Economic Outlook – 10 May 2020


  • April nonfarm payrolls confirmed that the labor market is collapsing. By the survey week of 12 April, net employment had fallen by 20.5 million jobs, more than ten times larger than the previous worst month on record. COVID-19 wiped out nine years of job gains in a single month, as the 131 million Americans on payrolls was the lowest since February 2011. The unemployment rate jumped 10.3% to 14.7%, the highest since World War II. However, many who were out of work because of the coronavirus were counted as merely absent rather than unemployed. It estimates that a proper classification would have pushed the unemployment rate even higher, to around 20%.
  • There was also an exodus from the labor force, which contracted by a record 6.4 million. Many who lost their job were unable or unwilling to look for a new one. This brought the labor force participation rate down by 2.5% to 60.2%, the lowest since 1973. Perhaps the clearest measure of devastation is the employment-to-population ratio, which dropped 8.7% to just 51.3%, the lowest on record.
  • The COVID-19 economic crisis is disproportionately hurting women, minorities and those without a college degree.
  • The May nonfarm payrolls report will be awful as well. Initial jobless claims, a proxy for layoffs, have continued to pour in, reaching a cumulative 33 million. Some of these workers will be re-hired, but gross hiring is freezing up across a broadening array of industries. If there is any reason to be optimistic, it is this: of the 20 million jobs lost in April, more than 18 million were reported as temporary layoffs.
  • The sour data buffet included a widening of the US trade deficit in March as a decline in exports outweighed that in imports, plunging vehicle sales in April (-24.5% month-on-month) and the service sector falling into contractionary territory, as indicated by the April ISM non-manufacturing index (-10.7 points to 41.8).
  • According to a statement issued by the Office of the United States Trade Representative, Ambassador Robert Lighthizer, US Secretary of the Treasury Steven Mnuchin and Chinese Vice Premier Liu He spoke by phone on Friday, Beijing time, with both countries reiterating that they expect to meet in a timely manner their obligations under the phase-one trade agreement reached in January. The two sides also agreed that progress is being made on creating the infrastructure necessary to make the agreement a success. Recent data suggest that China has been slow to purchase an agreed-upon quantity of goods from the US as a result of the sharp drop in economic activity stemming from the coronavirus pandemic.
  • While the US Federal Reserve has consistently signaled that its policy rate is at its effective lower bound, in a range between 0% and 0.25%, December Fed funds futures traded in negative territory last Thursday. Analysts see the move as a being driven by technical factors rather than by a market bet that the Fed will adopt a negative interest rate policy later this year.
  • While global equities have posted solid gains in recent weeks, investors continue to move money out of stocks and into cash.  Bank of America reported that over the past three weeks, USD$ 13 billion has flowed out of US equities. Bearish sentiment stands at 52.7%, the highest level since April 2013, according to the American Association of Individual Investors Sentiment Survey, while only 23.7% are bullish, potentially a contrarian indicator.
  • US stocks recorded solid gains for the week, as investors appeared to reconcile themselves to the depth of the economic downturn and focus instead on the reopening of parts of the economy along with possible therapeutic advances in the fight against the coronavirus. The gains brought the technology-heavy Nasdaq Composite Index back into positive territory for the year to date and within roughly 7.0% of its all-time high in February. Relatedly, tech shares outperformed within the S&P 500 Index, boosted by a solid gain in Apple shares. Energy stocks were also strong, helped in part by a slowing rise in domestic oil inventories. Utilities and consumer staples shares lagged.
  • US Treasury yields generally decreased slightly on the worse-than-expected jobless claims data, but the Treasury Department’s indication that it would ramp up issuance of long-term debt to finance the federal deficit kept some upward pressure on bond yields with the longest maturities.
  • In terms of data release, on Tuesday the CPI is out while on Thursday the US jobless claims print will be released.


  • As expected, the Monetary Policy Committee (MPC) of the Bank of England (BoE) kept the policy rate unchanged at 0.1 %. The decision was unanimous. The GBP 200 billion asset purchase programme was also kept unchanged, but the vote was 7-2, as two of the members preferred to increase the target for the stock of asset purchases by an additional GBP 100 billion at the meeting.
  • The BoE painted a somber picture of the UK economy, with its so-called “illustrative scenario” implying a drop in GDP by as much as 25.0% in Q2, after falling by 3.0% in Q1. The BoE then saw GDP recovering in the second half of the year as social distancing measures are gradually lifted. For the year as a whole, the BoE expects GDP to fall by 14.0% compared with last year. The BoE then foresees a rather solid recovery, with GDP growth of as much as 15.0% next year and 3.0% in 2022.
  • However, because a degree of precautionary behaviour by households and businesses is assumed to persist, the economy takes some time to recover towards its previous path and risks to the BoE’s outlook may be skewed to the downside.
  • British banks’ lending to firms hit by the coronavirus under the government’s main loan guarantee scheme for small and medium-sized firms has risen to GBP 5.5 billion from GBP 4.1 billion last week. Regulators and politicians criticised banks for the slow pace of lending under the Coronavirus Business Interruption Loan Scheme (CBIL), which is 80.0% guaranteed by the taxpayer.
  • Demand for labour contracted at the fastest pace in the 22-year history of the monthly Report on Jobs published by the Recruitment and Employment Confederation trade body and accountants KPMG. The figures chimed with other signs that Britain is in the midst of a historic collapse in economic output after measures to slow the spread of the coronavirus forced company closures across the country last month.


  • The European Commission (EC), in its spring forecast, said that the coronavirus crisis would cause the eurozone economy to contract by a record 7.75% in 2020. However, it would bounce back in 2021, expanding by 6.25% as conditions normalized. The European Union economy would shrink by 7.5% in 2020 and rebound in 2021 as well, growing by 6.0%. Growth projections for the EU and euro area have been revised down by around 9.0% compared with the autumn 2019 economic forecast, it noted. The EC said the new forecasts were clouded by an exceptional degree of uncertainty and the risks were tilted to the downside. 
  • Lufthansa is negotiating a EUR 9 billion bailout with Germany’s economic stabilization fund to ensure its future. Switzerland, Austria and Belgium, where Lufthansa has subsidiaries, have also offered help. The EU’s competition watchdog approved French state aid of more than USD$ 7.5 billion for Air France-KLM. The Dutch government is also considering aid of up to EUR 4 billion for the airline. Norwegian Air gained bondholder approval to seek government funding to keep itself afloat.  
  • The German Constitutional Court ruled that “some parts” of the European Central Bank’s (ECB) huge bond-buying programme were unconstitutional. It ordered the German government to ensure that the ECB carried out a “proportionality assessment” of its asset purchasing programme and that the “economic and fiscal policy effects” did not exceed other policy objectives. The court said it would prevent Germany’s central bank from making further purchases if the ECB failed to comply within three months.The ECB said Europe’s top court, the European Court of Justice, had previously said the quantitative easing programme was legal. It also pledged to continue doing everything necessary to revive inflation. 
  • Equities in Europe reversed course and ended higher amid late signs of easing US-China tensions and optimism that economies would start to recover as lockdown restrictions are lifted. The pan-European STOXX Europe 600 Index rose 0.92%. The main country indexes, however, were mixed. Germany’s Xetra DAX Index ended up 0.24%, France’s CAC 40 slipped 0.59%, and Italy’s FTSE MIB Index dropped 1.84%.


  • There was great interest among analysts in the sales and activity data for the Labor Day holidays from 1 to 5 May, as they looked for clues to the consumer attitudes and behavior now that most coronavirus restrictions have ended. Generally, the results for Golden Week reveal that Chinese citizens are returning to play and spend, but slowly. The holiday week saw some revival in domestic tourism (foreign travel is still banned) compared with the April Qingming holiday, though average daily revenue was down 68.0% from the same week last year. Steep price discounts and bargain offers were widely reported. Total passenger journeys soared on 1 May, but then fell back over the remainder of the holidays. All told, investors did not learn much about Chinese consumers’ propensity to travel, since the government had employed reservation systems to cap visitor numbers to popular tourist spots at 30.0% of capacity.
  • A surprise pickup in China’s external trade raised expectations in some quarters that the economy may be finding its footing. Merchandise exports beat consensus projections of a double-digit decline and instead increased 3.5% (year-on-year) in US dollar terms in April, up from a 6.6% decline in March. Imports, in contrast, came in slightly below expectations, down 14.2% year-on-year compared with a fall of 1.0% in March. China’s trade surplus widened to USD$ 45.3 billion in April. China is only the second country to have reported April trade data, and its optimistic export figures appear to conflict with South Korea’s 24.3% annual decline. It seems likely that China’s export pickup reflects a backlog following interruptions to outbound trade caused by the coronavirus lockdowns. As such, April’s export strength is unlikely to continue.
  • In a gesture toward greater financial openness, China’s financial authorities announced a number of reforms to the foreign investment regime. In sum, their effect is to remove much of the remaining red tape, making it easier for foreign portfolio investors to invest in China’s financial markets. Importantly, all quota restrictions for qualified foreign institutional investor (QFII) and renminbi QFII (RQFII) schemes have been abolished. Second, foreign investors in these vehicles are free to remit funds in a currency of their choice with very few restrictions. Finally, the regulations for investment income repatriation have been streamlined and simplified.
  • In terms of data release, Friday brings the print for China industrial production and retail sales.

Sources: T. Rowe Price, Danske Bank, Wells Fargo, Reuters, Handelsbanken Capital Markets, M. Cassar Derjavets.