30th April 2020

A slow and gradual recovery

Aykut Efe, Economist at BCEE Asset Management (now Spuerkeess Asset Management), considers the current economic climate amid the coronavirus pandemic.

We are currently experiencing a very deep recession due to the COVID-19 pandemic. The International Monetary Fund (IMF) forecasts negative global economic growth (-3%) in 2020. The lockdown measures have brought economic activity to a screeching halt, both in terms of production and consumption. In most developed countries, only businesses deemed “essential”, such as food and healthcare, have been allowed to operate normally.

We can try to get some idea of the trajectory the global economy might follow by glancing at the components of gross domestic product (GDP). In the coming months, we will therefore be looking closely at changes in consumption, investment and international trade.

Household consumption will be dragging its feet over the next few months. Since over a month ago, we have seen a particularly sharp rise in unemployment in the US, where more than 25 million people have joined the ranks of the unemployed in just a few weeks. This has caused confidence to plummet, as evidenced by various indicators which have hit all-time lows.

It is also not difficult to foresee a lasting change in consumer habits, even after the worst of the recession is over. According to a McKinsey survey, consumers living in developed countries are planning to reduce their non-food spending, international travel and participation in public gatherings.

Nor will investment ramp up very quickly. Corporate investment typically depends on the earnings of the previous period. But, for most companies, earnings have collapsed during the lockdown and lay-offs have subsequently already begun. Investment is also closely tied to an optimistic view of the future, but this uncertain environment is hardly generating enthusiasm.

In the near future, private demand will start to rise through consumption, investment and international trade, but on more shaky ground.

Lastly, international trade, which had already been badly hit by the 2018-2019 trade war, was disrupted once again when the pandemic threw a wrench in the supply chain. For 2020, the World Trade Organization (WTO) expects international trade to tumble by 13% to 32%. Despite its benefits, it is clear that the international division of labour creates vulnerabilities for companies and governments given the risk of supply chain disruption. We would therefore not be surprised to see widespread discussions about the partial repatriation of industrial production from developing countries to developed countries.

En somme, dans un avenir proche, c’est sur des bases plus fragiles que partira la demande privée, à travers la consommation, l’investissement et le commerce international. En revanche, la demande publique devrait prendre davantage d’ampleur via la politique budgétaire. Cela se reflète déjà dans les plans de relance gargantuesques mis en place par les différents gouvernements, lesquels atteignent 15% du PIB aux États-Unis, 20% au Japon, 11% au Canada et 5% en Allemagne. Tant que les acteurs privés naviguent à vue, l’économie mondiale devrait rester sous perfusion via les politiques budgétaire et monétaire, et ce, pour une période encore indéterminée pour l’instant.

In this difficult environment, we can at least be grateful for one important factor: unlike the last crisis, governments and central banks intervened quickly and decisively to counter the financial effects of the pandemic, as reflected in the equity markets’ reaction in April.