covid-19: economic brief · reflects a public health crisis that is triggering political turmoil...

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COVID-19: Economic Brief

Assessing implications for economies, sectors and markets

Grant Colquhoun and Marie-Louise Deshaires

22 May 2020


Developments and implications summary – 22nd May

2

Overview ◼ Cases are rising rapidly in emerging markets such as Brazil, Mexico, India and Russia. Nevertheless, the direction of travel is towards looser restrictions, which could have economic and political consequences.

◼ Several European governments have taken steps to open their borders from June onwards and all 50 US states have partially reopened. Timely indicators are still running at a fraction of previous levels.

Sectors ◼ In April, United States single-family housing starts saw their largest monthly drop since records began in 1970, but we are relatively optimistic that starts will recover as more builders are able to return to work.

◼ Rents in the major Canadian cities have been falling fast in April. With investors basing their price expectations on the assumption that rents would keep rising strongly, this represents a risk to house prices.

Markets ◼ Net capital outflows from emerging markets eased markedly last month and remained relatively modest so far in May. Turkey, however, is still experiencing major stress with risks of a currency crisis rising fast.

◼ The Franco-German proposal to issue common European Union debt pushed the yields of euro-zone periphery sovereign bonds a bit lower this week and we expect these to fall back over the rest of the year.

Forecasts ◼ Our forecasts are little changed this week. China will return to growth this quarter but elsewhere recovery will show in gross domestic product data for the third quarter, led by a rebound in Europe.

◼ We expect world gross domestic product to contract by 6.0 per cent this year, then rebound by 8.7 per cent in 2021.


Coronavirus tracker: Latest new cases and containment policy developments

3

New cases per million people*

Trend in new cases

Latest virus containment policy developments

Asia

China 0.01 No new policy development.

Korea 0.4 Students began returning to school on Wednesday.

Japan 0.3Prime Minister Abe on Thursday lifted the state of emergency in Osaka, Kyoto and Hyogo, as the spread of the novel coronavirus has slowed enough to justify the gradual easing of curbs on economic activity.

Singapore 85.0 Measures to be gradually eased from June 2 onwards in three phases.

India 3.9Nationwide lockdown extended until end of May, albeit some containment measures have been loosened further by the government allowing some travel to resume.

Europe

Germany 6.6The government decided to exempt all nationals of the European Union from the quarantine rules, including United Kingdom passport holders when borders will reopen.

France 4.7 Borders due to reopen, initially with Switzerland and Germany, from 15 June.

Italy 10.7Restaurants, bars, non-essential shops and museums reopened on Monday and foreign tourism to resume from 3 June.

Spain 9.6 Spanish Congress votes to extend ‘state of alarm’ until 7 June.

Poland 8.9Borders are likely to be open to international tourists from 13 June and international flights are due to begin operating again on 23 May.

United Kingdom 43.4 No new policy development.

Americas

United States 104.0 All 50 states have partially reopened from Wednesday after a two-month shutdown.

Mexico 17.4On Monday, approximately 300 municipalities were given the green light to restart economic activities and lift recommendations. Similar measures to start 1 June in the rest of the country, with classes to resume the same day.

Brazil 57.3 President Bolsonaro is rallying his supporters to back his call to end the lockdown.

Improving / Less

restrictive

Worsening / More

restrictive

Sources: Capital Economics and variousNote: *Change in confirmed cases per million people, three day average.


Easing of restrictions proceeding whether virus containment achieved or not

4

Total confirmed cases of coronavirus, selected countries, thousands

Sources: Capital Economics and Refinitiv.Note: Case numbers subject to revision.

Daily reported change in confirmed cases of coronavirus, selected countries, five-days moving average, thousands

Some emerging markets easing lockdowns even as new cases rise

Total confirmed cases globally have risen to almost five million due to the rising number of cases in emerging markets. Brazil’s number of new case has averaged more than 10,000 per day over the past week, second only to the United States. The Brazilian trajectory reflects a public health crisis that is triggering political turmoil and which will see its economy recover more slowly than in other emerging markets. Daily new infections continue to rise in Mexico, too, but the government is easing lockdowns in parts of the country and allowing the automotive and construction sectors to reopen.

Russia’s containment measures have been removed despite having failed to bring the virus under control. Restarting the economy before the virus is not contained may have important long-term implications, both for the economy and (potentially) domestic politics. While India’s lockdown has been extended, some travel restrictions have been eased. A further acceleration and spread in virus infections will exacerbate existing strains on the local medical systems, and containing the virus at a nationwide level could become even more difficult than it already is.

Europe take steps to open borders

Euro-zone governments have eased restrictions further, as new daily cases continue their downward trend. Borders are set to reopen for selected European partners in June in countries including Italy, France and Germany. However, the return to prior activity levels will be slow. For example, Germany’s restaurant reservations are rising, but are still 80 per cent below last year's level.

In the United States, all 50 states have now partially reopened after a two-month shutdown. Timely indicators, however, suggest that air travel and in-person restaurant dining are still running at a fraction of previous levels.

0

200

400

600

800

1,000

1,200

1,400

1,600

0

50

100

150

200

250

20-Jan 09-Feb 29-Feb 20-Mar 09-Apr 29-Apr 19-May

China Italy Spain

South Korea Japan United States (RHS)

0

10

20

30

40

50

0

2

4

6

8

10

12


Italy Spain South Korea Japan United States (RHS)


Number of cases still on a sharp upward trajectory in major emerging markets

5


Sources: Capital Economics and Refinitiv. Note: Case numbers subject to revision.


0

50

100

150

200

250

300

350


Australia Canada Poland

United Kingdom France Germany

0

50

100

150

200

250

300

350


India Mexico Russia

South Africa Turkey Brazil


Indian economy contracted in Q1 and far worse will follow in Q2

6

India daily electricity consumption, terawatts hours

Sources: Capital Economics, CEIC, Power System Operation Corporation Limited, Oxford University and World Health Organisation.

Coronavirus government response stringency index (T = Day of 10th Confirmed Case)

Indian partial lockdown loosening provides slight boost

With almost all Indian activity indicators having collapsed in March after a nationwide lockdown began on the 24th, we think the economy will have contracted last quarter. Electricity consumption has started to pick up, suggesting that the partial loosening in containment measures this month has provided a slight boost. But it is still around 10 per cent lower than its levels from last year.

A strong pick-up in these indicators is unlikely, given that the lockdown has most recently been extended to 31st May. Most parts of the economy are likely to remain inactive for the rest of the month. Beyond that, there’s a good chance that some form of widespread shutdown will stay in place too. After all, despite India’s stringent containment measures, reported coronavirus cases are still rising sharply.

Selected India activity indicators, annual change, per cent

2.25

2.75

3.25

3.75

4.25

11-Mar 23-Mar 04-Apr 16-Apr 28-Apr 10-May

2019 2020

Nationwide lockdown starts

-80 -60 -40 -20 0 20

Rail Freight Revenue

Non-oil/gold imports

Vehicle Production

Railway Passengers

Tractor Sales

Tourist Arrivals

March 2020 2015-19 Average

0

20

40

60

80

100

120

T T+10 T+20 T+30 T+40 T+50 T+60 T+70

China Brazil Russia India


Deepening Russian contraction but political stability supports currency, in contrast to Brazil

7

Russian economy sputters in Q1, collapse coming in Q2

The slowdown in Russian gross domestic product growth to 1.6 per cent year-on-year in the first quarter of 2020, from 2.1 per cent in the fourth quarter of 2019, is consistent with a small quarterly contraction of 0.1 per cent. However, the figure released almost certainly failed to capture the extent of virus containment measures as the government did not implement lockdown measures until late-March.

The implication is that, as elsewhere, activity probably fell off a cliff in April. We expect a thirteen per cent quarterly contraction in gross domestic product in the second quarter of the year. What’s more, with the authorities still struggling to contain the outbreak and fiscal support worryingly limited, any recovery once lockdown measures are lifted will be sluggish. This will put more pressure on the central bank to ease policy – we expect an additional 100 basis points of rate cuts this year.

Brazilian real rallies, but political pressure is not likely to go away

Despite its jump on Monday, Brazil’s currency has clearly underperformed since the coronavirus started to spread around the world early this year. That is probably due in part to the rapid increase in coronavirus cases in the country recently. Investors have been more forgiving of other countries, like Russia, where outbreaks have not yet peaked. This is because, in Brazil, more than elsewhere, the pandemic has challenged the stability of the government, and with it the hard-won prize of fiscal sustainability.

We doubt that the big bounce in the beleaguered Brazilian real early this week is a sign of things to come. The mounting political crisis in Brazil has increased the likelihood that the coronavirus outbreak causes long-term economic harm – and the political situation does not seem likely to be resolved soon.

Russia gross domestic product

Sources: Capital Economics, Refinitiv and Bloomberg.

Brazilian real and Russian ruble, local currency/US dollar

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

-6

-3

0

3

6

2012 2013 2014 2015 2016 2017 2018 2019 2020

Quarter-on-quarter (% SA, RHS) Year-on-year (% NSA, LHS)

CE estimate Q1 2020:-0.1 quarter-on-quarter

60

65

70

75

80

85

90

4.0

4.5

5.0

5.5

6.0

20-Jan 20-Feb 20-Mar 20-Apr 20-May

Brazilian real (RHS) Russian ruble (LHS)

Weaker vs US dollar


Signs of improving market sentiment on European peripheries and Emerging markets

8

Common debt proposal adds further support for periphery bonds

The news that Germany and France have agreed on a proposal for the European Union to fund a joint fiscal response to the coronavirus pandemic by issuing common debt backed by the European Union budget has pushed the yields of euro-zone periphery sovereign bonds a bit lower this week. The move, however, is relatively small, and the spread between the yields of periphery sovereign bonds and German Bunds remains much higher than before the pandemic hit, which suggests investors remain to be convinced that this is a game changer.

While the proposal to issue common debt is limited in size and some way from gaining final political agreement, it adds support to our view that the yields of euro-zone periphery sovereign bonds are likely to fall back over the rest of the year.

Net capital outflows from EMs eased markedly in April

Our Capital Flows Tracker suggests that net capital outflows from emerging markets eased markedly last month. And daily data on non-residents’ net purchases of equity and bonds suggest that net outflows may have slowed further so far in May, although much of the improvement happened in April.

One country which is still experiencing major stress, however, is Turkey. With the central bank burning through its foreign exchange reserves and confidence in policymaking evaporating, another currency crisis is fast approaching. A handful of low-income emerging markets, notably Angola, Ecuador and Zambia are also experiencing distress as their governments grapple with unsustainable debts. But, overall, the coronavirus seems to have pushed few large emerging markets into outright balance of payments crises.

Ten-year government bond yields, per cent

Sources: Capital Economics, CEIC and Refinitiv.

Foreigners’ net purchases of bonds and equities*, billion US dollars, one-month sum, based on daily data

0.0

0.5

1.0

1.5

2.0

2.5

Jan-20 Feb-20 Mar-20 Apr-20 May-20

Spain Italy Portugal

PEPP launched

Lagarde “not here to close spreads”

-60

-50-40-30

-20-10

01020

30

Jan-19 May-19 Sep-19 Jan-20 May-20

Net inflows

Net outflows

* Includes data from India, South Africa, Korea, Indonesia, Thailand, Philippines, Turkey, Mexico, Hungary


Weak confidence and rising unemployment point to slow consumption recovery in Europe

9

Slight improvement in EZ confidence but gradual recovery ahead

Euro-zone consumer confidence rose slightly in May reaching -18.8, from a revised -22.0 in April. This suggests that households are a little less depressed about their prospects and the wider economic outlook than they were in April. But the index remains very low and consistent with only a gradual recovery in the coming months.

Over the coming months, assuming that there is no major resurgence of the virus, we think consumption should recover, but only gradually. While the success of the short-time work schemes suggests that the unemployment rate may not spike as sharply as we initially feared, many firms will be unable to avoid bankruptcy which will involve many job losses. Many households will still be reluctant to spend as freely as they did in the past, while others will want to keep their savings higher than they were previously for precautionary reasons. Overall, household consumption is likely to fall by around twelve per cent in 2020.

First signs of the incoming wave of unemployment in UK

The headline ILO unemployment rate for the United Kingdom covers the three months to March and does reflect the fall in employment revealed in the timelier data. The claimant count unemployment rose from 1.2 million in March to 2.1 million in April, meaning the claimant count unemployment rate rose from 3.5 per cent to 5.8 per cent.

We forecast that the unemployment rate will continue to rise in the coming months, particularly from August when employers must start contributing to furloughed employees’ wages. Our forecast is that the unemployment rate will rise to almost nine per cent. While much of that jump should be reversed when businesses start to get back to normal, we still expect the unemployment rate to remain elevated over the next few years.

Euro-zone European Commission consumer confidence and household spending

Sources: Capital Economics, Refinitiv, Eurostat and Office for National Statistics..

United Kingdom unemployment rate, per cent

0

3

6

9

12

1987 1992 1997 2002 2007 2012 2017

Claimant count unemployment rate ILO* unemployment rate

*International Labour Organisation definition

-2.0-1.5-1.0-0.50.00.51.01.52.02.53.0

-26-24-22-20-18-16-14-12-10

-8-6-4-20

2007 2010 2013 2016 2019

EZ consumer confidence (LHS) Household consumption (RHS)


Housing markets in north America tumbled in April

10

Record fall in United States single-family housing starts

The shutdown of large parts of the United States meant single-family housing starts recorded their largest month-on-month fall on record in April. Total housing starts dropped 30.2 per cent last month. Both single and multifamily starts saw large month-on-month declines, of 25.4 per cent and 40.5 per cent respectively. At 650,000 and 241,000 annualised, single and multi-family starts are at their lowest level since early 2015 and mid-2013, respectively.

Compared to February, single-family starts in the Northeast were down 71 per cent in April. The declines in the other regions, where the lockdowns were less severe, are 30 to 35 per cent. But strong fundamentals mean building activity should resume as the country starts to re-open. We expect starts will have recovered to around 900,000 annualised by the end of the year. With lot and labour shortages still acting as constraints, however, the loss of output in the second quarter will not be made-up.

Tumbling rents in Canada a big risk for house prices

Rents in major Canadian cities seem to be falling fast. There are several reasons why rents have been quick to fall. Rising unemployment has most affected low-wage earners, who typically rent, and few people will commit to a new property if they are unable to view it in person. Moreover, immigration has all but stopped and the halting of tourism has caused a slump in demand for short-term rentals.

The situation looks very concerning in Toronto and Vancouver, which receive the bulk of new arrivals and which have the highest share of short-term rentals. With property investors basing their price expectations on the assumption that rents would instead keep rising strongly, this represents a big risk to house prices.

United States single-family housing starts by region, change Feb-20 – April-20, per cent

Sources: Capital Economics, Rentals.ca, Padmapper and Census Bureau.

Rents for two-bedroom units in selected Canadian cities, monthly change, April 2020, per cent

-80

-70

-60

-50

-40

-30

-20

-10

0

Northeast West South Midwest

-20

-15

-10

-5

0

Toronto Vancouver Ottawa Montreal Calgary

Rentals.ca Padmapper


Japan’s recession to deepen in current quarter as investment collapses

11

Economy in recession before full force of corona containment hit

According to Monday’s preliminary estimate, Japan’s first quarter gross domestic product fell by 0.9 per cent quarter-on-quarter, -3.4 per cent annualised. The 0.7 per cent quarterly fall in private consumption came on top of a 2.9 per cent plunge in the final three months of last year following October’s sales tax hike. The fourth quarter decline was driven by the sharpest quarterly fall in services consumption since 1994 when the series was first published.

The fall in output in the first quarter suggests the spread of the virus had already dealt a significant blow to economic activity in March. We are forecasting a further twelve per cent quarterly fall in gross domestic product in the second quarter. But we think output will only rise by seven per cent quarter-on-quarter in the next quarter as the threat of a third wave of infections and labour market scarring puts the handbrake on the recovery in consumer spending.

Non-residential business investment to collapse

Japan’s machinery orders excluding the volatile ships and utilities sectors held up surprisingly well in March, falling by just 0.4 per cent on the month. That said, excluding some huge one-off orders from the transportation and postal sectors, “core” machinery orders fell ten per cent month-on-month.

The decline in orders in March, however, is likely to give way to a collapse in investment across this quarter. The ominous plunge in the more-timely domestic machine tool orders in April suggests “core” machinery orders fell sharply last month. We’re forecasting a huge sixteen per cent quarter-on-quarter fall in business investment in the April to June period. Only part of that is likely to be recovered in the second half of the year. We suspect it will take years before non-residential investment returns to the level it was at before the sales tax hike in October 2019.

Japan contributions to quarterly gross domestic product growth, percentage points

Sources: Capital Economics, Refinitiv and Japan Cabinet Office.

Japan machinery orders and business investment

600

700

800

900

1000

1100

1200

1300

30

40

50

60

70

1995 2000 2005 2010 2015 2020

Thousa

nds

Investment in machinery and transport equipment (Yen tr, current

prices, Lat. = Q4, LHS)Core machinery orders (Yen bn, quarterly average, Lat.= Mar., RHS)

-1.9-1.6

-0.1

-0.8

0.0 0.1

0.5

-0.9-0.4

-0.1 -0.1

0.0 0.0

-0.2

-2.0

-1.5

-1.0

-0.5

0.0

0.5Q4 Q1 Preliminary

* Consumption and investment spending


Gross domestic product forecasts, selected countries

12

-21

-18

-15

-12

-9

-6

-3

0

3

6

9

Forecast as of 22nd May Pre-crisis forecasts

Source: Capital Economics.Note: * China Activity Proxy, not official measure of gross domestic product.

Latest forecast for year-on-year change in gross domestic product in 2020, alongside pre-virus forecasts, per cent


Gross domestic product forecasts in detail, selected countries – 22nd May

13

Real economic growth rate, quarter-on-quarter, per cent

Forecasts, year-on-year, per cent

Revisions since pre-crisis, percentage points

Q1 Q2 Q3 Q4 2020 2021 2020 2021

Asia

China* -19.5 13.5 7.0 3.5 -5.0 15.0 -10.0 10.0

Korea -0.6 -8.0 5.8 1.7 -3.0 6.0 -5.5 3.5

Japan -0.9 -12.0 7.2 2.5 -7.0 5.0 -6.8 4.1

India -6.2 -4.5 11.0 1.0 -4.0 8.0 -9.7 1.5

Europe

Germany -2.2 -11.0 4.0 3.0 -8.0 4.5 -8.2 3.9

France -5.8 -20.0 21.7 7.2 -10.0 7.5 -10.8 6.5

Italy -4.7 -25.0 9.0 7.5 -18.0 15.0 -18.2 14.8

Spain -5.2 -28.3 24.5 7.3 -15.0 10.0 -16.3 8.5

United Kingdom -2.0 -23.0 15.0 4.5 -12.0 10.0 -13.0 8.2

Americas

United States -1.2 -11.5 4.8 5.3 -5.5 7.0 -7.5 4.6

Mexico -2.0 -12.0 5.0 4.0 -8.0 5.0 -8.5 3.0

Brazil -0.5 -10.0 3.0 2.5 -5.5 2.5 -7.0 0.7

World -6.3 -7.0 7.0 3.8 -6.0 8.7 -8.8 5.5

Source: Capital EconomicsNote: * China Activity Proxy, not official measure of gross domestic product.


Summary of containment measures in place, selected countries

14

Summary of containment measures in place

LockdownSchools closed

Borders closed

Social distancing

Large events banned

Non-essential businesses

closed

Asia

China ✓ * ✓ *Korea * * ✓

Japan * ✓ ✓ ✓ *Singapore ✓ ✓ ✓ ✓ *India ✓ ✓ * ✓ ✓ *Europe

Germany * ✓ * ✓ *France ✓ * * ✓ *Italy ✓ ✓ * * ✓ *Spain ✓ ✓ ✓ * ✓ *Poland ✓ * ✓ * ✓ *United Kingdom ✓ ✓ ✓ ✓ *Americas

United States ✓ * * * ✓ *Mexico ✓ ✓ ✓ ✓ *Brazil ✓ ✓ ✓ * *

Legend

* Indicates partially in place

✓ Indicates (largely) in place

Indicates (largely) not in

place

Sources: Capital Economics and various agents.


Contact details

15

Grant Colquhoun

Head of Consultancy

[email protected]

Marie-Louise Deshaires

Economist

[email protected]

mailto:[email protected]

mailto:[email protected]


16

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