How much upside for the global economy?
In recent days, renewed concerns have been expressed about the recovery in the global economy as the number of new Covid-19 infections in the United States, India and Brazil surged — precipitating fresh lockdowns in many cases. Worse still, a few new clusters of infections emerged even in countries that had managed the pandemic reasonably well, such as Australia. Because Asia’s prospects hinge on how quickly global demand can revive, we need to determine whether the world economy could really be set back by these developments.
Overall, we remain confident that economic growth around the world will indeed begin a strong recovery in the coming months. That will put the global economy in a good position to deliver a substantial further rebound in 2021. There are two reasons for this view. One is that, as most of the world learns how to contain the pandemic, the economic damage that it causes is diminishing. That means that, over time, there will be less need for economy-crushing lockdowns. This being the case, the question then is how quickly the comeback in activity can happen, and how robust and sustained that rebound can be? Here, too, we are optimistic because recent data tells us that consumers are more resilient than expected and policy support has been much quicker and more powerful than ever before.
The pandemic is not over but its worst economic damage is past
There are several reasons why we should not be unduly pessimistic about the pandemic’s trajectory going forward.
First, much of the world is learning how to deal with the disease from the successful approaches taken in countries as diverse as China, Taiwan, Japan, New Zealand and Germany. There is now a useful template that works, including the wearing of face masks, encouraging better personal hygiene, practising safe distancing, and swift tracing and isolation of new infection clusters. As these techniques are mastered, infections are being brought under control and new waves of infection are swiftly contained — as the recent experience in Beijing showed. According to the numbers we crunched, countries representing more than half of world GDP are managing the pandemic relatively well and should enjoy a good rebound soon. In essence, where public health capacity is well-developed and political leaders exercise good judgement, the pandemic is under control, with occasional new outbreaks prevented from turning into a serious second wave of infections.
Second, there has been considerable medical progress — even before a vaccine is developed. New drugs and treatment regimes are helping to reduce the dangers posed by this virus. Several drugs are now in use to cure patients and to prevent their symptoms from escalating to dangerous levels. For example, a steroid-based drug called dexamethasone has been shown to decrease the 28-day mortality rate by 17% and considerably reduce the time in hospitals. There has been similar good experience with another drug, remdesivir, which has been shown to reduce the hospital stay for patients. Other therapies are being tested and show promise such as the use of convalescent plasma.
Third, there is little political or social tolerance for severe lockdowns, even when infection waves recur. Governments are finding that they have little choice but to employ more calibrated measures rather than widespread lockdowns which bring down the economy.
What about the United States which is still the biggest economy in the world and which is paying the price for a sloppy lockdown with a fierce resurgence in infections? The health crisis is certainly reaching worrying levels in California, Texas, Florida and Arizona — big states that account for 30% of the American economy. However, the Greater New York conurbation is now ahead of the curve while other key metropolitan areas in the East Coast are in a good position. These regions comprise another one-third of US GDP, and better growth outturns here will move the needle on global growth.
Resilient consumers can power a quick and sizeable rebound in the economy
The key to a stronger-than-expected recovery is the consumer. We can think of two reasons why consumer spending can stage a strong comeback. First, where consumers are confident that their public health authorities have brought the pandemic under control and doctors are increasingly equipped with the right medications so that the Covid-19 disease is no long as “scary” as before, then pent-up demand will be unleashed.
Second, the drastic plunge in consumer spending in the past few months was mostly because consumers were physically unable to make purchases because of lockdowns. What is referred to as “social” consumption or spending on goods and services requiring person-to-person contact fell sharply in April when restrictions on social mingling were imposed. This category of spending will take some time to return to pre-pandemic growth rates, reflecting continued safe distancing measures. However, our review of the data shows that other types of spending such as on staples or on “delayable” items (for example, computers, electronic goods, automobiles) remained on an even keel, and gained further traction in July. The indicators we follow show that this pattern is consistent across both the big developed economies as well as in Asia.
Third, related to this is the question of whether scared consumers are cutting back on consumption so as to build up their savings. Sure, the data does show a huge increase in savings rates across the world. But, our view is that so much of the fall in private consumption spending was because consumers were physically unable to make purchases, it follows that much of the recent upsurge in household savings was involuntary: that means it will be reversed as conditions normalise.
We are now getting good data that supports this view. Global consumer spending appears to have staged a considerable and swift recovery: Using tools provided by Google, we can monitor reasonably up-to-date measures of consumer spending — these show that a sizeable recovery has taken place, and swiftly after a vertiginous plunge in April, for both G3 and Asian economies. The hard data that is available supports this picture of consumer resilience. French consumer spending on goods surged 36.6 m-o-m in May 20, bringing household expenditures back to 91% of their pre-crisis level. In Spain, retail sales were up 19.3% m/m in May, going part of the way towards reversing the plunge of 20.1% in April. Surveys also suggest that consumer spending will continue to move up. In the US, the Conference Board US Consumer Confidence Index surged to 98.1 in June 20, up sharply from the upwardly revised 85.9 in May 20. The University of Michigan Consumer Confidence Index surged to 78.1 in June 20, up sharply from 72.3 in May.
Policy support has been extensive and more is in the pipeline
Our analysis shows that the policy responses to the pandemic have been on an unprecedented scale, worth almost 20% of the economy in some cases. Moreover, these responses were implemented far more swiftly than in any previous crisis. Moreover, the design of the policy packages was innovative, incorporating unconventional measures such as extensive wage subsidies, government-subsidised furlough schemes and substantial one-off cash transfers which have bolstered the financial position of households.
In addition, tax rebates, rental reductions and other direct assistance to businesses have helped them to weather the downturn far better than in previous crises. Stabilising households and businesses in this way has put them in a good position to resume normal spending quickly. For instance, nearly a third of the workforce across the UK, Germany, France, Italy and Spain have been placed on employee furlough schemes designed to prevent a sharp rise in unemployment and partially replace lost incomes. The job-subsidy scheme in Spain pays 70% of the salaries of furloughed employees, and was recently extended by three months to end-September.
As a result, for example, several analysts expect average household incomes in the US to remain stable this year despite the massive contraction in the economy, thanks to the disbursement of stimulus cheques under the US Cares Act in April plus a generous expansion of unemployment benefits. Similarly, in a number of Asian economies, direct fiscal injections have been sizeable enough to cover a large proportion of the estimated income losses.
This is one reason why the labour market has surprised positively in the US. The American economy added 4.8 million net new jobs in June, nearly twice the 2.5 million created in May, alongside an encouraging increase in the labour force participation rate.
Continued policy support on a large scale is essential to keep the recovery going. The indications from central banks, finance ministries and parliaments all over the world is that they will not hesitate to add more monetary and fiscal stimulus where needed. In the US, although Democrats and Republicans have been engaged in acrimonious debates over the details of the next stimulus package, there is little doubt that another sizeable stimulus will soon be passed. In addition, both President Trump and the Democrats are talking about the need for a huge initiative to build infrastructure. Statements from the US Federal Reserve Bank, the European Central Bank and the Bank of Japan leave little doubt that monetary easing will not just continue but be expanded.
In China, where a decent recovery is already underway, policy makers are still likely to expand stimulus programmes because of their concerns over a still-weak labour market. The credit impulse — the impact of monetary conditions on the economy — has reached levels seen just in 2009, just after the global financial crisis.
As a result of the above, the final factor needed for a sustained economic recovery — capital spending — could fall in place. While current surveys quote companies saying they are likely to drastically reduce investment this year, the extensive policy support described above as well as consumer resilience should give businesses more confidence to resume capital spending by the end of this year or soon after. Indeed, some measures of business sentiment, have been encouraging. The latest purchasing managers surveys have shown business expectations for the future registering sharp improvements across the globe. In addition, Germany’s monthly Ifo survey delivered its strongest ever increase in the business climate index, up by 6.5 points to 86.2 in June. In France, the INSEE business climate gauge rose 18 points to 78 in June, its largest m/m increment since the survey was started in 1980.
Conclusion: reason for cautious optimism
The sheer scale of the downturn in the past few months has terrified observers, leading many to conclude that such a plunge could not be quickly reversed. But this is not a normal economic contraction. It is one caused by policies needed to resolve a severe public health crisis. As these policies ease and with the consumer resilience and massive stimulus efforts discussed above, a quick comeback is not only possible but the most likely scenario.
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Manu Bhaskaran is CEO of Centennial Asia Advisors