The phase of rapid economic upturn, and in which there were about activity indicators better than expected in all of the major economies has come to an end. The recovery of the Eurozone runs the risk of stagnation, although the measures implemented should help to cushion the impact of the economic and financial health constraints around the Covid-19 and avoid another economic recession.
In trying to describe the recovery is in progress, the start focus on their disparate nature. The employment, for example, is behaving a lot better than expected, especially in the US. On the contrary, all companies and economies dependent on tourism are suffering a sharp declinewith little hope that the situation will change in the near future.
Housing, for its part, advances to all machine, supported by the historically low interest rates of the mortgage loans. This means that it can be expected that construction activity will continue and that, once built those homes, the expenditure on goods of domestic consumer durable increase.
With regard to the pandemic, that much damage it is causing to the sectors hotels, tourism and catering, it is complicated to make predictions. The number of daily new infections is clearly on the rise in Europe once more. And is particularly affecting some countries such as Spain or France, but the increase of the data is related, at least in part, with the highest number of tests performed. One aspect reassuring is that the number of patients who require hospitalization and the mortality rates of the virus are kept in levels.
In global terms, what level of economic growth can be predicted? The recovery still has a long way to go judging by the level of consumer confidence still low –but rising– and the rate of savings. However, given the high uncertainty prevailing, so that this growth potential will materialize it will be necessary to have policies that support constant. Not necessarily additional measures, but, at least, to a broadening of the programs in place.
The recovery still has a long way to go judging by the level of consumer confidence and the savings rate
The recent contributions of the US Federal Reserve (Fed) are, on the one hand, the extent of their predictions, according to which interest rates will remain at low levels until the end of 2023 (which encourages growth). On the other, the expectation of a full recovery, and relatively quick (with a fall in unemployment below 4% by 2023 and a return of underlying inflation as measured by the index, PCE at 2% that same year), so that it would not be necessary to adopt additional measures to the program of purchase of assets.
In fact, the Fed is shown to some extent optimistic and might be forced to increase asset purchases if yields begin to increase. On the other hand, it is likely that the European Central Bank (ECB) and the Bank of England to adopt further measures, whether in the form of quantitative easing, additionalof a refinancing more selective and criteria-more flexible operations to more long-term (OFPML) or even, in the case of the Uk, of the adoption of interest rates negative.
On the other side of the stimulus macro-economic (budget support), the levels are still low consumer confidence in the U.S. can be attributed in part to the completion of the providing of supplemental unemployment $ 600 per week associated to the pandemic, as well as to the inability of republicans and democrats to reach an agreement on its extension (or any other new aid measure).
Despite the fact that the executive orders from the president Trump distribute $ 400 per week offered support on a transitional basis, the funds are finished, and millions of households affected begin to fret due to their financial situation. This is a threat to the prospects of consumer spending and, consequently, economic expansion as a whole.
If we focus on the portfolios, it is justified to have a conservative approach
The uk is also coming to the edge of the cliff this month, when he is scheduled to complete the program, suspension of employment currently in force. However, it has announced a new program –although much less generous– for the period from November to march. France and Germany have also expanded their aid programmes to the workers, which cover up to 87% of the wages.
In general terms it is likely that the world economy to follow its course until it stabilized at a rate of growth more normal. Despite this, the risks are considerable in the current scenario. Among them it is worth highlighting the already mentioned ‘cliff’ budget in the US, a few adverse developments in the political level (in particular, in the us elections and in regard to the ‘brexit’) and a worsening of the situation of the pandemic.
In regards to the us elections, both the White House and the Congress play a lot in the face of international trade, and in particular in the country’s relationship with China. With regard to the pandemic of the Covid-19, we will be seeing a tug of war between the evolution of the number of daily new infections and the mortality rate of the virus and the positive news in the global race to find a vaccine.
If we focus on the portfolios, the slowdown of the economic improvement can be expected a decrease of the yields. It is justified to maintain a conservative approach –matching the loss in value expected of the portfolio with the risk level of reference–, as well as undertake an intervention progressiveas the news of the next few weeks could anticipate a high volatility in the financial markets.
***Samy Chaar is chief economist of Lombard Odier.