since the series start in 1998. IMF: -7.1% in 2020.
Japan: The April service sector flash PMI hit a record low of 22.8. Exports fell the most in three years last month, and the trajectory is expected to worsen before it turns around. IMF: -5.2% in 2020.
China: China’s first quarter GDP contracted by 6.8% in 2020 (year- on-year). This is the first contraction since 1976. Retail sales fell 19% in the first quarter, which casts the spectre of not only a Chinese supply side shock, but also a potential demand side one as well. IMF: +1.2% in 2020.
Unstoppable forces – monetary and fiscal support
US: The Fed has slashed its base rate to 0%. It also announced unlimited government bond purchases and entered the corporate bond market to provide critical liquidity. A $2.2 trillion spending bill has been signed. It includes $510 billion in loans and guarantees to prevent large corporate bankruptcies and a further $359 billion in forgivable loans for small businesses, since augmented by another $484 billion. This dwarfs the $1.5 trillion for bank bailouts and corporate support packages in 2008 and early 2009. This fiscal support amounts to about 11% of US GDP.
UK: The Bank of England base rate was slashed by 65 basis points to 0.1% in addition to expanding the central bank’s balance sheet by £200 billion in UK government bonds and non-financial corporate bonds. The government announced a £350 billion package of loans and grants. It will also pay up to 80% of workers’ wages up to £2,500 per month for three months. Fiscal support: nearly 20% of GDP.
Eurozone: The European Central Bank will spend over €1 trillion before the end of 2020, buying government debt and other securities. It also plans to accept junk-rated debt as collateral. European countries have committed at least €1.5 trillion in spending and loan guarantees to protect business and workers. Moreover, Chancellor Angela Merkel has said its country is prepared “...in the spirit of solidarity... to pay ... much higher contributions to the EU budget”, a sea-change for Germany. Fiscal support: nearly 22% of GDP.
Bottom line. No-one knows what happens when an immovable object meets an unstoppable force. Similarly, no- one knows how quickly lockdowns will be lifted, nor whether corporate and household spending plans will bounce back to normal after the crisis. As always, we hope for the best-case outcome but are prepared for a less desirable scenario, and as such remain defensively positioned.
For more information, please contact Sam Hartles, Private Banker firstname.lastname@example.org
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