This week has seen mixed news on the coronavirus outbreak front. On the positive side, Italy seems to have passed the peak in cases of new infections, as the national lockdown seems to have had the desired effect. In Germany and France, the growth rate of new coronavirus cases is also coming down. In contrast, Spain saw a sharp rise in the number of deaths, while the US saw a rapid increase in the number of infections, especially in New York State. In some of the big emerging markets, such as India and Brazil, there were also quite big increases. This week, we published our prediction of the containment of the virus (see Research COVID-19 – Closer to the peak of bad news , 25 March), saying ‘as the peak becomes evident in more countries, we may approach the peak in “bad news” regarding COVID-19 , although the total numbers will still rise for some time’. We look for lockdowns to be lifted gradually in late April and early May in both the US and Europe. For an overview of the US state action, see Research US – Overview of state policy actions , 25 March.
The economic cost of the country lockdowns to contain the virus is now becoming evident in economic releases. This week saw the release of the PMI surveys for March in the advanced economies and they presented a grim picture, especially of the service sector, while the manufacturing sector so far seems to be holding up relatively well. The composite PMI points to quarterly growth rates of -4% and -8% q/q AR in the US and eurozone, respectively, and we have downgraded our 2020 growth forecast. In the US, an unprecedented level of 3.28 million workers have applied for unemployment benefits in the past week but we note that the data in the US jobs report on Friday was collected two weeks before, is unlikely to reflect the weakening of the labour market to the same extent. On Monday and Tuesday next week, we are due to get Chinese PMI numbers, where we expect a rebound given that production is normalising. In Japan, the Tankan Business survey is due on Wednesday and the US ISM manufacturing report is due next Friday.
This week central banks and governments again did their best to limit the economic damage done by the coronavirus outbreak shock. The Fed made its QE programme open ended and unlimited in size (so enabling the Fed to monetise the rise in US fiscal deficit) and created several new facilities to support the corporate and lending markets (see Fed Monitor: Overview of Fed policy actions , 24 March). The US also approved a huge fiscal support package of the order of USD2,000bn (or almost 10% of GDP), including direct payments to households, payroll tax cuts and support for big corporations and hospitals. Germany also stepped up its fiscal efforts as parliament approved a new package of EUR750bn (or 20% of GDP) and suspended the infamous ‘debt break’ temporarily. For an overview of the fiscal and monetary policy support (see The Big Picture – Global fiscal and monetary responses to COVID-19 – Update 2 , 27 March). Japan may announce a fiscal package next week of the order 10% of GDP.
Markets have clearly improved compared with the ‘peak fear’ last Wednesday , with US credit spreads easing, the USD weakening, EUR credit markets improving, the EUR swap curve steepening and periphery spreads narrowing. The very aggressive packages from the Fed and ECB over the past week, combined with slight improvement in virus numbers, are currently overshadowing the world economy being in a very deep recession.