The global economy may be in the deepest recession for decades but – with signs that the worst could be over despite sporadic resurgences in Covid-19 infection rates – financial markets have been swift to discount both a recovery and a return to normality.
Global equities rose another 3% in June taking returns for the second quarter to an eye-watering 20%. It was a catch-up month for Asia and emerging markets with gains of 7%-8% bringing them into line with other global markets. The US recorded a more modest 2% gain, making 20% for the quarter and 40% since the 23 March low.
High octane US technology stocks have been the standout winner with second quarter gains of 30% and just under 50% from the low. UK equities continued to lag – which is more a reflection of the index’s industrial profile than the economy itself – gaining 1.5% in June and 10% over the three months to the end of June.
Although year-to-date global equity returns are more or less all square, the UK is down 18% and has not been helped by sizeable dividend cuts. Bonds had a quieter month with negative yields widespread in Europe and Japan. UK gilt yields are negative out to six year maturities and the yield on 10 year bonds closed at 0.18%. Conventional and index-linked have had positive returns over both the second quarter and year-to-date. Oil has had a roller-coaster ride but, with production discipline and the prospect of an economic upturn, Brent ended at $41 per barrel having briefly touched $16 in April. Gold closed at $1,775 and has proved a useful risk hedge.
Recovery v-shaped for now
The rate of change after such a sharp and deep economic setback means the rebound appears “V”-shaped at this stage. Although high frequency mobility data confirms that we are all on the move again and retail sales have spiked up, there has been a significant fall in economic output, not least because some sales have been permanently lost. Caution is still warranted on the sustainability of the recovery.
Many economies, including the UK, have benefited from furlough schemes; unemployment is likely to increase once these come to an end. Current estimates suggest that, after a 3.5% downturn this year, global GDP growth will be 5.5% in 2021 before settling to a normal 3% thereafter. Advanced economies will not recover as quickly and, after a 5% downturn this year, GDP growth is likely to be 4.8% in 2021. The US is expected to fare better than average – albeit with increased uncertainty on tax if the Democrats win the Presidential election – while Japan and the UK will be significantly worse. India and Latin America are likely to drag emerging market growth into mildly negative territory this year before a strong cyclical upturn in 2021.
China provides some insight on the shape of rebound. From a low point in February, industrial production and construction continue to recover much as expected while until recently consumer spending and corporate capital expenditure lagged. With services accounting for around 60% of economic activity and 50% of urban employment, the sharp upturn in the latest survey covering private businesses is encouraging and suggests the recovery is now broadening out. However, companies are still shedding jobs and clusters of new Covid-19 infections – including in Beijing – are being met with localised lockdowns that are likely to be problematic for restaurants, entertainment and tourism. These trends are also starting to appear in other Asian economies.
The rebound in US activity had exceeded expectations – at least before the latest Covid-19 resurgence. Economic data is likely to remain volatile and there appears to be some confusion between the rate of change and absolute levels. For example, job hiring was a major upside surprise last month but only about one-third of those lost jobs have been regained, with the unemployment rate standing at 11%. In Europe, Germany was least affected by the pandemic and is expected to be the first to return to normality while Italy and Spain only bottomed out in the second quarter. Spain is particularly dependent on tourism and, despite its furlough scheme, the impact on employment may not be apparent for some time.