Overview

Although the world economy continued to suffer in the face of the Coronavirus outbreak, during May there were some glimmers of hope that the worst may be behind us.

Across Europe several governments gave the go-ahead for the gradual re-opening of non-essential shops as infection rates continued to fall. Indeed by the end of the month both Spain and Italy were recording less than 500 new infections a day.

This was reflected in the fact that the US, UK, and Eurozone manufacturing sectors all contracted at a slower rate than in April.

Also during the month, whilst the hardest-hit European countries were beginning to relax their ‘lockdown’ rules, the leaders of France and Germany proposed a €500bn rescue package for the EU; a potentially significant development.

In an effort to temper some of the enthusiasm, however, the Chairman of the Federal Reserve cautioned that the economic recovery will be slow and drawn out.

Whilst the infection is slowing in some parts of the world, it is accelerating markedly in Latin America, India, and Russia.

Most stock markets continued to claw back lost ground during the month, with the tech-heavy Nasdaq now actually in positive territory for 2020.

Over 6 months the FTSE 100 lost around -15.4%, the Euro Stoxx 50 lost around -15.1%, and the S&P 500 lost around -1.9% (all in price terms).

The broad Emerging Markets index returned approximately -8.5% (in US$ price terms).

The Japanese Nikkei 225 returned approximately -6.2% (in price terms).

The yield  on ‘safe-haven’ government bonds remained at historic lows.

US Economic News

The US economy is now thought to have contracted by -5% (annualised) in the first quarter of the year, which is worse than the initial estimate of -4.8%.

The unemployment rate skyrocketed to 14.7% in April, which is the highest since at least 1948, as well over 20 million Americans are no longer in employment as a result of the Coronavirus outbreak.

However, despite these dreadful backward-looking numbers, there are some tentative signs that the outlook is improving.

Whilst the US manufacturing sector still contracted during May, it was at a less severe rate than during April.   

Equally, the number of new unemployment claimants has now been falling for several months, whilst the number of people making unemployment claims during May was much less than expected.

In the services sector businesses were slightly more confident about the future than previously.

UK Economic News

The UK economy contracted by -2% in the first quarter of the year, which was actually slightly better than many had expected.

The manufacturing sector continued to contract at a significant rate, but the speed of the deterioration slowed compared to April.

The much larger services sector also contracted at a slower rate than in previous months, although firms remained uncertain about their future in the face of social distancing measures.

The government has outlined plans to re-open non-essential retail over the coming weeks assuming that infections continue to fall. However, the social distancing measures required will mean many businesses will have to operate below capacity.

As if to emphasise the scale of the problem facing many businesses in the services sector, retail sales fell by an incredible -22.6% in April. That was by far the worst performance on record.

In an acknowledgement of the challenges which the economy will face for some time, the Chancellor announced that he was extending the job retention scheme, in one form or another, until October.

Whilst the Coronavirus continued to dominate economic news during the month, the ‘Brexit’ negotiations have also been taking place in the background.

However, the two sides do not seem to be any closer to forging an agreement and the UK government has so far refused to trigger an extension.

The Governor of the Bank of England warned UK banks to step-up preparations for a ‘no deal’ scenario.  

Eurozone Economic News

The Eurozone’s economy contracted by    -3.8% in the first quarter of the year. As expected this was a worse performance than either the UK or the US.   

However, as in the case of both the UK and US, there are initial signs that April may have been the nadir of the crisis.

The manufacturing sector for the region as a whole contracted at the slowest rate for several months, and the Italian manufacturing sector was not far off stabilising.

The services sector remained in a deep recession, although the latest surveys pointed to the slowest rate of contraction for several months.

Despite the job retention schemes in place across much of the Eurozone, there are indications that unemployment is set to rise substantially in the coming months.

With the European Central Bank already providing a huge amount of stimulus before the Coronavirus outbreak, the onus is on governments to insulate their respective economies from further damage.

In this respect a potentially important development was a Franco-German proposal to raise a €500bn fund for the whole region. However, several countries

such as the Netherlands and Denmark do not yet seem to be on board.

Wider Economic News

In China, where new infections are now down to trivial levels, the manufacturing sector rebounded and output is estimated to have risen at the strongest rate in 9 years.

However, as the country is so dependent on exports, demand remained relatively weak whilst the rest of the world continued to struggle economically.

Coronavirus infections are accelerating in several emerging economies, such as Brazil, India, and Russia.

Despite the fact that the Brazilian President has so far refused to enforce the kind of ‘lockdown’ witnessed in Europe, the unemployment rate has already risen above 12%.

Elsewhere, in Japan, the manufacturing sector bucked the trend of many others around the world as the downturn actually accelerated in May.

Towards the end of the month the government officially ended the state of emergency, potentially meaning a recovery can take place in June.    

Financial Markets and Corporate News

Most stock markets continued to make solid gains during May as investors focused on a potential economic recovery in the second half of the year.

The technology-heavy US markets rose particularly strongly as investors reasoned that these companies have, if

anything, been helped by the worldwide lockdowns.

Nevertheless stock markets as a whole remain in negative territory over a 6 month period.

Over 6 months the FTSE 100 lost around -15.4%, the Euro Stoxx 50 lost around -15.1%, and the S&P 500 lost around -1.9% (all in price terms).

The broad Emerging Markets index returned approximately -8.5% (in US$ price terms).

The Japanese Nikkei 225 returned approximately -6.2% (in price terms).

The Investment Association (IA) UK Gilts sector returned 8.9% over 6 months, whilst the IA Sterling Corporate Bond sector returned 1.44% and the IA Sterling High Yield sector returned -5.7%.

Source: FE Analytics

Summary of Key News:

• The world economy continues to shrink. However, there are signs that conditions have improved since April.
• The US unemployment rate is now over 14%.
• The UK, US and Euro Area manufacturing sectors contracted at a slower rate in May.
• The Governor of the Bank of England asked banks to step up ‘no deal Brexit’ preparations.
• The Chinese manufacturing sector rebounded strongly in May as the country returns to some normality.  
• Several emerging economies are experiencing accelerating infection rates.

Financial Markets:

• Over 6 months the FTSE 100 lost around -15.4%, the Euro Stoxx 50 lost around -15.1%, whilst the S&P 500 lost around -1.9% (all in price terms).
• The Japanese Nikkei 225 lost -6.2% (in price terms).
• The broad emerging markets index lost approximately -8.5% (in US$ terms).
• The IA UK Gilts sector returned 8.9% over 6 months, whilst the IA Sterling Corporate Bond sector returned 1.44%, and the IA Sterling High Yield sector returned -5.7%.

  Outlook

Despite the fact that the damage being done to the US and European economies appears to be slowing down, it remains the case that for as long social distancing is required the recovery will be long and relatively weak.

Moreover, because of how inter-connected the global economy is, for as long as the virus is active in one part of the world it will be difficult for the global economy to reach top speed.

For now investors seem focused on the fact that infections are falling in much of the northern hemisphere and this, together with huge stimulus measures, is propelling stock markets higher.

However, the recovery in stock markets has not been equal. Whilst companies such as restaurants now have a very low value placed on them, others such as technology companies are more highly rated.

By some measures the disparity between so called ‘value’ and ‘growth’ stocks is now higher than it was at the height of the dotcom boom.

At some point this gap must close, but the timing and way in which it does is uncertain.

In the longer term the pandemic is likely to bring about new economic trends, and has only served to accelerate current trends, such as the move to online retail and remote working.

We have also already seen a move to more protectionist policies from some, such as President Trump.