It is still too early to give the all-clear. With the skyrocketing from late May to early June, the stock markets were way ahead of their time. But cautious confidence is definitely appropriate. Since we had to lower our economic forecasts for Germany, Europe and the world faster and stronger than ever in March, the outlook has largely stabilized since then.
At the end of March, we predicted a checkmark for economic performance in the developed world. The dramatic downturn in March and April will be followed by a stronger but not V-shaped recovery with a relaxation of the respective lockdowns from mid-May. From autumn 2020, the angle of rise will flatten out. Around two years after the low point in the second quarter of 2020, the gross domestic product of structurally reasonably healthy economies in the western world will then be able to return to the pre-Corona level. While private consumption and corporate investment would take a little longer to recover after the pandemic shock, additional government spending could slowly fill this gap.
Since then we have seen four developments.
- First As expected, the central banks and supervisory authorities have done almost everything possible to prevent the inevitable mega-recession from additionally triggering a major financial crisis. Otherwise this would have prolonged and deepened the economic downturn.
- Secondly Finance ministers and parliaments in the western world are fighting the crisis vigorously with national fiscal programs.
- Third the hard economic figures for March and in some cases for April were even slightly worse than feared.
- Fourth However, the easing of the hard restrictions of everyday and economic life in many countries has already started somewhat earlier than we expected at the end of March. That speaks for better economic figures for the month of May. All in all, we have therefore been able to maintain our economic picture so far.
The signs of an impending upswing usually follow a certain pattern. A monetary policy stimulus sends a signal against the recession and creates space for more spending by households, companies and states. Supported by more liquidity and in the hope of a change for the better, the financial markets are turning upwards. Shortly thereafter, the mood of the analysts and then also of companies and households brightens up again. This can then be seen in less restrained spending on consumption and investment and thus in a better economy.
Signs of an upswing
After the unprecedented shock of the pandemic and lockdowns, we can see this in fast motion. The money supply on both sides of the Atlantic has risen sharply since the beginning of March, share prices have been rising since April, the German ZEW expectation index has risen steeply with an increase from minus 49.5 in March to plus 63.4 in June. Even Ifo business expectations had already recovered somewhat in May to 80.1 after 69.4 in April. In the United States, which provides many of its statistics faster than Europe, recent retail and labor market data have been pleasantly surprising.
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So the recovery has started. How strong it will turn out cannot be said yet. The numbers so far fit our prediction that both the United States and the euro zone can offset about half of the second quarter slump in the third quarter. Things could get even better in the US for now. State aid there has been so generous for many citizens and especially for the unemployed that in April incomes rose by 10.5 percent compared to March, even though the – correctly measured – unemployment rate (including zero short-time work) was 19.5 in April Percent had peaked. After more and more stores reopened, US consumers apparently started spending part of this money in May.
A base effect also speaks for strong growth in the third quarter. The second quarter is characterized above all by the absolute low in April, at which economic output in the euro zone, for example, was probably a good 30 percent below normal. Thanks to the upturn that began in May and June, the third quarter started much higher than the average of the previous quarter.
The pandemic is not over yet
However, we have to keep a few risks in mind. The pandemic is under control in Europe. However, it is far from over. The virus spreads rapidly in large parts of Latin America and some other emerging countries. The share of these countries in the global economy is rather modest. But the situation is also unclear in the USA. While the pandemic subsides in Greater New York as well as in Europe, the number of cases is increasing in some other states such as California, Florida, Texas and Arizona. We will have to live with the virus for the foreseeable future.
Our forecasts are therefore based on a central assumption. The USA will not see itself forced to introduce such hard lockdowns again in large parts of the country that this would deal another blow to the economy. Instead, regional trouble spots will be contained regionally. In parts of the United States, people are obviously willing to accept higher casualties and deaths than in Europe, similar to Sweden. If the US curve of the total registered infections rises linearly but not exponentially, as is currently the case, the US upswing, which is so important for the global economy, should be able to continue.
Our outlook for the financial markets is positive overall. Given the prospect of at least two more years of low inflation and even lower key interest rates, markets have further upside potential in the upturn over the next six to twelve months. After the phenomenal soaring of the past ten weeks, a noticeable correction in the meantime would definitely fit our outlook for the economy.
Holger Schmieding is chief economist at Berenberg Bank. He writes here regularly on macro-economic issues. More columns by Holger Schmieding can be found here