GIVE NO QUARTER
Few will regret the end of the first 2020 quarter. Fears of a U.S.-Iran war gave way to the coronavirus pandemic which JPMorgan reckons will have pushed the world economy into a 12% contraction over January to March. The quarter saw the most brutal global equity collapse since the Great Depression, exacerbated by a 60% oil price slump.
April may not bring much relief, with coronavirus still spreading rapidly and keeping large parts of the global economy shuttered. Banks have rushed to slash Q2 forecasts too, so expect more turbulence on financial markets.
The cavalry has arrived though. G20 governments have promised a $5 trillion revival effort, major central banks have slashed rates and restarted asset purchases. Markets have bounced big and may actually end Q1 on a high. What we need now is to see infection rates peaking and that will show whether April falls, or if it’s indeed time for spring.
Through years of stubbornly low economic growth and inflation, the brightest spot was the U.S. labor market, with unemployment reaching half-century lows. Coronavirus may have ended that boom.
With infections surging, cities in lockdown, businesses downing shutters and most travel on ice, staff layoffs are likely to mushroom. That showed up in the number of Americans filing unemployment benefit claims which hit a record of more than 3 million. Economists polled by Reuters had forecast claims would rise to 1 million, though some estimates were as high as 4 million.
Now the wait is on for Friday’s non-farm payrolls figures that will offer a snapshot of the jobs picture over March. The government’s unprecedented $2 trillion fiscal expansion package includes a $500 billion fund to help hard-hit industries and a comparable amount to fund direct payments of up to $3,000 apiece to U.S. families.
Economists expect the payroll data to show a loss of 293,000 jobs - the largest monthly drop since July 2009. A significant overshoot of that and the $2 trillion stimulus approved by Congress could suddenly start to look inadequate.
CHINA’S PYRRHIC VICTORY
The world’s factory is re-opening, but the market is closed and the shoppers are gone.
China’s social isolation policies appear to have contained the coronavirus at home, allowing work and travel to resume. But major economic damage may be yet to come. With infections climbing exponentially in the United States, Europe and the other markets China exports to, and with supply chains in disarray, China is getting neither the imported components it needs nor demand for its products.
Already Chinese factories’ Jan-Feb profits have hit their lowest in a decade and upcoming manufacturing surveys will very likely reveal more pain. And just like everywhere else, job losses are mounting up, regardless of how many cheap loans are being offered to businesses. Expectations are now for the economy to contract this quarter but many economists reckon 2020 growth will be around 2%
COME TOGETHER, RIGHT NOW
The European Central Bank has done its bit to tackle the virus damage, having massively expanded asset purchases, agreed to more flexibility on the share of bonds it buys from each country and buffered borrowing costs for weaker euro zone states such as Italy. Now it’s up to European Union leaders to come together.
So far there is no united front: they’ve failed to agree on the scale of support for economies ravaged by the outbreak. The ECB’s aggressive action gives them some breathing space but, as of now, politicians are wrangling over setting up a credit line worth some 2% of annual output from the euro area bailout fund.
Many European governments urge the issuance of a joint debt instrument to face a crisis which Goldman Sachs economists estimate may shrink the euro economy by 9% this year. But Germany and some others oppose that. At stake, says France’s Emmanuel Macron, is the survival of the European project. The crisis, for sure, is far from over.
FRONTIERS ON THE EDGE
It’s been a tough time for riskier assets in recent weeks, including emerging market stocks, bonds and currencies. But few have felt the pain as much as frontier markets, a subset of smaller and often riskier emerging economies.
Many of those frontier economies are in Africa, and are suffering from a toxic combination of tumbling oil and commodity prices, the prospect of the global economy tumbling into recession and weakening currencies which will make servicing external debt ever-more expensive.
Oil-producing countries like Angola, Ghana, Gabon and Nigeria have seen their dollar-denominated debt drop sharply, with yields of some issues shooting above 20%, indicating soaring borrowing costs. Many countries on the continent lack the financial firepower or foreign currency reserves needed to combat the coronavirus and prop up their economies, with healthcare systems already under strain.
The World Bank and International Monetary Fund on Wednesday urged official bilateral creditors to provide immediate debt relief to the world’s poorest countries as they grapple with the human and economic consequences of the pandemic.
Leaders of the Group of 20 major economies pledged on Thursday to inject over $5 trillion into the global economy to limit job and income losses from the coronavirus and “do whatever it takes to overcome the pandemic,” expressing concern about Africa in particular. Many hope that the acknowledgement of the need to bolster global financial safety nets and national health systems will translate into action.