In focus

Could the bounce-back be quashed by a second wave?


While there are hopes that the easing of lockdowns and reopening of businesses are beginning to give life to the global economy, fears of  second waves of infections are also growing.

Keith Wade, Schroders’ chief economist, answers our questions.

What signs of a recovery or bounce-back have there been?

Keith observes that the data for June was strong, especially in the US.

“So for example, we saw a strong bounce-back in retail sales,” he says. “We saw small business surveys and housing surveys improve pretty sharply. The economy did appear to be coming back pretty strongly.”

The US economy added 4.8 million jobs in June, while retail sales surged 7.5% month-on-month. Small business optimism increased after a seven-year low in April, according to the National Federation of Independent Business. Meanwhile sales of previously owned homes jumped by 20.7%.

Keith adds that it was a similar story across Europe, where the purchasing managers’ index bounced quite sharply.

IHS Markit’s manufacturing PMI  data – which measures activity based on responses from a panel of senior purchasing executives in the eurozone – increased to 51.1 in July, up from a reading of 39.4 for May.

“And then looking in Asia, we had the second quarter GDP numbers for China, which showed a bounce back in activity. So that was all very positive.”

China’s economy grew by 3.2% in the second quarter, avoiding a recession.

Could the flare-up of infections in the US halt the recovery there?

Keith says the concern is that worries over a second wave of infections building in the US, particularly in the southern states will have a knock-on effect on consumer spending, as local lockdowns are extended and households batten down the hatches.

Some of the high frequency data (figures that are collected rapidly, in a matter of days ) Schroders uses shows “that the economy appears to be levelling off somewhat”.

He explains: “The University of Michigan consumer confidence indicator was a bit disappointing. Consumers don’t seem to be particularly confident at the moment. In the meantime, given the number of new cases in the US is rising very rapidly, there’s likely to be renewed lockdowns. For example Chicago put new restrictions in on bars and restaurants.”

He adds that research from Schroders’ data insights unit shows that in sectors like hotels, airlines, restaurants, there’s been a bit of a levelling off, even a dip in activity.

These downbeat signals seem to have been confirmed by data released on Thursday 30 July from the Bureau of Economic Analysis suggesting the US economy contracted at the sharpest rate on record in the second quarter of the year - an annualised 32.9 per cent plunge.

What about the jobs situation in the US – it seems serious?

That poor 30 July GDP reading was accompanied by disappointing employment data. It showed new jobless claims in US rose for the second week in a row - after dropping for 15 straight weeks.

Keith is concerned by unemployment claims remaining “very high”.

“It was 1.3 million earlier in July and if you think about that in historical context, the highest number before that was I think 890,000.

“Businesses are assessing their longer term future – and where they might have put their workers on furlough or on hold, they’re saying ‘will we really need those workers?’. It looks like a lot of businesses are saying no, there won’t be a long-term future.

“The level of unemployment as measured by continuing claims remains very high at around 17 million. So it is not a surprise to me that we got some disappointing data in July as a result of the rise in infections and the return of lockdowns in southern states.”

How does the European experience compare?

Europe appears to have been “much better at bringing the pandemic under control and bringing the rate of new cases down very significantly”. Keith says that does “bode well” for the reopening of the services sector, and that Germany has been “ahead of the curve”.

He adds that prospects for the European economy have been improved by a massive €750bn worth of spending that “will come through into the EU quite quickly”. The EU announced its ground-breaking deal for the “Next Generation” recovery fund in July.

He says: “They expect to be spending 70% of this over the next couple of years. So that could provide quite a helpful boost to EU GDP. That €750bn, on my calculation, is about  5% of GDP in Europe. That obviously relieved the financial tension in Europe and it means Europe has moved on a long way from the aftermath of the global financial crisis."

It represents a step towards much greater fiscal coordination than we’ve ever seen from the Eurozone – “and this is exactly what the European Central Bank has wanted” Keith observes.

However, looking forward, he warns that an improvement in global trade is critical. He says that without this, “Europe will struggle”.

“Like everywhere, the fiscal policy that’s been put in place so far, a lot of it is filling the gap that’s been created by the fall-off in demand. I think they are better placed than, say, the US for recovery. But unless we can see that trade begin to improve, you won’t get those multiplier effects to really drive the European economy forward. It’s not entirely within Europe’s hands.”

How does China’s recovery look in detail?

Keith has used Schroders’ own activity indicators to break down China’s economic performance in the second quarter.

“What it looks like is that the industrial sector, the manufacturing sector, has bounced back pretty quickly. Production has returned and risen above the pre-Covid levels. And that’s good. The difficulty is that the retail spending side seems to be lagging behind somewhat. And I think this has been quite a general problem for the authorities in China,” he says.

He adds that while the official unemployment rate doesn’t seem to have increased that much, it does not include many migrant workers in the economy.

“And we’ve seen research and estimates that suggest that 10 million or so migrant workers have lost their jobs,” he adds. “Many of them have had to return to their towns, villages, and leave the main cities. And this has had quite a big impact on consumer demand overall.”

Some might find work back in their home region, but many will not and therefore be producing low or no incomes. So Keith will be watching inventory build-up in China.

“Because if you’re producing but you’re not selling then that will lead to an inventory build up. And it could well be that what China’s done is cleared a lot of the backlogs of demand and bought production back. But ongoing demand is not improving quickly enough for it to be able to sustain that increase in production.”

And that comes back to the question of indicators like those for global trade, which remain quite weak.

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.