Did The Pandemic Destroy The World Economy As Much As We Think?
Did the pandemic destroy the world economy as much as we think. That depends on who you ask. Barclays Capital economists, led by Christian Keller, say no.
“The pandemic is not over, but (economic) activity data in recent months provided good news,” says Keller. “The growth contractions in the second quarter were typically less severe than feared and the subsequent recovery, at least in its initial phase, has surprised on the upside.”
This has been particularly true in the U.S. and in China, where the economy is on the upswing. China, in fact, is expected to register positive growth this year. It won’t be over 5%, as was expected. But it won’t be negative, either, assuming economies remain as is for the next three months with no surprise second waves taking place in major global economies as is now occurring in Spain. The Spanish economy does not seem set to return to lockdown measures, while London’s mayor Sadiq Khan said he would reinstate lockdown orders if the virus is spreading beyond what public health authorities consider manageable.
Still, with Spain still open, the U.S. recovering almost all of the second quarter losses (within about 10 percentage points) and China proving to be more resilient than anyone predicted, the global economy — thanks to the No. 1 and No. 2 economies — is generally in better shape than Wall Street assumed a few months ago.
So if the market is going up again this week, that’s one of the reasons why.
Risks remain high. Second infection waves leading to restrictions anywhere in the world, and a highly uncertain U.S. election where consensus now assumes no winner on Election Day night, means investors should just panic early because panic will come in the fourth quarter and into the first. Political tensions will be high on the list of foreign investors minds.
But there are positives.
The recent passing of Supreme Court judge Ruth Bader Ginsberg has some in the market thinking that the news cycle may switch towards her vacant seat, and election drama, rather than the constant focus on protests in some cities, and the number of positive coronavirus tests that show no end of the SARS pandemic in sight.
Recent progress on a vaccine could also surprise to the upside, with some investors rotating out of tech and back into the coronavirus-focused pharma stocks that have sold off of late.
In the winter months, the spread of the pandemic—not yet declared a ‘pandemic’ until mid-March by the World Health Organization—economic growth forecasts fell precipitously. Global GDP was seen contracting by around 5%, easily.
After borders were closed and lockdowns were enforced throughout the biggest economies of the world in March and April, unemployment rose and stimulus kicked in immediately to backstop those lost jobs.
Still, untold thousands lost wages and bonuses, not calculable at this time.
But it was the prompt policy response from Brazil and China, Europe and the U.S., that kept investors hopeful. The bottom in the market in March — like the bottom in March 2009 — was spotted, and the switch was flipped to buy; buy like the wind, abuela!
Incoming economic data in recent months showed that the doom and gloom forecasts were too pessimistic.
In many cases, the reported second quarter GDP numbers showed contractions were less severe than the market projected. Activity bounced back faster than expected in May in China and June in the U.S. and Europe once restrictions were lifted.
Upside surprises in high-frequency data across regions over the summer months suggest that the third quarter was shaping up for a very strong rebound around the world, led by China and the U.S.
So the data wasn’t so negative.
But didn’t Wall Street basically ignore all that negatively anyway, prompted to buy anything with a ticker symbol?
Maybe the risk now is the risk of becoming overly optimistic, Barclays Capital economists warned in their weekend note to clients.
Have we swung too far to the side that thinks the worst is over; it’s a V-shape recovery, ready or not.
“We think not,” says Keller, the BarCap bull in London. He says that his forecasts anticipate some loss of momentum in economic activity in the fourth quarter, and acknowledges that the market is still figuring out the more “permanent scaring” inflected on some companies — not only retail and restaurants, but travel and maybe even corporate real estate REITs, though Keller did not single those guys out.
Their updated forecast predicts global growth to decline by 3.7% this year, around 200 basis points better than previous consensus estimates.
Next year will be better, regardless who is in the White House: a 4.9% gain in 2021 for global GDP.
China will grow this year, proving once again that it is the indispensable nation as far as manufacturing goes. Barclays estimates China GDP to grow by 2.3% in 2020 and 6.9% 2021.
Here at home, GDP is seen contracting by 4.5% this year, erasing the last two years of economic growth. But will pick up some of that in 2021 with at least a 3% growth rate.
The EU will be in worse shape.
For Barclays, 2020 will see a 6.9% contraction for the Eurozone, but 2021 will rebound more than the U.S. at 4.7%, assuming EU stimulus and second wave infections don’t panic public health officials to the point of a roll back of progress to March-like restrictions.
China remains the standout in emerging markets, though.
The other big emerging economies will do way worse than China. India: -6.5%, Brazil: -5.0%, Mexico: -8.8%.
Emerging market economies should fall by around 5.4% in terms of their collective GDP in 2020 and will recover some of that next year. If all goes well, the emerging markets are looking at 4.7% growth next year.
Emerging markets and the S&P 500 have moved in unison over the last six months, with the MSCI Emerging Market Index beating out the S&P 500 by around 300 basis points.
To beat the benchmark, investors did best in tech no matter where they were over the last six months. Some names that might be worth looking at despite their major run over the last several months include Indian household names Infosys (+89%), Wipro (+84.8%), Yandex (+99.12%) and a little known Brazilian software company called Linx (+91.4%).