It has now been just over four months since Chinese health officials first reported the cluster of pneumonia cases to the World Health Organisation that would come to be known across the globe as Covid-19. With much of the world still on lockdown, entire industries remaining shuttered and record unemployment figures expected, many are beginning to wonder whether the cure may end up being worse than the disease. So, what will it take to get the global economy up and running again? Can it possibly be as simple as businesses just reopening and everyone returning to work?
The economic indicators we have been seeing recently are truly astounding. At the end of April we witnessed US jobless claims coming in at just over 4.4 million, when combined with the five previous weeks it brings the total of Americans out of work to over 30 million. This figure dwarfs the number of jobs lost in the country during the Great Recession, which according to the Department of Labour’s Bureau of Labour Statistics, totalled 8.7 million lost jobs. It also exceeds the number of jobs created in the country since that same Great Recession, which totalled 22.4 million. What this means is that the US economy has managed to shed more jobs in six weeks than it created in eleven years.
The GDP data is equally alarming. The advance estimate of US GDP showed the American economy contracting by 4.8% in Q1 of 2020. Europe’s preliminary flash GDP reading fared only slightly better, coming in at -3.8%, with both the French and Spanish economies having contracted by over 5%. Canada’s monthly GDP reading for February narrowly avoided going into negative territory at 0% but its Flash estimates for March have it coming in at an astonishing -9%.
The PMI figures are also particularly shocking. European Flash Manufacturing PMI came in at 33.6 at the end of April and its Flash Services PMI came in at 11.7. Recall that any reading under 50 indicates contraction. US Flash Services PMI was reported at 27 and its Final Manufacturing PMI at 36.1. With the exception of China, it’s pretty much the same almost all across the board, with Japan, Australia, Canada and the United Kingdom all reporting PMI figures below 50 in April.
The consumer is king
Many of you will remember the phrase “the consumer is strong” being repeated over and over again last year by various American central bankers, policymakers and economic pundits. Why did so many of them resort to this trope amid mounting evidence that growth was slowing? Because continued consumption is vital to economic growth. Particularly in the US, where consumer spending historically accounts for between 65% to 70% of the economy. When people are spending it’s easy to make the argument that times are good and will continue to be so. But consumer spending, even though widely regarded as a leading indicator, can continue to look strong even as an economy heads into a slowdown, as evidenced by the previous two recessions.
Why is this relevant now? Because if consumer spending can lag into a recession when spirits remain high, it can certainly lag out of a recession. PMI readings from all across the globe are loudly pronouncing that the consumer is most certainly not strong at this time. In fact, the consumer is nowhere to be found right now. It doesn’t matter whether the factories reopen and the service sector gradually returns back to work if consumer demand is not there. What we are dealing with is not just a shock to supply, as April’s meltdown in the oil market demonstrated, we are also in the midst of a huge shock to demand. Consumption is unlikely to resume to anywhere near its former levels, even after the lockdowns are lifted because something has fundamentally changed in the consumer’s outlook. The future for many is now not expected to be brighter than the past, at least in the short to medium term, and this is going to have consequences that are far-reaching and long-lasting. After confidence is lost it takes a long time for it to return, so those expecting everything to ramp up once more as soon as the shops and factories reopen may be in store for an unpleasant surprise
Last week the Bank of Japan joined the QE unlimited contingent by announcing that it would be purchasing as many government bonds as is required to combat the effects of the corona crisis on its markets. It also announced that it would more than double the size of its corporate bond buying program to 20 trillion yen. This follows the Federal Reserve’s move in March where it also announced unlimited government bond purchases as well as three new lending facilities through which it will be purchasing up to $300 million in corporate debt to help prevent US businesses from going under. In March, the ECB also removed its self-imposed limits on how much government debt it is allowed to purchase.
If the last crisis is anything to go by, then we are likely to soon witness a further and even more pronounced dislocation between conditions in the real economy and the price of financial assets. In such a climate anything is possible in the short term, even stock markets rising further as a bi-product of central bank largesse. What’s particularly worrying, is that when we talk of a return to normal, we’re actually talking about a return to just a few months ago, the new normal post-2008, which wasn’t very normal at all.