In fact, every single component showed negative growth and deceleration, reflecting a global economy where services activity has been near-totally shut down, and manufacturing largely disrupted. The FLI quantitative ‘bet’ has turned even more negative on risk, near the 10th percentile of history. Sector developments paint a very negative picture, with all five underlying components in the bottom left quadrant.

But now, the question is to what extent activity can recover as lockdowns are eased. It is becoming clear that stringent lockdowns have held activity about 20 per cent below potential, if not more. There is a sense, looking at some Asian economies that continue to social distance but are operating with a reasonable degree of normality and their outbreaks under control, that this could be reduced to high-single-digit declines assuming here are no new waves of virus transmission.

Broad deterioration across all categories

Digging deeper into the data, business surveys have deteriorated with broad-based depressed sentiment, as manufacturing and services surveys have made new all-time lows. Industrial orders have moved back into the ‘bottom-left’ quadrant, with no notable differentiation between Japanese, German or US indicators.

The consumer and labour segment has accelerated its downtrend. Consumer confidence has weakened across the board, although it is notable that the US is holding up somewhat better than Europe at present. Hard data on the US labour market cratered in April, with initial unemployment claims an order of magnitude above previous highs, and aggregate hours worked contracting nearly 20 per cent over two months. The hit to the consumer in the US and globally will create structural imbalances, and it is unlikely to be entirely transitory.

Commodities remain in the bottom-left quadrant, driven mainly by Australian forward orders, while global freight shipping may have troughed based on the Baltic Dry Index. Global Trade is also in the bottom-left quadrant as South Korean export data dropped significantly after holding up heroically through the first quarter. Interestingly, exports to China and total exports of semiconductors are holding up well. Essentially all other industries and geographies slumped, however.


Coming out of the crisis

With the virus closing borders and de-correlating economies, different countries could emerge at very different speeds in the short and medium term.

One factor is whether a country pursues a policy of near-complete eradication of the virus, or one of ‘living with the virus at an acceptable level’. The first was seen in China and some other Asian and Antipodean economies; appearing feasible even in some European countries that had significant outbreaks. It may trade off acute short-term pain for longer-term gain, although success will vary and is not guaranteed. The second appeared to be the tactic in the U.S. and Sweden. Perhaps it’s the only choice for countries that had very severe initial outbreaks, or EMs with weaker infrastructure.

Another factor is reliance on services, especially tourism, which may be harder to restart and more impacted than some industrial activities. A third factor is the size and success of policy responses in mitigating long-term ‘hysteresis’ effects from bankrupt companies and financially stressed consumers; this is yet to become clear in more developed markets, while emerging markets suffer different challenges given less fiscal space and relatively greater importance of informal economies.

The return to normality will be a nonlinear and uncertain process, even in a relatively optimistic scenario. Business and consumer confidence will suffer as smaller waves of contagion re-emerge that force control measures to be reintroduced at different times in different locations. Until we have a vaccine, this seems to be the best we can hope for.

Ian Samson

Ian Samson

Assistant Portfolio Manager

Louise Fribourg

Louise Fribourg