covid-19: economic brief...the recovery is likely to be fastest in china and central and eastern...

Business in strict confidence

COVID-19: Economic Brief

Assessing implications for economies, sectors and markets

Grant Colquhoun, Marie-Louise Deshaires and Roxane Osuna

7 August 2020


Developments and implications summary – 7 August

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Overview ◼ The pandemic seems to have entered a new phase. Daily new cases in the United States are levelling off after weeks of tighter restrictions in several states. At the same time, several developed countries outside the United States seem to be in the early stages of their own second outbreaks.

◼ The Americas are still the global hotspots. On a per capita basis, new cases are at much higher levels in the United States and Latin America. Death rates are high by international standards too.

Sectors ◼ PMIs for July suggest that conditions in emerging markets manufacturing are improving, albeit performance is mixed. The recovery is likely to be fastest in China and Central and Eastern Europe.

◼ The euro-zone’s industrial recovery is lagging behind an uneven retail rebound. In both cases, growth is likely to moderate after initial strong rebounds. Rising virus cases pose a growing threat to the outlook.

Markets ◼ We have revised down our previous end-2020, 2021 and 2022 forecasts for the 10-year yield on United States Treasuries to 0.5 per cent, from 1.0 per cent and we think that real yields of Treasury Inflation-Protected Securities (TIPS) will fall even further below zero, to the benefit of “risky” assets.

◼ The China-led revival in metals prices has invited comparisons with the post-financial-crisis era. As was the case back then, we expect base metals prices to make further gains in the near term, before entering a period of decline as the boost to demand from the current round of Chinese stimulus fades.

Forecasts ◼ We have revised downward by 0.5 percentage points our 2021 forecasts for Australia. The state of Victoria entered a severe lockdown on Thursday, with most non-essential businesses now shut. This should push activity in Victoria around twenty per cent below normal levels until September and means we only expect Australia’s gross domestic product to rise by a measly 0.5 per cent in the third quarter.

◼ With worries about a major second coronavirus wave in Europe intensifying we now expect a slightly weaker economic growth in Spain and Italy in the current quarter.

◼ After shrinking by 4.7 per cent this year the world economy will grow by 7.1 per cent in 2021.


Latest new cases and containment policy developments

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New cases per million people*

Trend in new cases

Latest virus containment policy developments

Asia

China 0.1 Clinical trials on humans have begun in China for a potential coronavirus vaccine.

Korea 0.6 No new policy developments.

Japan 10.4The governor of Japan's Aichi Prefecture, announced a regional "state of emergency", urging people to stay home at night and businesses to close altogether or close early to curb the coronavirus.

Singapore 54.4 No new policy developments.

India 39.8 No new policy developments.

Europe

Germany 8.8Germany's Foreign Ministry has revised its travel guidance for Belgium, warning against all non-essential travel to the province of Antwerp because of the high incidence of the coronavirus epidemic in the region.

France 16.9Since August 1, those travelling to France from sixteen countries with high viral circulation are subject to the requirement of COVID-19 negative test results taken less than 72 hours before the flight.

Italy 4.6Italy's national civil aviation authority has threatened to suspend Ryanair's permit to fly in the country over alleged non-compliance with coronavirus safety rules.

Spain 55.4 No new policy developments.

Poland 16.0 No new policy developments.

United Kingdom 12.0 Arrivals from Belgium will be quarantined after a rise in coronavirus cases there.

Americas

United States 180.7New York City will put up COVID-19 quarantine checkpoints at key entry points to ensure that travellers from 35 states on New York state's travel advisory comply with the state's 14-day quarantine mandate.

Mexico 54.7 No new policy development.

Brazil 210.0 No new policy development.

Improving / Less

restrictive

Worsening / More

restrictive

Sources: Capital Economics and variousNote: *Change in confirmed cases per million people, seven 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 European countries, from 0=less stringent to 100=most stringent, points

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

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

0

20

40

60

80

100

Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-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

0

20

40

60

80

100


United States Canada Mexico Brazil


The pandemic seems to have entered a new phase with cases rising again in many countries

5

Daily reported change in confirmed cases of coronavirus, selected countries, seven day moving average, thousands

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

Daily reported change in confirmed cases of coronavirus, selected countries, seven day moving average, thousands

The pandemic has entered a new phase

A new phase in the coronavirus pandemic now appears to be underway. Daily new cases in the United States are levelling off after weeks of tighter restrictions in several states. At the same time, several developed countries outside the United States seem to be in the early stages of their own second outbreaks. The initial focus was on Australia and Japan, followed by countries in the euro-zone.

Spain and Belgium have seen the biggest per capita rebounds in cases in the advanced economies outside of the United States. While these outbreaks have been small compared to previous peaks, the sharply rising rate of infection in Spain has prompted the authorities there to put several regions into lockdown. Cases are creeping up elsewhere too, including in Germany, France, the United Kingdom and the Nordics. While we don’t expect nationwide lockdowns to be re-imposed, the chance that they become necessary has risen.

The Americas are still the global hotspots

On a per capita basis, new cases are at much higher levels in the United States and Latin America than in most of the rest of the world. Death rates are high by international standards too. While new cases are rising in most of the world, they are typically doing so from a low level. However, limited testing capacity in poorer emerging markets may mean that the infections numbers are understated, particularly in Africa and southern Asia.

While renewed restrictions in the Unites States seem to be slowing the spread of the virus there, with the exception of Chile, the situation has been getting worse in Latin America. This reinforces our below-consensus gross domestic product forecasts for the region. Indeed, we expect emerging markets outside China to generally underperform advanced economies in the next two years.

0

20

40

60

80

100

120

140

02-Feb 28-Feb 25-Mar 20-Apr 16-May 11-Jun 07-Jul 02-Aug

USA Other developed markets

China Other large EM*

Other emerging markets

0

10

20

30

40

50

60

02-Feb 28-Feb 25-Mar 20-Apr 16-May 11-Jun 07-Jul 02-Aug

Brazil Mexico Russia India South Africa

*Brazil, Mexico, Russia, South Africa and India


0

20

40

60

80

100

120

140

Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20

Daily subway passengers in nine major cities

Congestion across 100 cities

Latest uptick in China infections has yet to derail the national recovery in consumer activity

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New confirmed COVID-19 cases in China*

Sources: Capital Economics, CEIC and Ministry of Transport.

China subway usage, persons, share of 2019 level

Infections have risen in China but mobility has not been affected

New confirmed infections in China have been the highest since early April during the past few weeks as Xinjiang province has gone through a localized outbreak. The recent increase in cases has been predominantly driven by locally transmitted infections.

So far, the latest uptick in infections has yet to derail the national recovery in consumer activity. Road congestion has been broadly stable since late May, when it returned above 2019 levels. And subway usage has increased since early July. The higher level of subway usage suggests that consumers increasingly feel safe spending time in crowded public places. The difference between subway usage on weekdays and weekends has been declining and suggests that people have increased the amount of time they spend outside their homes on weekends.

China transport activity, share of 2019 level, seven-day average

0

5

10

15

20

0

20

40

60

80

100

8 10 12 14 16 18 20 22 24 26 28 30 32

Week number

Weekday Weekend Difference (RHS)

0

20

40

60

80

100

120

140

May Jun Jul Aug

Domestic spread Infection in arrivals from abroad

* Includes asymptomatic cases


Manufacturing recovery remains mixed across EMs while China drives metal prices revival

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Uneven manufacturing recovery in emerging markets continues

The rise in the emerging markets manufacturing PMI in July (to 51.4) should be treated with caution. First, the headline PMI significantly underestimated the slump in emerging markets industrial production in April, so it may be overstating the subsequent rebound. Second, the pick-up has been driven in part by China. Excluding China, the emerging markets PMI did edge up, from 46.8 to 48.4, but remained below 50. Indeed, more broadly, the PMIs from many countries, including India, Russia and South Africa, dipped last month, while others are still below 50.

However, the index still suggests that conditions in emerging markets manufacturing are improving. The recovery is likely to be fastest in China and Central and Eastern Europe, while Mexico and South Africa are two countries where prospects look particularly bleak.

Post-GFC-style metal revival to continue, for now

Industrial metals prices have staged an impressive comeback since their trough in March. This has been aided by a return of investor risk appetite, reflected in rising equity prices, and a weaker US dollar, particularly in recent weeks. Supply concerns have also helped to lift prices. But by far the biggest boon has been the strong recovery in economic activity in China. The country’s success in containing the virus, the short duration of its lockdown, and a large fiscal stimulus have enabled domestic demand for metal to bounce back quickly.

The China-led revival in metals prices has invited comparisons with the post-financial-crisis era. As was the case back then, we expect base metals prices to make further gains in the near term, before entering a period of decline as the boost to demand from the current round of Chinese stimulus fades.

Emerging markets manufacturing PMI indices

Sources: Capital Economics, Refinitiv and Markit.

S&P GSCI industrial metals price index, start date = 100

40

60

80

100

120

1 6 11 16 21 26 31 36 41 46 51 56 61 66 71

Number of months

August 2008 onwards

Jan. 2020 to Jul. 2020

CE forecasts (Jul. 2020 onwards)

20

30

40

50

60

Brz

.

Col.

Pol.

Chn.

S. A

f.*

Hun.*

Tw

n.

Mly

.

Php.

Rus.

Vie

.

Cze

.

Idn.

Kor.

Ind.

Tha.

Mex.

June July

*Not compiled by Markit


Euro-zone industrial recovery lagging behind an uneven retail rebound

8

German production still a long way from normal

German industrial production rose by 8.9 per cent month-on-month in June, but it was still 11.7 per cent down in year-on-year terms and remained well below its pre-crisis level. The most reliable monthly surveys, such as the manufacturing expectations component of the Ifo Business Climate Index, point to a further rise in output in July.

The recovery should have a bit further to run in the coming months, but we expect its pace to slow. There is less room left for “rebound growth” as the economy gets nearer to normal. And the weakness of external demand looks likely to persist for many months, particularly if the recent upturn in coronavirus cases elsewhere in Europe continues. We think output will remain well below normal for a long time yet in Germany and the euro-zone.

Rising virus cases pose growing threat to the euro-zone outlook

While industrial production has yet to fully recover, euro-zone retail sales reached their pre-crisis level in June. That said, in Portugal, Spain and Italy, sales were still well below their levels in February. In Italy and Portugal, that might partly reflect the lower-than-average number of internet users. Sales were above February levels in most other countries, including Germany and France, as consumers made purchases that they were forced to delay during lockdowns. It wouldn’t be surprising to see sales fall slightly in the next few months.

While other parts of the economy won’t have rebounded as quickly as retail sales, July’s final PMIs confirmed that the broader recovery continued at the start of the third quarter. The PMIs were consistent with the retail data, in that they show that Germany and France are making quicker recoveries than the more tourism-dependent Italian and Spanish economies. Looking ahead, the rising number of virus cases across the region poses the biggest threat to the outlook.

Ifo manufacturing expectations index and German industrial production, year-on-year change, per cent

Sources: Capital Economics, Markit and Refinitiv.

Retail sales, percentage change February to June, per cent

Por Spa Ita EZ Aut Ger Fin Net Bel Fra Ire

-15

-10

-5

0

5

10

-30-25-20-15-10-5051015

-60-50-40-30-20-10

0102030

2011 2013 2015 2017 2019

Ifo manufacturing expectations index (LHS)

German industrial production (RHS)


Canada retail sales paint overly positive picture while falling US yields will benefit risky assets

9

Canadian retail sales to support total household consumption

Canadian retail sales data are painting an overly positive picture of total consumption. June’s official preliminary read shows sales surging 24.5 per cent month-on-month, after jumping 18.7 per cent in May, suggesting a rapid V-shaped recovery back to pre-virus levels and another boost to gross domestic product. However, we think this reflects a shift in spending patterns more than any release of pent-up demand from the short lockdown. As suggested by our mobility tracker, households have been substituting groceries for meals out, sporting goods for gym subscriptions, and entertainment products for travel. With consumer confidence still weak and spending on goods unable to fully substitute for lost spending on services, we don’t expect household consumption to fully recovery until the end of next year.

Even lower safe real yields could be a fillip to risky assets

We have revised down our previous end-2020, 2021 and 2022 forecasts for the ten-year yield on United States Treasuries to 0.5 per cent, from 1.0 per cent. This acknowledges both the downward trend in the yield since early June towards its March low of 0.5 per cent amid worries about a resurgence of coronavirus, and signs from the Fed that it may soon strengthen its forward guidance to suggest that it will not raise interest rates until inflation rises consistently above two per cent. In such circumstances, we think that real yields of Treasury Inflation-Protected Securities (TIPS) will fall even further below zero, to the benefit “risky” assets.

Admittedly, the broad-based recovery in “risky” assets that got underway on 23rd March has run out of steam since 8th June. But there has been no repetition of the major sell-off in equities in late February and early March, when worries about the impact of the coronavirus pandemic first hit financial markets. We attribute this to massive policy support, which we expect to endure.

Canada Capital Economics mobility tracker, percentage difference from January to 6th February 7-day moving average

Sources: Capital Economic, Refinitiv, Google, Apple and Moovit.

Ten-year TIPS Yield and MSCI ACWI Index

-70

-60

-50

-40

-30

-20

-10

0

10

Mar-20 Apr-20 May-20 Jun-20 Jul-20

Activity further below pre-virus level

350

400

450

500

550

600-1.5

-1.0

-0.5

0.0

0.5

1.0

Jan-20 Mar-20 May-20 Jul-20

Ten-year TIPS yield (%, LHS)

MSCI-all country world (inverted, USD-terms, RHS)


Gross domestic product forecasts, selected countries

10

-15

-10

-5

0

5

10

Forecast as of 7 August 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 – 7 August

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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* -18.6 20.5 4.0 2.5 -1.0 11.0 -6.0 6.0

Korea -1.3 -3.3 1.5 1.2 -1.5 3.5 -4.0 1.0

Japan -0.6 -9.0 4.5 2.0 -6.0 4.5 -5.8 3.6

India 0.7 -16.7 9.0 6.8 -5.5 11.0 -11.2 4.5

Europe

Germany -2.0 -10.1 7.5 1.8 -5.0 3.5 -5.2 2.9

France -5.9 -13.8 16.0 2.5 -8.0 6.5 -8.8 5.5

Italy -5.4 -12.4 9.5 2.0 -10.0 6.0 -10.2 5.8

Spain -5.2 -18.5 13.2 3.5 -12.0 7.0 -13.3 5.5

UK -2.2 -21.5 14.2 5.2 -11.0 9.5 -12 7.7

Americas

US -1.3 -9.5 5.3 2.0 -4.6 4.5 -6.6 2.1

Mexico -1.2 -17.3 7.0 4.5 -10.5 6.0 -11.0 4.0

Brazil -1.5 -10.8 3.3 2.5 -7.0 2.5 -8.5 0.7

World -5.0 -5.6 5.7 3.0 -4.7 7.1 -7.5 3.9

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


Contact details

12

Grant Colquhoun

Head of Consultancy

[email protected]

Marie-Louise Deshaires

Economist

[email protected]

Roxane Osuna

Economist

[email protected]

mailto:[email protected]




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covid-19: economic brief...the recovery is likely to be fastest in china and central and eastern...

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