Macro (Re)view (26/6) | Disconnect steers the narrative

The International Monetary Fund (IMF) this week significantly downgraded its outlook for the global economy anticipating that the COVID-19 pandemic will lead to a deeper and longer-lasting recession as countries struggle to recover from scarring effects to confidence and structural change lowers productive capacity. As per their June Outlook Update, the IMF now expects a steeper decline in global GDP in 2020 of 4.9% compared to the 3.0% fall it forecast back in April (see chart, below). With economic conditions expected to progress towards normalising over 2021 global output recovers by 5.4% (revised down from 5.8%) bringing GDP broadly back to its pre-pandemic level. The outlook remains highly uncertain and dependent on the path of the virus, though as the IMF highlighted the recovery has now also become vulnerable to a change in market sentiment if optimism over the continuation of unprecedented policy support and reopenings through the sequential improvement in the data gives way to the still very bleak prospects for the global economy. It is the disconnect between these two opposing views that is steering the narrative of this recovery depending on what markets decide to give more weight to and prioritise from day to day. 

Chart of the week

In the IMF's Global Financial Stability Report released this week, the group was cautious in noting that with valuations appearing stretched markets were vulnerable to "a repricing of risk assets" and this "could add financial stress on top of an already unprecedented economic recession". The range of potential triggers put forward by the group that could adversely impact sentiment included a reassessment of the economic fundamentals, a ramp-up in virus infections leading to the reinstatement of containment measures, misplaced optimism in the ability of central banks to continue to support markets, an intensification of global trade tensions and social unrest. This week provided a snapshot of these tensions as virus cases in the US states of Florida, Texas and California saw sharp increases while the data flow played into the sense of optimism around the reopening. IHS Markit's 'flash' composite Purchasing Managers' Index (PMI) reading for June improved to 46.8 from 37.0, indicating that while the US economy was still contracting it was now doing so at a much slower pace than in April and May during the height of the shutdown. The details of the report suggested that the improvement in conditions was occurring across both the services (46.7 from 37.5) and manufacturing sectors (49.6 from 39.8), while on the consumer front personal spending rebounded by 8.2% in the month of May — albeit disappointing the consensus forecast for a 9.2% lift — but heading in the right direction and a sign that households were beginning to re-engage more broadly in economic activity after the shutdown. Meanwhile, to enhance the resilience of its banking sector in response to the pandemic, the Federal Reserve has mandated that large banks must cap dividends and suspend share buybacks for the September quarter.   

Across the Atlantic, the outlook for the euro area economy was revised sharply lower by the IMF with GDP in the bloc now anticipated to contract by 10.2% in 2020 from -7.5% in the previous forecast. The sharpest revisions came through from France (-12.5% from -7.2%), Spain (-12.8% from -8.0%) and Italy (-12.8% from -9.1%) to reflect a more significant impact from the virus and the measures to contain it, including precautionary behaviour ahead of government-mandated shutdowns as the risks to public health increased. In 2021, GDP growth in the euro area is expected to rise by 6.0%, which would still be some 4.8% below its 2019 level highlighting the drawn-out nature of the recovery expected. Given this, it is not surprising that the Account of the European Central Bank's Governing Council meeting early this month called on fiscal authorities to increase their support to aid the recovery and complement its measures, which most recently included the expansion of its pandemic emergency purchase programme by €600bn to €1,350bn. Similar to the US, June's flash PMI readings for the euro area showed a slowing in the pace of contraction in economic conditions. The composite PMI lifted to 47.5 from 31.9, led mostly by the services sector (47.3 from 30.5) as the manufacturing sector showed a more modest improvement (46.9 from 39.4). At a country level, France was showing tentative signs of growth with its composite PMI rising to 51.3 from 32.1, though Germany was trailing behind (45.8 from 32.3).

Turning to events at home, Australia was one of the very few countries to have its economic outlook for 2020 upgraded by the IMF. After the contraction on Q1 GDP was less severe than forecast, the group revised the decline for the 2020 year from -6.7% to -4.5%. With the data flow mainly second tier this week, clusters of the virus in Victoria gained most of the attention, though in the other states new cases have generally remained very low. On the data, the ABS's measure of Australian job vacancies contracted at a record pace in the 3-month period to May falling by 43.2% led by a very sharp decline in the private sector (-45%), though public sector vacancies also deteriorated rapidly (-29%). This mainly captures the effect of the nation's shutdown from late March and April with more timely indicators showing that labour demand started to pick up in May as restrictions eased, highlighted by the 31.1% rise in skilled internet vacancies also published this week. In the latest ABS Business Impacts of COVID-19 survey, key insights related to the very significant extent of change the pandemic has enforced on firms' operating conditions that could persist long term and weigh on productive capacity, while 2 in 3 firms had reported a decline in revenue as a result of the emergence of the crisis (see more here).