Economic Outlook – 24 May 2020


  • The latest jobless claims data did not provide much cause for optimism. Some 2.2 million people applied for regular state benefits in the week ended 16 May (on a non-seasonally adjusted basis). However, an increasing number of states have started to report the number of people applying for the Pandemic Unemployed Assistance (PUA) separately, and these claims were also up 2.2 million on the week. PUA was created as part of the CARES Act in late March, and expands eligibility to many workers who do not typically qualify for regular state benefits. It took time for states to update their systems to accept and report these claims, so there is a backlog being reported now. Including all special program recipients, continuing claims totaled 27 million as of 2 May and have risen by 25 million since early March.
  • The housing market provides no comfort either. Housing starts fell 30.2%, and are down 43.0% versus February. Even though construction was classified as an essential business in most states, homebuilder confidence has plummeted. Builders were clearly reluctant to break ground or apply for new projects with building permits down 25.0% since February.
  • Stay-at-home orders also left their mark on the resale market, with a 17.8% drop in existing home sales in April. Unlike other segments of the economy where the declines in activity are records, the drops in the housing market are not quite as bad as what was experienced in the housing market crash.
  • After taking a wait-and-see approach with regard to additional economic aid, the administration of US President Trump and the Republican leadership of the US Senate signaled that an additional coronavirus relief package is not too far off. The Senate is prioritizing liability protections against coronavirus-related lawsuits for businesses as an essential part of any new bill. Should a second wave of infections hit the US, President Trump said he would not close down the economy but instead focus on containing flare-ups.
  • Optimism about a possible new round of monetary and fiscal stimulus also seemed to support sentiment. On Sunday night, Federal Reserve Chair Powell stated that the central bank had other tools available to counteract the slowdown and that “there is really no limit to what we can do.” On Thursday, Treasury Secretary Mnuchin told reporters that the White House preferred to wait to see how the economy was responding to existing fiscal stimulus measures, although he acknowledged that there was a “strong likelihood” that more support would be needed.
  • Other economic reports released were more encouraging, with IHS Markit’s gauge of May services sector activity surprising handily on the upside. Existing home sales in April were also modestly stronger than expected, while mortgage applications jumped in May off a five-year low.
  • Stocks rose for the week, with the S&P 500 Index touching its highest level since 6 March on Wednesday before falling back somewhat. Small- and mid-cap stocks saw the strongest gains, and slower-growing value shares outperformed higher-valuation growth shares. However, energy, financials, and other value-oriented stocks remained far behind their growth counterparts in the wake of the pandemic, the Russell 1000 Value Index ended the week down around 20.0% since the start of the year, while the Russell 1000 Growth Index finished up over 2.0%. Vaccine hopes fostered strong gains in the shares of cruise lines and other travel-related stocks in the consumer discretionary sector, while a solid rise in Facebook boosted communication services shares. Health care stocks lagged.
  • Treasury yields increased sharply at the start of the week, as investors reacted to reports of encouraging vaccine trial results but then retraced most of the rise amid growing US-China tensions.


  • The volume of UK retail sales in April 2020, the first full month of lockdown, fell by a record 18.1% month-on-month. This follows a monthly fall of 5.2% in March 2020. The only exceptions were online retail, which increased by a record 18.0%, and a continued increase in alcohol sales, which were up 2.3%. The UK was already a leader in online sales across Europe and the proportion of online sales soared to an all-time high of 30.7% in April 2020, compared with the 19.1% reported in April 2019. All retailers achieved record proportions of online sales in April 2020, as some stores shifted to online sales only. Online food sales, in particular, surged by 56.0% month-on-month to account for 9.3% of all food sales. The question for many retailers is how much of this shift will be permanent. The fear is that, the longer the lockdown, the more permanent the shift in sales channel may become.
  • A measure of British public debt leapt to close to 100.0% of the country’s economic output in April, its highest in nearly 60 years, and retail sales slumped by a record 18.0% as the coronavirus crisis hammered the economy. Government borrowing of 62.1 billion pounds in April alone was just a fraction lower than its total for the whole 2019/2020 financial year. It was also far higher than a median forecast of 40 billion pounds in a Reuters poll of economists.
  • British consumer confidence in early May dipped back down to its joint-lowest level since the global financial crisis in 2009, despite moves by the government to start loosening its coronavirus lockdown, a survey showed on Friday. GfK, a polling firm, said its consumer confidence index (which it is now publishing every two weeks) slipped to -34 in the May 1-14 period from -33 during the second half of April.
  • Bank of England Governor Bailey confirmed that negative interest rates are under active review. All options are on the table, the governor said, shortly after the United Kingdom reported that consumer price inflation tumbled to just 0.8% in April. The UK Treasury issued a 3-year gilt with a negative yield for the first time in history.
  • Eurozone business activity in May bounced off the historic lows plumbed in April as coronavirus lockdowns were relaxed, although the bloc is still headed for a historic contraction in the second quarter, a survey of purchasing managers by IHS Markit showed. The composite index, an average of the service and manufacturing sectors, rose to 30.5 from the previous 13.6. However, the result was still below 50, the level that separates growth from contraction.


  • Italy, Spain and Greece said they would restart tourism in June. Their decisions came as EU tourism ministers agreed to do “whatever it takes for the quick and full recovery of European tourism.” Eleven countries, including Germany, Greece, Italy, Portugal, and Spain, agreed on a set of rules aimed at allowing cross-border travel while minimizing the risk of coronavirus infections. They also agreed that tourists would not be placed under quarantine in foreign member states and could safely return home.
  • Germany and France proposed a EUR 500 billion European Union recovery fund, giving impetus to a coordinated European fiscal response to the coronavirus pandemic. The proposal would be linked to the EU’s next seven-year budget cycle from 2021-2027, and the funds would not be available until then. The European Commission would raise the money in the capital markets and use it to support EU spending rather than loans to national governments. However, Austria, the Netherlands, Denmark, and Sweden oppose the plan, saying they would only accept a rescue fund that gave out loans.
  • In an interview conducted with European newspapers, European Central Bank President Lagarde said on the ruling on quantitative easing (QE) handed down by Germany’s Constitutional Court that the EU’s top court had ruled that the ECB’s bond purchases were consistent with its mandate and EU law. She said that the ECB would continue undeterred in delivering its price stability objective and that the new pandemic program was not affected by the judgment. She noted that inflation was projected to remain below target in the coming years and that the ECB must ensure as much accommodation as needed to stabilize inflation and the economy. She added that the central bank will act whenever a risk of a tightening in financial conditions emerges, and for this purpose, it must ensure policy is being transmitted properly. That is the whole point of the pandemic emergency program, she stressed.
  • Equities ended the week higher on hopes of an economic recovery as countries began to emerge from lockdowns, but renewed US-China tensions curbed the gains. The pan-European STOXX Europe 600 Index rose 3.63%. Among major European country stock indexes, Germany’s Xetra DAX Index climbed 6.10%, France’s CAC 40 gained 4.34%, and Italy’s FTSE MIB Index added 2.79%.


  • China’s leadership gathered in Beijing for a week-long National People’s Congress. Typically, the government announces an annual economic growth target at the annual meeting, but it declined to do so this year due to the uncertainty caused by the coronavirus pandemic and its impact on the global economy and trade.
  • While key policy announcements typically appear on the first day in the annual economic work report, on account of the uncertain economic outlook, the report contained no official growth target for the first time since 1994. This gives policymakers more flexibility in the reopening phase without the need to worry about meeting a target that is a “man-made” construct.
  • Instead, the priority for Beijing in 2020 is labor market stabilization together with poverty reduction. To this end, the target for urban unemployment is 6.0%, implying no increase from the current level. Private forecasters project China’s current unemployment rate at a much higher level by year-end, anywhere from 10.0% to 20.0% after allowing for migrant workers who are largely excluded from the official measure.
  • China reaffirmed the phase one trade deal with the United States and said it would raise the government’s fiscal deficit this year to 3.6% (up from 2.8%), a much smaller fiscal stimulus than most developed economies.
  • Regarding Hong Kong, China announced it will enact a law that will impose new national security laws on the territory. That move drew a quick response from the US Senate, which introduced a bipartisan bill that would sanction Chinese individuals and entities who enforce the new laws.
  • The central government budget deficit is earmarked to increase moderately from 2.8% in 2019 to 3.6% this year. China’s broader fiscal deficit, including off-budget items, notably local and central government special purpose bonds to finance infrastructure, is set to rise from around 5.0% of GDP last year to around 8.0% in 2020. Other features include a commitment to keep China’s currency, the renminbi, stable at a reasonable level, and to strive to fulfill the terms of the Phase 1 trade deal agreed upon in February with the US.
  • The week brought no key data releases but plenty of political issues for markets to digest. The week saw a further deterioration in US-China relations as the White House stepped up pressure on China, while Beijing announced plans to impose national security legislation on Hong Kong. Asian markets weakened on Friday, with Hong Kong’s Hang Seng Index plunging 5.6% to close 3.6% lower week on week. Mainland A-shares also fell on Friday, with the large-cap CSI 300 Index down 2.2% from the previous week.

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