Economic Outlook – 17 May 2020


  • US Federal Reserve Chair Powell said that while the government’s response to the coronavirus pandemic has been both timely and large, “it may not be the final chapter, given that the path ahead is both highly uncertain and subject to significant downside risks.” Powell again ruled out the use of negative policy rates but said the Fed has a good toolkit with which to respond to the crisis. The Fed used one of its new tools for the first time last week, purchasing investment-grade and high-yield bond ETFs. The central bank announced that its balance sheet approached $7 trillion dollars as a result of the extraordinary interventions to support market functioning as a result of the pandemic.
  • Retail sales plummeted by 16.4%, a decline never seen before in the history of the series. The extraordinary drop took retail sales to 2012 levels in April, wiping out 8 years of gains. Closures of non-essential businesses all around the country coupled with price declines and mounting job losses explain the sharp drop in sales in the month.
  • The consumer price index (CPI) showed prices in April fell by 0.8% month-on-month, the largest monthly decline since December 2008. While the collapse in gasoline prices (-20.6%) was the main driver, prices also retreated in areas most affected by COVID-19: motor vehicle insurance, airline fares, and apparel. Core CPI inflation was 1.4% in year-over-year terms, down from 2.1% in March.
  • The NFIB small business optimism index fell by 5.5 points to 90.9 in April. Small businesses grew more pessimistic across nearly all sub-indices. Interestingly, however, there was a large increase in the percentage of firms expecting the economy to improve in the next six months (April: 29.0%; March: 5.0%), coinciding with the news that states are gradually re-opening their economies. But, gradual restarts of state economies do not mean economic activity will rapidly return to normal.
  • With forward earnings estimates for the S&P 500 Index at their highest levels since the dotcom bubble era, investors grew more skittish amid dwindling odds of a V-shaped bounce back by the US economy. The large-cap index trades at more than 20 times next-twelve-months’ estimates at a time when earnings will be extremely difficult to forecast, given the uncertainty caused by the coronavirus epidemic. Bulls, however, point out that low interest and inflation rates could support markets while the economy mends and earnings prospects become clearer. The narrow nature of the rebound in equities in recent weeks was also a concern, since it was led by only a handful of mega-cap tech names.
  • Treasury yields decreased through most of the week on the dismal economic data, mostly solid demand for surging levels of new issuance, and continued purchases by the Federal Reserve of longer-term Treasuries.
  • US weekly jobless claims numbers were marred by inaccuracies with the small state of Connecticut reporting 10 times what it should have due to the accidental addition of a digit, while the continuing claims data for California was under-reported – the net result making the initial claims look worse than they should have the continuing claims better. In Georgia, one of the first states to begin opening up from shutdowns, the state reported a 76,000 drop in continuing claims. Nine in ten people who lost a job said that their employer indicated that they would return to their job at some point, indicating that programs such as the Paycheck Protection Program are working.
  • As the coronavirus pandemic drags on, so does the finger-pointing between the US and China. US intelligence agencies accused China of trying to steal research on COVID-19 vaccines, testing and treatments using cyberattacks. The claims come amid persistent doubts over whether China will live up to its obligations under the phase-one trade deal signed in January. This week, US President Trump dismissed any discussion of renegotiating the agreement and said that 100 trade deals could not make up for the damage caused by the pandemic. Trump also said that his administration is looking at Chinese firms listed on US stock exchanges that do not follow US accounting rules. Additionally, the White House short-circuited a planned moved that would have allowed the US government employee retirement plan to invest in an index fund with Chinese equity exposure. The prohibition stops a roughly $4.5 billion flow into Chinese markets. For its part, China is considering countermeasures against US states and politicians who seek damages from China over the coronavirus pandemic. On Friday, Chinese state media reported that China could activate its unreliable entities list if the US blocks technology sales to Huawei.  
  • In terms of data release, the US initial jobless claims and the US PMI are out on Thursday.


  • The British economy contracted 5.8% month-on-month in March, the largest fall since the series began in 1997. Though the decline was smaller than expected, the Office of National Statistics warned that data collection difficulties could add to volatility of the figures.
  • Separately, a Treasury document cited by the Daily Telegraph showed the budget deficit could balloon to GBP 337 billion this year from just GBP 55 billion forecast in March after a huge increase in public spending to cushion the economic fallout from the coronavirus. Officials suggested in the document that the government would have to raise taxes or cut spending to avoid a potential sovereign debt crisis.
  • Bank of England (BoE) Governor Bailey said in a television interview that one of the main aims of the bank buying GBP 200 billion of government debt is to spread the cost and help the government avoid a return to austerity. He also said that the financial markets’ basic assumption is that there will be more quantitative easing from the BoE.
  • Britain’s government is on track to borrow a record GBP 298 billion this year, equivalent to more than 15.0% of economic output, to cope with the economic damage being caused by the coronavirus. The Office for Budget Responsibility raised its forecast for public borrowing on Thursday by GBP 25 billion from April’s GBP 273 billion estimate, which already represented a five-fold jump from its pre-lockdown prediction of GBP 55 billion. Government borrowing looks set to far outstrip the peak caused by the 2008-2009 financial crisis, when the Conservative Party that is now in office accused the Labour government of fiscal mismanagement for letting the deficit reach 10.0% of GDP.
  • In terms of data release, the UK PMI is out on Thursday.


  • The eurozone economy contracted by a record 3.8% in the first quarter compared with the final three months of 2019, according to a flash estimate from Eurostat. France’s economy shrank 5.8%, the worst result among the 19 participating countries, followed by Slovakia (5.4%) and Spain (5.2%). Italy’s gross domestic product withered 4.7%. The largest economy, Germany, shrank 2.2%.
  • European Central Bank (ECB) Vice President Luis de Guindos said in a speech that the eurozone economy had already put the worst of the coronavirus downturn behind it. He said the economy could rebound in 2021, expanding by as much as 6.0%, although he acknowledged the level of uncertainty was high.
  • The Italian government approved a long-delayed economic stimulus package worth EUR 55 billion. The measures, following an initial EUR 25 billion package introduced in March, include a mix of tax breaks and grants for businesses and households and incentives to help the tourism sector.
  • Analysts further reduced their expectations for company earnings in the second and third quarters as fears of a prolonged recession due to the coronavirus grew. The second-quarter earnings of companies listed on the pan-European STOXX Europe 600 Index are expected to drop 46.7%, compared with 44.9% predicted the previous week. In the third quarter, analysts now expect earnings to fall 35.1%, compared with 32.7% last week.
  • The political crisis sparked by a German constitutional court ruling that could prevent the Bundesbank from participating in the European Central Bank’s stimulus program intensified. European Commission President Ursula von der Leyen said the European Union executive could start legal action against Germany over the ruling, although officials later rowed back on the idea. However, Constitutional Court Judge Peter Huber then said in newspaper interviews that such a move could “weaken or endanger” the EU. Chancellor Angela Merkel then moved to defuse the crisis, saying in Parliament she would defend the euro and ensure that the Bundesbank could take part in the ECB’s activities. She gave no details but said the ruling “will have to motivate us to do more to push ahead with integration in the area of economic policy.”


  • Some monthly economic data releases for April beat the market consensus by a comfortable margin. The hard data show that industrial production continues to lead the way in recovery, with a rise of 3.9% year-on-year, bolstered by April’s stronger-than-expected exports. Additionally, auto sales only fell 5.6% year-on-year in April after a supply-restricted 40% plunge in March, though industry association data for the first 10 days of May were weak. In contrast, demand-side indicators in China have lagged, with retail sales down 7.3% in April. Infrastructure and property were the pillars supporting fixed asset investment growth of 0.8% in April, while the trend in manufacturing remains negative.
  • Despite some bright spots, overall economic data in April still pointed to China remaining a “90% economy,” where recovery is gradual and uneven. The gain in April exports appeared due mainly to the recovery of domestic supply capacity and not overseas demand, with sectors such as equipment and machinery jumping the most as the backlog in export orders from the lockdown was filled. After the export order backlog has been cleared, China’s export growth is expected to contract sharply, according to various external trade leading indicators. In the absence of new fiscal stimulus, demand headwinds might prevail, notably from exports, price deflation, and the savage squeeze on enterprise profits, leading some China economists to talk about a W-shaped recovery.
  • Credit and money supply growth came in significantly better than expected for the second consecutive month in April. The details were less promising, however, as credit expansion was mostly in short-term loans, including bill financing (up 28.0%) and corporate bonds (up 19.0%). Prior to the release of the April credit data, the central bank’s quarterly monetary policy report stated that the People’s Bank of China would introduce “more powerful” policies in response to the unprecedented economic challenges. This was welcomed by markets, as many local investors had begun to question why the monetary and fiscal policy response to the coronavirus outbreak had been so much less forceful in China than in the US, Japan and Europe. China’s Finance Minister, Liu Kun, in an article in the People’s Daily official newspaper, promised to reveal additional fiscal measures at the upcoming meeting of the National People’s Congress. 

Sources: T. Rowe Price, Danske Bank, Saxo Bank, Reuters, MFS Investment, TD Economics, M. Cassar Derjavets.