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June 2020 Macroeconomic Review
Global Economy
o After infecting more than 5.5 million people and killing more than 340,000, the coronavirus contagion curve appears to be flattening. The US is at the center of the crisis with 30% of the number of cases verified and the number of deaths
o Steps taken to limit virus spread lead to massive layoffs, resulting in a severe recession that began in March, intensified in April and culminated in May
o In response, decision-makers flooded financial markets with 18 trillion Dollars in liquidity and kept credit flowing in the economy in an effort to limit the harm and prevent the recession from turning into depression. Interestingly, despite the high liquidity and market stabilization, indicators show continued investor pessimism with cash levels elevated
o Now, after most of the world gained control over the spread of the virus and optimism about vaccine breakthrough increasing, the global economy is expected to recover through the second half of this year, but full global economic recovery is expected only during 2021
o Tensions between the US and China are mounting and relations rapidly deteriorating, as both countries play the blame game pointing the finger at each other for the health crisis responsibility. The big trade agreement between the two superpowers will probably not be signed, as China’s blame for the economic crisis is becoming a major component of Trump’s election campaign
o The world after the pandemic – changes that started even before the crisis are expected to accelerate, most notably de-globalization and self-production as a strategic need, which will lead to a rise in inflation in the long run. The move to remote work which creates an opportunity to increase flexibility and optimizing, resulting in a productivity boost. The crisis was also boosting the digital economy (e-learning and e-commerce) in a way that gives small businesses access to markets and people to education
United States
o After two difficult months, May brings with it signs of recovery, as the initial shock gives way to attempts to restore the economy to routine. However, this is a gradual process in which all states are taking steps toward loosening restrictions and as a result, most indicators are showing slight but steady improvement. Amongst indicators unemployment benefits, mortgage applications and travel
o 38.6M jobless claims have been filed since mid March. This staggering number roughly equivalent to all initial claims filed during the 2008 recession. Continuing claims increased to a record 25.1M, reflecting an unemployment rate of 17.2%. However, as states remove restrictions numbers are expected to decline at a slow pace but unemployment is expected to remain elevated through the end of 2021
o Short-term deflation and long-term expected inflation is one of the historic implications derived from the coronavirus pandemic. The April Core Index fell 0.4%, the sharpest decline since 1957. Headline inflation dropped 0.3% YOY as gasoline prices plunged 20.6%.
o As the economic fallout from the coronavirus is sinking in, heated debate emerges on the issue of negative interest rates and, in particular, the benefit if at all of the possibility that the Fed will go after the ECB and choose to reduce the interest rate to negative territory. Right now, futures are pricing one as president Trump declares that the US needs negative interest rate, yet Fed officials have dismissed the idea, fearing that the damage will outstrip the benefit, mainly as a result of the expected crippling effect on the banks
o Oil prices have surged more than 75% in May after drilling activity touched an all-time low in the US. The decline is mainly present in the US shale fields production which probably would plummet by more than one-third this year to less than 5 million barrels a day, hence undercut US influence in world energy markets
Eurozone
o The Eurozone economy contracted by 14.2% (annually), its deepest quarterly contraction on record in Q1. Interestingly, France showed the deepest contraction of 23.2% followed by Slovakia with 21.6% and Spain with 20.8%. Italy’s output shrank 18.8%, putting it officially in recession after a 0.4% contraction Q4 2019. Q2 data could be much worse as lockdown measures are now gradually lifted
o A decade after Europe’s debt crisis threatened to blow up the currency zone, the region south part returns to the eye of the storm. According to European Commission countries such as Italy, Spain and Greece all face economic contraction of more than 9% in 2020. The need to implement rescue programs for those weak economies bloat their financing needs and increases the tensions between the countries in the bloc, especially between the north and the south
o In this context, the German Constitutional Court ruled against the ECB’s actions to support the economy. This ruling received a reprimand from the Court of Justice of the European Union and revealed the depth of the disputes and tensions that exist between the countries in the Eurozone, precisely at the height of the economic crisis
o In response, somewhat defiant, the ECB has declared that it is not deterred and intends to continue to do what it takes to carry the Eurozone through the coronavirus crisis. Some see this as a hint of a possible increase in the existing 750B bond purchase program announced by the Bank in March, especially as swift recovery is ruled out. The European commission released its 750B euro plan of grants and loans, in what conceived by some investors as an important step towards fiscal consolidation, which is expected to reduce the gaps between the bloc countries and reduce the risk of decommissioning
o Meanwhile, the downfall in the economy is reflected in the economic indicators: Unemployment rose slightly to 7.4% although this seems to be just a preliminary effect of the crisis. However, leading indicators like the PMI reveal an economic downturn shows signs of easing as lockdowns lift. Composite PMI increased to 3 months high at 30.5, but still far below the 50 point level separating expansion and contraction
Israel
o The spread of the coronavirus and the steps taken by the government to contain the virus have brought the Israeli economy to a standstill and pushed it to deep recession already in the first quarter. GDP contracted 7.1% annually in Q1 after businesses closed in March and people remained at home, resulting in a very sharp decline in economic activity
o The BOI, in a more optimistic note, recently updated its growth forecast for 2020 to -4.5% up from -5.3% in the forecast from April, due to the faster than expected opening of the economy. Although, it sharply reduced growth in 2021 to 6.8%, compared with 8.7%, as a result of social distancing weighting on business activities
o The labor market has suffered a severe blow since the beginning of the crisis. After the number of jobless claims rose to 1.15 million and the unemployment rate rose to 26%, now with the relief measures beginning on April 19, workers slowly began to return to work, although at a slow pace and their number was estimated only at 200K
o The budget deficit jumped to 4.8% of GDP in April with 2020 expected to end with a deficit of 11% or more. The economic plan to rescue the economy from the coronavirus crisis is already over 100B Shekels and state tax revenues are expected to decline by 60B Shekels this year, which bring the total amount to an unprecedented amount of 160B and the Debt/GDP ratio to 75%
o The BOI left the interest rate unchanged but expressed its unease about the appreciation of the Shekel to its pre-crisis level – “If the exchange rate stabilizes at this level, exports will find it difficult to recover, especially in light of the decline in global demand, and inflation will find it difficult to return to the target range”
