covid-19: economic brief · india 5.0 indian airlines operated 532 domestic flights, on monday,...

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COVID-19: Economic Brief

Assessing implications for economies, sectors and markets

Grant Colquhoun and Marie-Louise Deshaires

29 May 2020


Developments and implications summary – 29th May

2

Overview ◼ Infection curves have flattened in Emerging Europe. Most countries have eased lockdowns in recent weeks and activity is rebounding quickly in parts of the region. Lockdowns are easing further in western Europe.

◼ New cases are drifting lower in the United States but remain stubbornly high. Timely measures of activity and discretionary consumption showing a steady pick up. Latin America is the new epicentre of the crisis.

Sectors ◼ United States durable goods orders dropped sharply in April, driven mainly by plunging orders for transport equipment. Weakness in global investment will feed into only a gradual recovery in world trade.

◼ The pharmaceutical sector is growing strongly, at least in some countries. The sector in Singapore has been boosted as drug companies relocate production there from “cheap” countries such as China and India.

Markets ◼ The Chinese authorities’ wariness of sharp falls in the currency is one reason why we expect the renminbi to weaken only a little further in the coming months and reach 7.20 renminbi per US dollar by year-end.

◼ Retail is expected to be the worst performing commercial property sector in the United Kingdom this year. Commercial property returns to over the next five years are projected to be fairly weak.

Forecasts ◼ Incoming data for the United States suggests that the slump in the economy this quarter may be a little less severe than we forecast, while a small rise in euro-zone economic sentiment this month adds to the evidence that the economy bottomed out in April.

◼ We have become a little more pessimistic on a number of medium sized emerging market economies. As a result our forecasts for world economic growth this year now stands at -6.5 per cent and that for next year 8.5 per cent, down from -6.0 and 8.7 per cent, respectively, last week.


Latest new cases and containment policy developments

3

New cases per million people*

Trend in new cases

Latest virus containment policy developments

Asia

China 0.01 Final-year students of Hubei universities, the province in which Wuhan is, can return to school starting from 8 June.

Korea 0.4Tightened restrictions in the metropolitan area of Seoul after a spike in infections. Seoul has made face masks compulsory on public transportation such as buses, taxis and subways after growing reluctance to wear them.

Japan 0.2 State of emergency lifted in Osaka, Kyoto and Hyogo.

Singapore 90.7 No new policy development.

India 5.0Indian airlines operated 532 domestic flights, on Monday, resuming activity for the first time since the country shut down its economy. Prime minister Modi likely to extend the lockdown when he addresses the nation on Sunday.

Europe

Germany 4.6 The German government plans to lift travel warnings for 31 European countries on June 15.

France 2.7The French government banned the use of malaria drug hydroxychloroquine to treat patients suffering severe forms of COVID-19.

Italy 8.3Gyms and swimming pools reopened across the country on Monday, albeit sports facilities in Lombardy remain closed until 31 May.

Spain 10.1Easing of measures for people in Madrid and Barcelona from Monday. Elsewhere in Spain the first beaches are due to reopen with foreign tourism to be allowed from July.

Poland 8.9Poles to be allowed to go outside without protective masks from May 30 and cinemas, theatres and gyms will reopen on June 6.

United Kingdom 35.0Outdoor markets and car showrooms to be allowed to start trading from June 1 while shops providing non-essential services to be allowed to open from June 15 as long as social distancing rules are adhered to.

Americas

United States 72.1President Donald Trump has brought forward a ban on travellers from Brazil to Tuesday following a surge in coronavirus deaths in the South American nation.

Mexico 23.9 No new policy development.

Brazil 84.5 No new policy development.

Improving / Less

restrictive

Worsening / More

restrictive

Sources: Capital Economics and variousNote: *Change in confirmed cases per million people, three day average.


Aggregate measure of the stringency of containment policies in place

4

Stringency index of selected European countries, from 0=less stringent to 100=most stringent, points

Sources: Capital Economics and Oxford University.

Stringency index of selected American countries, from 0=less stringent to 100=most stringent, points

points

Stringency index of selected Asian countries, from 0=less stringent to 100=most stringent, points

Stringency index of selected European countries, from 0=less stringent to 100=most stringent, points

points

0

20

40

60

80

100

120

Jan-20 Feb-20 Mar-20 Apr-20 May-20

China Korea Japan Singapore India

0

20

40

60

80

100


Germany France Italy Spain

0

20

40

60

80

100


Poland United Kingdom Russia

Sweden United States

0

20

40

60

80

100


United States Canada Mexico Brazil


Worst may have passed for Europe while the focus in the Americas has shifted south

5

Total confirmed cases of coronavirus, selected countries, thousands

Sources: Capital Economics and Refinitiv.Note: Case numbers subject to revision.

Daily reported change in confirmed cases of coronavirus, selected countries, five-days moving average, thousands

Lockdowns easing across Europe as new cases decrease

Infection curves have flattened in Emerging Europe. Russia has the worst outbreak on a per capita basis in the region at 2,400 cases per million of the population, compared to 500 one month ago. Outbreaks are smaller in Hungary, Bulgaria, and Slovakia where the authorities were quick to implement containment measures. Most countries have eased lockdowns in recent weeks and activity is rebounding quickly in parts of the region. Large fiscal and monetary support means that we think recoveries will be faster in Central and Eastern Europe compared with Russia and Turkey.

The downtrend in new cases Spain and the United Kingdom is not as clear as it was in World Health Organisation data, although this may reflect statistical noise. Nevertheless, most countries are easing lockdown restrictions further. Denmark was one of the first countries in Europe to impose a lockdown, in mid-March, and to start easing its restrictions, in mid-April. Recent Danish experience suggests that activity in the euro-zone may be just 85-90 per cent of pre-crisis levels once the bulk of the restrictions have been lifted.

Brazil now has the second most cases after the United States

New cases are drifting lower in the United States but remain stubbornly high. With most states now reopening and timely measures of activity and discretionary consumption showing a steady pick up, though, we expect employment to rise from June onwards. That said, it will be years until the unemployment rate returns to pre-virus levels.

Latin America is now the epicentre of the global outbreak. Brazil has overtaken Russia to become the country with the most confirmed cases after the United States. Indeed, the escalation of infections in Brazil prompted the United States to implement a travel ban with the country.

02004006008001,0001,2001,4001,6001,800

0

50

100

150

200

250

20-Jan 07-Feb 25-Feb 14-Mar 01-Apr 19-Apr 07-May 25-May

China Italy Spain

South Korea Japan United States (RHS)

0

10

20

30

40

50

0

2

4

6

8

10

12


Italy Spain South Korea Japan United States (RHS)


Brazil surpasses Russia becoming the country with most confirmed infections after the US

6


Sources: Capital Economics and Refinitiv. Note: Case numbers subject to revision.


0

50

100

150

200

250

300

350

400


Australia Canada Poland

United Kingdom France Germany

0

50

100

150

200

250

300

350

400


India Mexico Russia

South Africa Turkey Brazil


Euro-zone services yet to share in cautious recovery

7

Euro-zone service sentiment index, points, and services gross value added, annual change, per cent

Sources: Capital Economics and Refinitiv.

Public transport use, seven-day use of Moovit App compared to typical seven-day period pre Jan 15th, per cent

European sentiment improves but slow recovery ahead

Euro-zone Economic Sentiment in May rose marginally, adding to the evidence that the economy bottomed out in April but that activity is recovering only very slowly. But while business sentiment improved in industry, it fell even further in services. That reflects the lingering effects of lockdowns and social distancing measures, which will continue to weigh on services for a long time.

As countries further eased their lockdown measures, signs of increasing movement of people have started to appear. Traffic congestion rose slightly in May across major European cities, in particular in Berlin and in Paris. Public transport use has also improved across European cities this month. The recovery, however, remains slow suggesting that, consumers are still cautious in using means of transport and fully resuming their travel plans.

Traffic congestion in major European cities, percentage deviation from 2019, seven days average

-100

-75

-50

-25

0

25

Jan Feb Mar Apr May

Rome Milan Madrid Paris Berlin

-35

-30

-25

-20

-15

-10

-5

0

5

03-Mar 16-Mar 29-Mar 11-Apr 24-Apr 07-May 20-May

Rome Milan Madrid Paris Berlin

Less congested than 2019

More congested than 2019

-6

-4

-2

0

2

4

-45

-30

-15

0

15

30

2007 2009 2011 2013 2015 2017 2019

Services sentiment (LHS) Services output (RHS)


Virus to take its toll on all UK commercial property sectors with retail hardest hit

8

Slump in footfall points to retail rents plunging this year

The slump in United Kingdom city centre footfall points to the collapse in retail activity brought on by the restrictions to tackle the coronavirus. Retail rents, under downward pressure before the outbreak, will likely fall even faster in the current quarter. The downward pressure may ease with lockdown restrictions later in the year. But we expect rents to fall by almost nine per cent year-on-year for 2020, more than twice as sharp as our pre-virus forecast.

The drop in retail capital values is also set to accelerate this year, with a seventeen per cent fall expected. The decrease is milder than the post-global financial crisis crash, but dwarfs other sectors this time. A slow recovery in retail values later this year won’t prevent retail returns from underperforming other commercial sectors in 2020. As conditions normalise and the economy rebounds over the next twelve months or so, retail rents, capital values and returns should come back to growth in 2021.

COVID crash to decimate UK capital values this year

We expect already slowing commercial property transactions to collapse in the near term and property yields to spike, as uncertainty over future rental growth peaks. Assuming the path out of lockdown continues as set out by the government, there should be early signs of recovery by the summer, though the risks will remain skewed to the downside.

Over the next five years, we think all-property rental value growth will resume slowly, as economic growth recovers, averaging 1.8 per cent per annum. As a result, capital value growth will also see consistent improvement, rising by an average 2.6, 3.7 and 2.0 per annum in the office, retail and industrial sectors, respectively. Overall, we expect all-property returns to average 5.2 per cent a year, which is fairly weak compared with recent historic averages.

Footfall in United Kingdom city centres, annual change, per cent

Sources: Capital Economics, MSCI and Springboard..

Capital Economics forecasts for annual rental value growth in 2020, per cent

-25 -20 -15 -10 -5 0

Shopping centresRetail warehouses

LeisureStandard shops

HotelsLondon west end

London cityRest of South East office

Rest of UK officeRest of UK industrial

Rest of South East industrial

All-property average: -10.6 %

-100

-80

-60

-40

-20

0

20

40

Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20


World trade damage to intensify as investment turns down

9

Trade volumes down for third month and worse is to come

Given that lockdowns were implemented in most countries in March, the 1.4 per cent monthly contraction in world trade volumes that month seems fairly muted. However, the global number was flattered by a sharp rebound in China as shutdowns there eased. The latest evidence suggests that the damage to world trade from the virus will intensify, with data from the early-reporting East Asian economies showing that real trade fell by three per cent on the month in April.

The easing of lockdowns should lead to global trade rebounding in the second half of the year, but the risks lie to the downside. New export orders sub-indices from May’s Flash PMIs remain at low levels, suggesting that any recovery will be gradual. What’s more, the reignition of tensions between the United States and China points to a risk of renewed tariffs or other trade limiting measures, which could be an additional headwind to trade.

Transport equipment leads US orders downturn

The big 17.2 per cent drop in United States durable goods orders last month was once again driven mainly by plunging transport orders with underlying capital goods orders falling more modestly. Transport orders collapsed by 47.3 per cent while non-defence capital goods orders excluding aircraft, dropped by a more modest 5.8 per cent. This suggests business equipment investment is on track for a twenty per cent annualised fall in the second quarter.

Together with the drop in continuing jobless claims and more encouraging details in the revised first quarter gross domestic product figures also released on Thursday 28 May, that suggests the risks to our forecast that gross domestic product will fall at a 40 per cent annualised pace in the second quarter now lie to the upside.

Flash PMIs new export orders indices

Sources: Capital Economics, IHS Markit and Refinitiv.

United States on-defence capital goods ex-aircraft, billion dollars

15

25

35

45

55

65

2010 2012 2014 2016 2018 2020

United States Euro-zone Japan United Kingdom

46

50

54

58

62

66

70

74

2007 2009 2011 2013 2015 2017 2019

Orders Shipments


China steps up support for the economy but not the renminbi

10

China’s economic lift from fiscal stimulus will come with a cost

The fiscal plans unveiled by China’s leadership on Friday 22 May suggest that fiscal support will be reasonably large. The official budget deficit will exceed three per cent of gross domestic product for the first time. The augmented deficit, which is a better measure of the true fiscal position, is likely to widen by around 4.5 per cent of gross domestic product. That’s the same as the increase in 2009. An important difference with the response in 2009, however, is that borrowing by firms will not be allowed to soar. Another difference is that property construction will apparently not be a major target of investment. Instead, the focus will be infrastructure.

We expect stimulus to succeed in lifting demand and economic growth in the near-term – China should emerge from the coronavirus downturn faster than other major economies. But another wave of state-mandated investment to boost demand will worsen the structural misallocation of resources across the economy and contribute to a further decline in long-run potential growth.

Market pressure is driving the renminbi down

The People’s Bank of China’s decision to set its daily fixing for the renminbi at its weakest against the dollar since 2008 looks more like a partial acquiescence to market pressure than a strategic depreciation to hit back at the United States. Both during the trade war last year and since late March 2020, the renminbi was allowed to depreciate, but policymakers repeatedly set the fix stronger than the offshore rate to limit the speed and scale of the move.

The authorities’ wariness of sharp falls in the currency is one reason why we expect the renminbi to weaken only a little further in the coming months, even as United States-China relations remain frosty. Our year-end forecast for the renminbi is 7.20 renminbi per US dollar only a bit weaker than its level now.

China augmented fiscal balance, share of gross domestic product, per cent

Sources: Capital Economics, CEIC and Bloomberg.

Chinese renminbi per US dollar

6.65

6.75

6.85

6.95

7.05

7.15

7.25

Jan-19 May-19 Sep-19 Jan-20 May-20

PBOC CNY Fix (onshore) CNH (offshore)

Weaker vs US dollar

-16

-12

-8

-4

0

4

2007 2009 2011 2013 2015 2017 2019

General busget Funds budget

Social secutity budget Net land sales revenue

Off budget borrowing Total


Better than expected first quarters in Singapore and India but full year contractions expected

11

Pharma saved Singapore’ economy in Q1 but won’t do so in Q2

A very strong performance from the pharmaceutical sector meant that Singapore’s economy contracted much less in the first quarter of 2020 than previously thought – by 4.7 per cent quarter-on-quarter and by 0.7 per cent year-on-year. The threat to supply chains from the pandemic has likely led drug companies to bring production back from “cheap” countries such as China and India to “safer countries” such as Singapore. With a stringent lockdown in place at home and demand cratering abroad, however, the sector is unlikely to stop a huge contraction in the economy in the second quarter.

The economy should recover strongly in the second half of the year as lockdowns are eased, demand from abroad starts to recover and as a result of fiscal support worth around twenty per cent of gross domestic product. By the end of 2022 we expect Singapore to have recovered closer to its pre-crisis path than most other economies.

Relative Indian resilience won’t last

According to the official gross domestic product data released on Friday 29 May, India’s economy held up rather well in in the first three months as a whole given that a stringent lockdown was imposed in the second half of March. The economy grew by 3.1 per cent year-on-year in the first quarter of 2020.

But the data are increasingly subject to significant revisions and, in any case, a huge drop in output is all but certain in the second quarter. After all, the lockdown lasted for all of April and, while restrictions are now gradually being lifted, activity has been severely hampered in May as well. What’s more, timely indicators such as the services and manufacturing PMIs have dropped to record lows. We still expect the economy to contract this year, by around four per cent, and suffer one of the slowest recoveries among major economies.

Singapore gross domestic product, annual change, annualised, per cent

Sources: Capital Economics, Singstat and Indian Ministry of Statistics and Programme Implementation.

India gross domestic product, annual change, per cent

-30 -25 -20 -15 -10 -5 0 5 10

Finance & Insur.

Manufacturing

Info & Comms

Business Services

Construction

Wh'sale and Retail Trade

Transport & Storage

Accom. and Food

Q1 2020 Q4 2019

0

2

4

6

8

10

2012 2013 2014 2015 2016 2017 2018 2019 2020

Latest Old data


Gross domestic product forecasts, selected countries

12

-21

-18

-15

-12

-9

-6

-3

0

3

6

9

Forecast as of 29th May Pre-crisis forecasts

Source: Capital Economics.Note: * China Activity Proxy, not official measure of gross domestic product.

Latest forecast for year-on-year change in gross domestic product in 2020, alongside pre-virus forecasts, per cent


Gross domestic product forecasts in detail, selected countries – 29th May

13

Real economic growth rate, quarter-on-quarter, per cent

Forecasts, year-on-year, per cent

Revisions since pre-crisis, percentage points

Q1 Q2 Q3 Q4 2020 2021 2020 2021

Asia

China* -19.5 13.5 7.0 3.5 -5.0 15.0 -10.0 10.0

Korea -0.6 -8.0 5.8 1.7 -3.0 6.0 -5.5 3.5

Japan -0.9 -12.0 7.2 2.5 -6.5 2.7 -6.3 1.8

India -6.2 -4.5 11.0 1.0 -4.0 8.0 -9.7 1.5

Europe

Germany -2.2 -11.0 4.0 3.0 -8.0 4.5 -8.2 3.9

France -5.8 -20.0 21.7 7.2 -10.0 7.5 -10.8 6.5

Italy -4.7 -25.0 9.0 7.5 -18.0 15.0 -18.2 14.8

Spain -5.2 -28.3 24.5 7.3 -15.0 10.0 -16.3 8.5

United Kingdom -2.0 -23.0 15.0 4.5 -12.0 10.0 -13.0 8.2

Americas

United States -1.3 -11.5 4.8 5.3 -5.5 7.0 -7.5 4.6

Mexico -1.2 -12.2 5.0 4.0 -8.0 5.0 -8.5 3.0

Brazil -1.5 -9.0 3.0 2.5 -5.5 2.5 -7.0 0.7

World -6.3 -7.0 7.0 3.8 -6.5 8.5 -9.3 5.3

Source: Capital EconomicsNote: * China Activity Proxy, not official measure of gross domestic product.


Contact details

14

Grant Colquhoun

Head of Consultancy

[email protected]

Marie-Louise Deshaires

Economist

[email protected]

mailto:[email protected]

mailto:[email protected]


15

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covid-19: economic brief · india 5.0 indian airlines operated 532 domestic flights, on monday,...

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