Richard Potts, Chief Investment Officer, IM Asset Management Ltd
The last three weeks has seen a big change in financial markets and policy stances. Unfortunately the worst still seems to be ahead for the West in terms of infections and mortality, as the virus continues to spread.
However - and hopefully this isn’t premature - we’ve seen some very significant positive signs.
Firstly, the scale of the response put in place by governments across the world shouldn’t be dismissed lightly.
UK outlook – Government measures to fend off recession
If we just focus on the UK, the measures put in place by the government will amount to around 5% of GDP. Some economists are forecasting that the social isolating policies introduced by the government will mean that, all other things being equal, GDP will shrink by -4% from its previously anticipated level of +1%. This will result in a contraction of -3%: a bad recession.
However, to offset this -3% contraction we have seen government and Bank of England launch policies aimed at boosting GDP by about 5%. There will still be challenges, but this quick, meaningful and coordinated action creates the potential for a better economic outlook than the markets feared last week.
International outlook – evidence of recovery in China?
Extending the analysis to other countries generally shows a similar story. In the US a very meaningful statement will translate into decisive action for the G10 as a whole. There may be worse to come, but so far a counterbalance is in place.
Recovery will come. Small recoveries have knock-on effects to other parts of the economy, spread with increasing momentum.
Take coal consumption for example. Measures like this are useful as they represent real economic activity as opposed to people’s views or intentions (and are much harder to distort by the authorities to present a better picture).
When we look at coal consumption in China, what we’ve seen is the usual slowdown in consumption as factories shut down in the run-up to the Chinese New Year. However, unlike previous years there was no pick-up in demand afterwards as the country was on lockdown. But consumption has started to pick up and is now almost at a normal level.
This morning we have seen other measures of economic activity in China. PMIs (Purchasing Managers Index) reported at a level better than expected and one that is consistent with continued growth (although much slower than expected a month ago). Recovery comes - but not without challenges.
Maybe the bottom is in for financial markets?
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