Covid -19 is easing throughout the developed world, although we are seeing an upswing in Latin American countries. Most countries are now slowly reopening their economies. In terms of a cure or a vaccine, research continues but we saw no significant breakthrough in the past few weeks. Where economies have opened we saw consumers optimistic for tomorrow, but hesitant today, due to both Covid fears and uncertainty over volatile employment conditions.
The pace of the recovery is picking up in China and Asia (especially in countries that are most affected by China), but not in India. Europe and the US where the virus took a heavier toll are recovering more slowly.
The UK was one of the hardest hit countries in terms of deaths per million, enduring one of the longer lockdowns, and seeing some of the more pronounced construction crunches and supply chain pressures. Brexit talks do not look overly optimistic and the British government has publically denied seeking an extension.
We are looking at possibly a temporaryV-shaped recovery in China and its major trading partners, a U-shaped recovery in Europe, the US and a deeper U-shape in the UK, especially if a no-deal Brexit becomes reality at the end of the year. A W-shaped recovery (in essence a second wave that would force economies to shut down again is certainly possible -and feared- but it would depend really on the course and mutations of the virus.
While data was still suggesting a fast economic deceleration in May, the pace of the downturn globally was significantly slower than in April. The services sector suffered more than manufacturing both of which have experienced record post -WWII drops. Consumers across the globe show optimism for 6 months down the line but continue to defer spending decisions as they expect unemployment to rise. We believe than on all fronts (the US, UK, Europe and China) unemployment trends shifting this fast may not be properly captured by conventional statistics and risks are certainly to the downside. Trading conditions are still tepid and demand for goods and services across borders remains weak. Backlogs of work are being reduced, staffing levels are dropping and deflationary pressures are intensifying.
Against an environment of deteriorating fundamentals, central banks continue to provide significant amounts of monetary accommodation. Unlike 2008, some of it is now expressly designed to reach Main Street, the real economy, especially in China. Overall, market volatility is actively and aggressively suppressed by central banks, avoiding an exacerbation of pressures in the real economy.
We slightly upgraded the probabilities for a V-shaped recovery (a six month recovery), due to some pockets of consumer confidence, but we still believe that globally the main scenario calls of a U (or a W) shaped recovery.
The IMF is currently forecasting -3% global growth and -6.5% growth in the UK for 2020. GDP In the UK fell 6% from February to March.
For the UK, the IMF predicts a 6.5% drop throughout 2020, the OBR 9.5%, the EU Commission 8.4% and the BOE 14%. Individual economies (like the UK) are expected to move in lockstep with the rest of the world.
UK earnings downgrades continued, in line with our previous month's prediction. Corporate earnings have been downgraded 40%-47% for FTSE all-share companies and 90%+ for AIM companies.
The question remains: will the downturn acquire its own dynamic, i.e. persist even if the virus were eradicated. Consumer sentiment indices, earnings expectations as well as current forecasts, suggest that confidence that the downturn will be temporary is eroding, and consumers and business owners are getting more pessimistic.
Not everyone is expected to suffer equally: Main Street will suffer more than Wall Street, Small and unlisted more than Large and Listed, sclerotic more than nimble and agile. Tech and Healthcare could come out as winners from the crisis. Sectors like leisure and hospitality and airlines may take years to recover.
Higher taxation, less regulation, higher structural unemployment will create both business and staffing opportunities.
Going into this crisis, globalisation was already under attack. Political protests, big differences in the pace of recovery across the world, persisting trade conflicts, rolling back of supply chains are increasing the risk to the post-WWII global order.