Economic Outlook – 3 May 2020


  • An additional 3.8 million Americans filed for unemployment insurance, bringing total initial claims over the past six weeks to over 30 million. This dwarfs past recessions. With so many jobs lost and more at risk, consumers have cut back sharply on spending. Services spending accounts for over 45.0% of US GDP and is typically steady, even in the most uncertain times.
  • Services consumption declined at 10.2% annualised rate in Q1, more than three times the next steepest rate of decline on record (-3.0% in Q4 of 1953). March already marks the worst month on record for a majority of consumption categories. But spending data was likely even worse in April, when stay-at-home orders spanned the entire month.
  • Overall GDP contracted at a 4.8% annualised rate in the first quarter. But, further steep declines in April consumption will pull overall GDP lower at a record rate in the second quarter.
  • The personal savings rate to jump to a 39-year high of 13.1%. The saving rate should remain elevated as personal income (which includes unemployment benefits) should continue to fall less than spending.
  • In the post-FOMC meeting press conference, Chair Powell detailed “considerable risks to the outlook over the medium term,” (1) the virus trajectory (2) damage to the US economy’s productive capacity and (3) the global dimension of the crisis. The rapid monetary and fiscal policy response to date should help cushion against the second and third risks, but until the virus is truly behind, a rapid resurgence in economic activity remains unlikely.
  • It was the market’s busiest week of earnings season, with roughly one-third of S&P 500 companies expected to report first-quarter results. Two of the most heavily weighted firms in the index, Facebook and Amazon, reported after the close of trading Thursday and beat consensus revenue expectations. Amazon’s earnings fell as the company spent heavily to keep up with booming demand, however, and shares dropped sharply on Friday on news that the House Judiciary Committee had asked CEO Jeff Bezos to testify about allegations that the company had earlier misled Congress on how it interacted with third-party sellers on its site.
  • Stocks ended mixed for the week, as investors weighed some hopeful developments in the battle against the coronavirus pandemic against poor economic news and a possible restart to the US – China trade war. Small- and mid-caps outperformed for the week, as the major indexes rounded out their best monthly performance since 1987. Energy shares outperformed within the S&P 500 Index by a wide margin, helped by signs that crude oil consumption was recovering in some countries. Cruise line shares were also notable standouts, surging early in the week on growing optimism that they had the financial resources to survive the current no-sail orders. Health care and utilities shares lagged.
  • The focus continues to be on the jobless claims on Thursday as well as the labour market report on Friday, although this will be less interesting in the coming period compared to the jobless claims.


  • The ECB kept its policy rates unchanged, with the marginal lending facility and the deposit facility to remain unchanged at 0.00%, 0.25% and -0.50% respectively. Furthermore, it reiterated its forward guidance that it expects key rates to remain “at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2.0% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.” It further repeated its preparedness to ” increase the size of the PEPP and adjust its composition, by as much as necessary and for as long as needed.”
  • As for the bond purchases, the APP will continue at a rate of EUR 20 billion per month together with the purchases under the additional EUR 120 billion temporary envelope until the end of the year. The net asset purchases under the APP are expected to run as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates. PEPP purchases will continue to be conducted in a flexible manner over time, across asset classes and among jurisdictions and the Governing Council will conduct net asset purchases under the PEPP until it judges that the coronavirus crisis phase is over, but in any case until the end of this year.
  • GDP in the common currency zone shrank in the first quarter by 3.8% on the quarter, more than the 3.5% forecast, because of lockdowns to curb the spread of the coronavirus. Spanish and French economic contractions were also worse than expected, at 5.2% and 5.8%, respectively. France’s slump was the worst since 1949. Second-quarter readings are expected to be worse, as most lockdowns started after early March and a reopening of economies will be gradual. Eurozone inflation, meanwhile, slowed to 0.4% in April, well under the ECB’s target of almost 2.0%.
  • Fitch unexpectedly cut Italy’s credit rating to BBB- due to the impact of the coronavirus. Fitch had been due to review the rating in July. The previous Friday, S&P Global Ratings left Italy’s rating at BBB with a negative outlook, despite forecasting a sharp increase in the debt level to 153% of GDP.This downgrade raises the prospect that the bloc’s third-biggest economy could lose access to ECB financing. 
  • European equities rose as investors welcomed announcements that lockdown measures will soon start being lifted. However, the European Central Bank’s decision not to inject more stimulus into the economy eroded gains. The pan-European STOXX Europe 600 Index ended the week 2.6% higher. Germany’s Xetra DAX Index surged 5.08%, France’s CAC 40 climbed 4.07%, and Italy’s FTSE MIB Index gained 4.93%.
  • This week, the focus turns to the EC’s spring forecast On Thursday, which includes fiscal and debt projections for 2020 and 2021. The Italian projection in particular will gain attention, especially after the Fitch downgrade to BBB-.


  • British manufacturers suffered the biggest fall in output and orders for at least three decades in April, as measures to slow the spread of the new coronavirus sent the economy into a steep downturn. April’s final IHS Markit/CIPS Manufacturing Purchasing Managers’ Index (PMI) confirmed the bleak picture painted in a flash estimate released on 23 April.  The headline activity index fell to a record-low 32.6 from March’s 47.8, broadly in line with forecasts in a Reuters poll and the earlier flash estimate of 32.9.
  • British factory output risks falling by more than half during the current quarter after 80.0% of manufacturers reported a collapse in orders due to the coronavirus. A survey conducted from 20 to 27l April, showed that more than three quarters had already suffered a drop in sales. Britain’s Office for Budget Responsibility said on 14 April that factory output could fall by 55.0% in the second quarter, as part of a scenario for the broader economy that showed a 35.0% plunge in total output if lockdown restrictions stay in place.
  • On Thursday during its meeting, the BoE will likely face some pressure to scale up its QE, compared to other central banks.


  • In another sign of growing confidence, Beijing announced that the annual National People’s Congress (NPC), originally scheduled for March, will begin on 22 May, although some sessions of the NPC are expected to be undertaken online this year. It is not clear how many of the 2,900 delegates will travel to Beijing to attend the congress in person. Also postponed in March, the Boao Forum for Asia, China’s equivalent to Switzerland’s World Economic Forum in Davos, has been cancelled and will not take place in 2020. 
  • China’s April purchasing managers’ indexes (PMIs) were mixed. The nonmanufacturing PMI from the National Bureau of Statistics (NBS) improved, beating consensus, while the Caixin manufacturing PMIs disappointed. Profits recorded by industrial enterprises plunged 36.7% in the 12 months ended in Marchm following 38.3% year-over-year contractions in the first two months of 2020, according to NBS data. Meanwhile, the first-quarter GDP report revealed a surge in inventory investment associated with coronavirus lockdowns, reflected in a 15.0% year-on-year increase in the industrial inventory of finished goods. Running down unwanted inventories is likely to act as a drag on growth in the second quarter.
  • Moody’s Investors Service released a generally positive report on China. The rating agency confirmed China’s stable A1 rating and said that the sovereign’s credit strength was intact. According to Moody’s, China still has the policy space needed to combat the coronavirus and promote economic recovery. Targeted fiscal and monetary easing will help facilitate a moderate economic recovery in the second half of the year. While more policy measures can be expected if the recovery is weak, aggressive measures to hit some predetermined official growth target as in 2008 are considered unlikely.
  • Financial markets in China were shut on Friday for an extended Labor Day holiday and were set to open again on Wednesday 6 May. Over the shortened week, the CSI 300 large-cap index rose 3.0%, beating the Shanghai Composite, which gained 1.8%. In an attempt to boost consumer spending, the Labor Day holiday is one day longer than last year. Most analysts believe a mood of caution will prevail, however, as workers worry about job security, global recession, and a potential second wave of infections. Per capita disposable income fell by 3.9% in the first quarter, so any rebound due to pent-up consumption may be brief.
  • China export figures are out this week could prove very interesting to see how hard China will be hit by the European and US economic slump.

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