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September 2020 Macroeconomic Review
Global Economy
o Liquidity is the name of the game in the current crisis, with trillions of dollars being poured into economies and financial markets in order to preserve the resilience of households and businesses until the day a cure or vaccine for the Coronavirus is found
o These conditions, which reward investors for taking risks, are behind the miraculous recovery of the stock and bond markets to pre-pandemic levels, at the same time as the real economy is sinking into the biggest recession it has known in about a century
o After recovery during May and June, the global economy experienced a monthly stall during July as a result of the acceleration in the number of Coronavirus cases, which led to a halt and a setback in the opening of the economy. However, during August high-frequency data suggest that recovery may finally be getting moving again as the global economy continues to stabilize, courtesy of the ultra-accommodative monetary and fiscal policy
o Following the financial crisis in 2008, investors estimated that super accommodative monetary policy would lead to price pressures. However, the lack of fiscal expansion, slow growth, technological improvements, an aging population, and globalization have led to a lack of price pressures. In the current crisis, the dynamics are different – the center of gravity of economic policy is fiscal and we witness trends of de-globalization, trade-wars, and reshoring which create a comfortable environment for the formation of inflation
o Oil continues to trade in a narrow price range above 40 $ a barrel. On the one hand, the fear of setbacks in developed economies in light of a surge in the number of Coronavirus cases prevents it from rising, but on the other hand, declining investment in the energy sector, multiple bankruptcies and M&A prevent it from declining. Vaccine approval is expected to accelerate economic recovery and lead prices above 50 $ a barrel
United States
o The U.S. continues to account for about a quarter of global Coronavirus infections and deaths, a testament to the administration’s dysfunction in treating the pandemic, while continuing to push for the opening of the economy at almost any cost, hoping for a continued recovery in the economy and financial markets ahead of the coming elections
o Indeed, despite the resurgence of the Coronavirus, economic data suggest that the economy continues to improve. The recovery is particularly noticeable in the manufacturing sector and in the industries associated with real estate, but there has also been an improvement in the labor market and consumer confidence, and it seems that incentives are doing their part and are able to keep businesses and households afloat
o The labor market is on its long and bumpy road to recovery as the total number of Americans claiming ongoing unemployment assistance is consistently decreasing since May. Pauses and setbacks in the opening of the economy due to infection numbers cause upticks in jobless claims but don’t change the long-run trend, which is positive
o The housing sector continues to be the bright spot in the economy as record-low mortgage rate and low inventory pushes optimism to the highest level since 1998 and the S&P Homebuilders touched record-high after more than doubled its price since March
o The Fed changed its inflation policy by announcing that it would aim for 2% inflation over time. It means that the bank will be willing to accept periods in which inflation will exceed the target upwards after periods of weakness, the Fed explicitly says that it is eager and even wants higher inflation. Investors have already prepared for the policy change prior the announcement: The 10-year breakeven is 1.75%, the highest since January and up from as low as 0.47% in March and Treasuries yield curve is the steepest since June
Eurozone
o After being hit hard by the lockdowns, restrictions, and failures in the supply chains, the Eurozone economy is showing signs of recovery. A resurgence of infections, a result of the opening of economies, does not lead to immediate closures, amid decision-makers’ understanding that one must learn to live alongside the virus
o Growth engines are awakened, signaling a long recovery is coming as the region’s PMI index jumped in manufacturing and services sectors above the 50-point level, indicating an expansion of economic activity. A particularly sharp jump occurred during July, but despite some setbacks in August, the index remained above the 50-point level
o Eurozone decision-makers play an important role in the ability of businesses and households to float, after signs of pressure in the money markets and economies in the spring months were met with unprecedented inflows of funds. Cheap cash from the ECB has sunk the Euribor to an all-time low of -0.5%, enabling lenders to take 1.3T € in cheap loans
o However, despite the positive overall momentum, problematic signs can also be seen, especially in the labor markets. In countries like Germany and France, employment is still declining as companies continue to cut labor force for the 15th straight week and the outlook remains challenging
o Inflation for the Eurozone increased 0.4% YOY in July and core inflation edged up 1.2%, still far below the ECB inflation target. The five-year inflation expectation, which crushed to record low in March, recovered to close but below pre-pandemic levels, evidence of a lack of confidence from investors in the ECB ability to push inflation back to target
Israel
o Evil winds are blowing in the Israeli economy, evoking memories of past crises such as the 2000-2002 crisis and even the great economic crisis of the 80s. The slow, hesitant and minor response of the government and the possibility of a fourth round of elections, threatens to turn the crisis from a liquidity crisis to a solvency crisis, which will be difficult to recover from
o Efforts to stamp out the virus have led the local economy to 28.7% annualized contraction during Q2. Privet consumption dropped 43.4%, imports fell 41.7%, and investment decreased by 31.6% were the main causes of the sharp drop
o Following GDP publication and based on high-frequency data, the BOI raised its growth forecast for 2020 to -4.5% and -6% in the scenario of an additional closure. With that being said, the BOI’s Stability Report indicates an increase in the risk
o Consumer confidence, an important indication for understanding future private consumption trends, fell in July to a level similar to April at the height of the crisis but improved slightly again during August. It is important to note that more households are reporting a deterioration in their economic situation and that the intention to make large purchases in the coming year is still close to the lowest level, evidence of a high level of uncertainty and apprehension
o A similar pattern of improvement in May-June and retreat during July is noticeable in the labor market. Starting in the second half of June, there has been a gradual increase in unemployment from 11.8% to 12.1%, and it seems that increasing and securing support for the unemployed until June 2021 does not encourage their return to the labor force
o There is growing concern that the deficit in 2020 will reach 14.3% and the Debt/GDP ratio will rise to 77%-80%. The Debt/GDP ratio is expected to go back about a decade and lead to a reduction in Israel’s credit rating
