The FLI now points to a quarterly contraction about 125 per cent of the magnitude of that seen in the depth of the Global Financial Crisis.

Universally negative

Weakness is broad-based, with all five underlying sectors in the bottom-left quadrant, and every single component still showing negative growth and deceleration.

Business Surveys have remained weak this month. They are in contraction across the board, unwinding relatively little of their prior plunges even as economies reopen.

The one glimmer of optimism was the aggregate services PMI. Much of this was driven by China, where genuine momentum is finally picking up several months after lockdowns eased.

The Consumer and Labour segment has been the most affected by this crisis. Consumer confidence in the US has been holding up somewhat better than its European counterparts, with the French consumer appearing particularly weak. The US labour market is responding fairly well to reopening in May, however, with initial unemployment claims pointing to improved acceleration - a rarity in this month’s FLI reading.

Industrial orders remain in the bottom left quadrant, with every region experiencing deterioration. Interestingly, the US scores worst here, perhaps reflecting limited exposure to China’s restarting, stimulated economy.

Global Trade is also in the bottom-left quadrant as bellwether exporters fail to pick up.  However, survey data points to a potential stabilisation, with the acceleration score becoming less negative.

The Commodities sector has accelerated its downtrend, driven by cratering Australia forward orders. This comes despite some stabilisation in the Baltic Dry Index, albeit shipping costs are yet to pick up meaningfully even going into June suggesting huge slack even as economies tentatively reopen.

Approaching equilibrium

The full lockdowns seen in late March and April were probably associated with 20 per cent declines in GDP, if not more. Based on ‘big data’ activity trackers, several reopening economies such as Germany, Austria and Switzerland seem to be fast approaching a ‘social distancing’ equilibrium less than half that figure. Even countries with particularly disastrous outbreaks, such as France, Spain and Italy, are not lagging too far behind. Indeed, on reopening they - much like the FLI - appear to be heading for a hit that is only slightly worse than the depths of 2009, while still managing to avoid exponential virus dynamics.

But economic momentum after reopening remains unclear. In many economies, the huge fiscal response has replaced effectively all forgone income for many consumers, providing a significant boost. Nonetheless, it seems likely that holding activity significantly below potential for an extended period to control the virus will leave a semi-permanent and significant impact on activity.

Louise Fribourg

Louise Fribourg

Tactical Asset Allocation Analyst

Ian Samson

Ian Samson

Portfolio Manager