Economic Outlook – 12 April 2020


  • The NFIB Small Business Optimism Index tumbled 8.1 points in March. This was the largest one-month drop in the index’s history. This drop, however, did not capture the full extent of the deterioration in business conditions that took place later that month. A special survey conducted by the NFIB found that most businesses only had resources to hold on for one-to-two months. After that, restarting their business would become much more difficult or impossible, which is one reason why the success of the Payroll Protection Program and Fed’s Main Street Lending Program are so essential for the economy to recover. While both programs will take time to ramp up, they should be in place by the time the economy is ready to reopen.
  • Several measures were put in place to ease funding strains and to support households, business, and state and local governments. Last Thursday, the US Federal Reserve announced an array of programs with total lending power of $2.3 trillion dollars to backstop small and medium- sized business as well as state and local governments. The Fed also announced it would support new debt issuance of companies that have recently lost investment-grade credit ratings in addition to buying a limited amount of high-yield exchange traded funds. Corporate bond markets rallied sharply on the news while municipal bonds saw more muted gains. Fed Chair Jerome Powell expects a very weak second quarter followed by a quick rebound in the second half of the year. He said there is no limit to the aid the Fed can offer except where prohibited by law.
  • The University of Michigan’s Consumer Sentiment Survey offers another near-term look on the state of the consumer. The index plunged 18.1 points in early April, providing the first real insight into how much consumer attitudes have been dented. A big part of the reason consumer confidence has fallen so much is that layoffs continue to skyrocket.
  • Last Thursday, the Labor Department reported that 6.6 million Americans had filed for unemployment benefits in the previous week, only slightly lower than the record-setting number in the previous report and well above consensus estimates. As an illustration of the unprecedented contraction in the labor market, the 17 million jobs lost since mid-March totaled over 10.0% of the US workforce.
  • US stocks recorded one of their best weekly gains on record, as some encouraging trends in global coronavirus infection and hospitalization rates lifted hopes that stay-at-home orders might soon be eased. The most beaten-down asset classes fared best, with small-caps outperforming large-caps and slower-growing value shares outpacing higher-valuation growth stocks. The same was true among sectors of the S&P 500 Index, with energy shares and financial services shares regaining some lost ground, while consumer staples stocks lagged. The gains brought the large-cap indexes and the technology-heavy Nasdaq Composite Index within 20.0% of their February highs.
  • US Treasury yields increased over the week, driven by the risk-on sentiment in equity markets and an increased supply of Treasuries. In a reassuring signal for government debt markets, however solid demand for Treasury bills largely offset massive levels of issuance.


  • Eurogroup finance ministers resumed their efforts to agree on a package of measures to support economies struggling with the impact of the coronavirus pandemic. The Dutch, backed by Germany, are resisting the unconditional use of the ESM (European Stability Mechanism). France and Italy insist on a temporary reserve fund, financed by joint bond issuance, to support fiscal policy in the most indebted countries.
  • Ahead of the resumption of talks, European Central Bank President Christine Lagarde said Europe needs to show greater solidarity and full alignment of fiscal and monetary policy as the best way to protect productive capacity and employment. She urged ministers not to get hung up on joint debt issuance, so-called “coronabonds”, adding that there are other forms of solidarity like mutualized spending from the shared budget or a reconstruction fund.
  • Germany’s five leading economic institutes forecast in their spring report that GDP would shrink by over 4.0% this year. They said economic output was likely to have shrunk by 1.9% in the first quarter alone and predicted GDP would slump by almost 10.0% in the second quarter (the sharpest decline recorded since quarterly national accounts became available in 1970). The unemployment rate is forecast to jump to 5.9% this year, and short-time workers will swell to 2.5 million year over year. Measures taken to weather the crisis would lead to a record combined deficit of €159 billion. Gross debt is expected to rise to 70% of GDP in 2020. However, Germany is in a relatively good position to recover lost ground once the pandemic is over, and the economists forecast the economy could expand by 5.8% next year. However, the institutes also warned that there were significant downside risks to the forecast.
  • Equities in Europe rose over the week, as the slowing deaths from the coronavirus raised hopes that country lockdowns may soon be eased.The STOXX Europe 600 Index ended 6.62% higher. Germany’s Xetra DAX Index climbed more than 11.0%, France’s CAC 40 Index gained 7.62%, and Italy’s FTSE MIB was up around 5.0%.


  • Britain’s government has now received 1.2 million new claims for welfare payments since mid-March, about eight times normal levels, as the coronavirus outbreak hits the economy. Last week, the government put the figure for new Universal Credit requests at around 950,000 people. The payments include support for people on low incomes working fewer hours as well as people who lose their jobs. There are normally around 100,000 applicants per two-week period. As the coronavirus pandemic sweeps the country, analysts think the country is heading for its sharpest economic slump in a century.
  • The Bank of England has agreed to temporarily lend the government money if needed to help finance its massive COVID-19 spending plans, reviving a measure used during the 2008 financial crisis. Sensitive to claims it is resorting to ‘monetary financing’, or permanently supporting government spending by printing money, the BoE stressed its move was a short-term measure. BoE Governor Andrew Bailey said that monetary finance was anathema to central bankers and has linked it to hyperinflation in 1920s Germany and later Zimbabwe. “As a temporary measure, this will provide a short-term source of additional liquidity to the government if needed to smooth its cashflows and support the orderly functioning of markets, through the period of disruption from COVID-19,” the BoE said in a joint finance ministry statement.
  • More than half of small manufacturers in England plan to cut jobs despite government programs to help them through the coronavirus hit to the economy, which many deem insufficient. Nearly three-quarters of those surveyed by the South West Manufacturing Advisory Service (SWMAS) and the Manufacturing Growth Program said either they did not think the assistance being offered by the government was sufficient, or that they were unsure about whether they could access it. The survey chimed with a report from the British Chambers of Commerce that showed only a small fraction of British companies have so far successfully accessed financial help from the government.


  • Press reports pointed to a growing economic toll for China’s small and mid-size enterprises arising from the coronavirus pandemic. According to a South China Morning Post report, more than 460,000 companies shut during the first quarter, including 26,000 in the export sector. Over half had operated for less than three years, according to Tianyancha, a commercial database. The same report said new company openings in the first quarter fell nearly 30.0% year over year, but at 3.3 million, these newcomers exceeded shutdowns by a large margin. Getting financial aid to SMEs in need is viewed by many as being one of the keys to a successful fiscal response. Ratings agency Moody’s indicated the coronavirus is putting more strain on China’s privately-owned enterprises, the majority of which are smaller companies.
  • Beijing’s stringent international travel restrictions allow Chinese airlines just one flight per country per week. National flight capacity is down by about 90.0%, while Hong Kong’s Cathay Pacific has cut 96.0% of flights. Press reports point out that this poses serious logistics difficulties and threatens global supply chains. According to the International Air Travel Association, around 35.0% of global trade is by air, and around half of that travels in the holds of regular passenger flights, especially items such as high-value electronic components. One result of the elimination of passenger flight cargo capacity is that air freight rates have soared by 200.0% on average to Asian destinations and by over 100.0% to the US and Europe.
  • Markets were closed for the Ching Ming holiday last Monday. Taking their cue from the rally in global markets on better coronavirus numbers, they opened higher on Tuesday. From the previous Friday to Thursday, the Shanghai Composite and CSI 300 large-cap index both rose by around 2.2%.

Sources: T. Rowe Price, Reuters, MFS Investment Management, Wells Fargo, M. Cassar Derjavets.