Waiting Game

After the initial storm the wind in our global sails seems to have dropped away as we enter a period of uncertainty as to how rapidly the economy will recover.

The virus hasn’t yet passed around the entire globe yet, and whilst many countries have brought it under control, South America is in the eye of it and cases continue to rise rapidly in India.  In the meantime, we enter a waiting game as we watch to see people emerge from being fearful, to a resumption of something close to normality.  Unemployment in the short term is likely to rise as furlough schemes drop away and consumer spending looks to be slowing following the initial exuberance of countries unlocking.  But after such an initial shock to the system we were bound to come out slightly “punch drunk”. Now is a time for reflection and planning.  Markets generally have recovered well since March and whilst I do not expect any significant rise from here to the end of the year, I do anticipate markets rising again next year and beyond as they look beyond the near term and to a future recovery.

Output and Activity

In general, there is growing evidence that the world economy is picking itself up after a plunge in activity in March and April. In April, global industrial production fell by over 8% at least compared with March, as double-digit percentage drops in Developing Markets (DM), Asia and Latin America were mitigated by only a slight decline in emerging Europe and a continued rebound in China. The collapse in manufacturing in Developing Markets was largest in transport goods and clothing, while foodstuffs, pharmaceuticals and electronics fared the least badly.

Whilst data for May show that the global industrial recovery has been underwhelming, activity has continued to pick up around most of the world in June. Latin America is a notable exception, where the virus is still out of control. Recoveries also seem to have stalled in parts of the US, and not just in the virus hotspot states like California and Texas. Overall, though, the surprising strength of these indicators in recent months was one reason why we revised up several of our Q2 GDP growth forecasts. We had expected global GDP to contract by 8% last quarter, but now expect something closer to a still-record decline of 5½%.

While activity is still well below normal levels, the surprisingly large rebounds in the Purchasing Manager’s Index (PMI) , a measure of the direction of manufacturing trends, was one factor that convinced us to revise up some of our Q2 forecasts. The composite PMIs rose in all major economies in June, with most jumping by ten points or more. It is encouraging that the PMIs have come back a long way from their April lows so quickly.

Having fallen further, the services activity indices have generally bounced back by more than those for manufacturing. And supplier delivery times have now shortened, which suggests that supply chain disruptions have begun to ease and bodes well for a continued recovery in production. Stripping out the effect of China on the headline Emerging Markets (EM) manufacturing PMI, it seems that EM industry initially fared worse than that in DMs but has since bounced back further. At the global level, the manufacturing output PMI pointed to only a small year-on-year contraction in global output in June.

Consumer Spending

The virus appears to have hastened the trend towards online shopping. In the UK, for instance, since February non-store sales have risen by 51.8% and now account for a third of all sales – up from a fifth before the crisis. In China, this trend has continued even as bricks and mortar stores have reopened.

While consumer spending has returned faster than we anticipated, we expect the recovery to slow further ahead. Retail sales are still far below their pre-virus levels in most major economies.

Timelier data suggest that the recovery has stalled. Having jumped when restaurants were reopened, bookings have since levelled off in the US and the euro-zone, and have actually slumped in Australia. What’s more, the uptick in air travel also seems to have slowed over the past few days.

As a result, we doubt that the current speed of recovery will be maintained. After all, renewed fears about the virus and depressed consumer confidence will weigh on consumption in the months ahead. In the US, for instance, after rebounding steadily since mid-April, consumer footfall at retail stores has edged down recently as case numbers have started to pick up and some restrictions have been re-imposed in some states. However, footfall has also fallen in states relatively unaffected by the new rise in cases.

External Trade

April’s 12.1% monthly fall in world trade volumes was by far the largest on record and left the three-month average annual growth rate at -7.9%. The euro-zone and the US were the worst hit, with exports falling by over 20%. But while trade appeared to hold up slightly better in emerging economies, Latin American and Asian countries outside China also experienced large contractions in exports.

With most countries in full lockdown, a very sharp fall was inevitable in April. In fact, the damage has been less severe than we might have expected given the scale of the economic collapse. Boosted demand for some products, including medical equipment, has helped put a floor under trade flows. In China, for instance, without the support from these products, exports would have fallen by over 10% in May, far greater than the actual 3.3% decline.

There are signs of a tentative recovery. The new export orders component of June’s PMI suggests that the pace of decline in exports slowed.

Labour Markets

Loosening containment measures have allowed some people to return to work, but incomes are still depressed and we think that further redundancies are to come.

Job retention schemes have been effective at limiting the rise in unemployment in DMs outside the US. But these schemes won’t protect workers indefinitely and their generosity has been reduced in several cases.


Inflation continued to fall in May. At 1.2%, the OECD core inflation rate fell to its lowest level since 2011, which is consistent with weak demand outweighing supply constraints in driving prices. The headline rate plunged to 0.3% due mainly to the continued drag from energy prices, which has knocked over 1%-point off inflation this year. However, this drag from energy prices has now passed. With oil prices rebounding, higher energy prices will cause headline inflation to rise even as core rates remain subdued.

This article reflects the research and opinions of Capital Economics and Irongate and is not intended to be a forecast or recommendation.