Has the coronavirus-hit global economy seen the worst of the crisis? It’s too early to tell

While the stock market and business surveys point to a rebound, the improvement in economic data is rooted in the steep contractions in output earlier this year
Markets seems to be conflating the stronger-than-expected rebound with a smooth recovery

Nicholas Spiro

Published: 1:00am, 10 Jul, 2020

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Has the Covid-19-ravaged global economy turned the corner? Over the past few months, financial markets have been betting that it has as nationwide lockdowns are eased in Europe and the United States. The MSCI World Index, a gauge of stocks in advanced economies, has risen 12 per cent since mid-May, turbocharging a rally that began in late March when leading central banks launched massive stimulus measures.

Yet, signs that the world economy is over the worst of the coronavirus crisis are apparent not just in markets. Business and consumer surveys, as well as hard economic data, also point to a sharp rebound in activity.

On Monday, the publication of a gauge of global output produced by JPMorgan and IHS Markit showed that manufacturing and service-sector activity last month rose by 11.4 points, the sharpest monthly increase on record, leaving the measure at 47.7, slightly below expansion territory and up a whopping 21 points since its all-time low in April.

Other indications of a strong rebound are the July 3 publication of a survey showing that activity in China’s services industry rose in June at its fastest rate in over a decade. Even in the euro zone, where the uptick in economic activity has been weaker, retail sales increased by almost 17.8 per cent month on month in May, data from the European Union’s statistical agency, published on July 6, revealed.

Few would have predicted such a swift rebound, particularly in the case of the US labour market. In the past two months, employers have added a net 7.5 million new jobs, allowing the country to claw back just over one-third of the jobs lost since the virus-induced shutdown in March decimated the labour market overnight.

Hundreds of people line up outside a Kentucky Career Centre hoping to find assistance with their unemployment claims in Frankfort, on June 18. The US has added 7.5 million new jobs in the past two months. Photo: Reuters

However, the bounce-back needs to be put into context. First, the dramatic improvement in economic data over the past two months, especially in the US, has its roots in shockingly steep contractions in output earlier this year when the global economy experienced a sudden stop without precedent in peacetime. This set the stage for a sharp rebound as the data began to improve in the spring.

The fact that sentiment, both in markets and in the real economy, was so bleak to begin with increased the scope for the data to beat expectations, which is precisely what happened.

A US economic surprise index produced by Citigroup, which measures how often data come in above or below expectations, has risen to its highest level since its inception in 2003. Citigroup’s surprise measures for China and the euro zone have also rebounded sharply.

The bounce-back, therefore, says more about the performance of the global economy relative to expectations, rather than the strength and durability of the uptick in activity.

A worker removes shields for safety glasses cut from a die cutter at the Team Plastics facility in Cleveland, Ohio, on July 1. The company has said Covid-19-related plastic products now make up 60 per cent of its business. Photo: Bloomberg

Second, markets appear to be conflating the stronger-than-expected rebound with a smooth recovery. Yet, even in the US labour market – the part of the global economy in which data has exceeded expectations the most in the past two months – the headline numbers understate the severity of the Covid-19 shock.

While many Americans who were furloughed due to lockdowns and social distancing measures have been rehired, 2.8 million workers permanently lost their jobs last month, an increase of almost 590,000 from May, according to Bloomberg. This suggests that a significant part of the virus-induced deterioration in the US labour market is structural.

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It is likely to become even more structural if the recent surge in infections in several key states – which has resulted in the reimposition of restrictions – derails the pickup in economic activity. The greater the fear of the virus, the more reluctant consumers and businesses are to re-engage in the economy in the absence of a vaccine.

Not only are investors mistaking the rebound in activity for a sustainable recovery, they are also conflating the easing of lockdowns with a greater willingness to consume and hire.

05:38

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Third, the sharp improvement in economic data has done little to reduce the uncertainty faced by companies and investors. While the benchmark S&P 500 index just had its best quarter since 1998, a staggering 80 per cent of the index’s members failed to provide guidance on their earnings last quarter, data from Bloomberg shows.

Analysts’ own forecasts, moreover, are resoundingly bleak. According to data provider Factset, in the first half of this year, analysts lowered their estimates for S&P 500 companies’ full-year earnings by almost 29 per cent, the biggest drop since Factset began tracking earnings forecasts in 1996.

Indeed, even stock markets, which have soared partly because of expectations of a strong recovery, are reflecting deep uncertainty. The VIX Index, Wall Street’s “fear gauge” which measures the anticipated volatility in the S&P 500 over the next 30 days, currently stands significantly above its historical average.

The economic rebound in the past two months is encouraging, and could be the start of a durable recovery. Yet, it is too early to make that call, especially since the evidence so far points to a slow and uneven recovery, marred by stops and starts.

Nicholas Spiro is a partner at Lauressa Advisory

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