It is now just under 6 months since the WHO first confirmed the existence of a novel Coronavirus, and a little over 4 months since the first case in Britain was identified. Yet in this relatively short space of time we have seen extraordinary damage done to the world economy, a rapid sell-off in stock markets, and an equally rapid recovery.
In terms of the course of the pandemic, the world is now split into two broad groups. Whilst large parts of Europe and East Asia have made good progress in suppressing the virus, allowing economic activity to gradually pick up, infections are accelerating rapidly in other regions such as Latin America and India.
Whilst the US economy is also beginning to reopen, the epidemic does not appear to be under control in several states. If infections continue to rise exponentially then it could be that the world’s largest economy faces further setbacks.
The scale of the economic fallout from the pandemic is now becoming clearer as the UK economy shrank by more than 20% in April alone. To put this in context, the largest monthly contraction during the financial crisis was 1%. At the same time, the collapse in tax revenues and the size of stimulus measures is causing government deficits across the world to balloon.
The US unemployment rate is now at its highest level since the Great Depression of the 1930’s and, if it wasn’t for the government job retention scheme, UK unemployment would likely be on a similar scale.
On a more positive note, however, it is likely that April was the absolute low point for most developed economies as from May onwards societies began to reopen. The unprecedented size of support from Central Banks and governments is likely to cushion the blow going forward, although most economists expect the recovery to be weak and drawn out.
In the face of what some expect to be a slow economic recovery, many have been surprised at the speed with which equity markets have recovered. As at the 19th June the MSCI World Index was down approximately -6% since the start of the year, having been down well over -30% only a few months ago. The stock markets which are more focused on energy and financials, such as the FTSE 100, have not recovered quite as fast but have still made respectable gains from an historical perspective.
It is normal for stock markets to bottom out before a recession is officially over because they are forward-looking. However, the fact that they have recovered so rapidly whilst there is still uncertainty about when economic activity can return to normal has raised some eyebrows.
One factor driving stock markets is likely to be that Central Banks have been so explicit in suggesting that they will do whatever it takes to support their respective economies. This has gone a long way in supporting sentiment, but ultimately company earnings must recover for stock prices to be sustainable.
As we have said previously, economic forecasts, which are difficult in normal times, are essentially best guesses during a global pandemic. It will be the speed with which effective treatments and vaccines can be developed which will determine how quickly the economy can return to full speed.
At this moment there are more than 120 vaccines in development, any one of which could be the answer the world is searching for. But until that point the economic recovery is likely to be weak and financial markets could remain volatile.
Statement issued on 22/06/20 by:
Nigel Foster, DipPFS