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COVID-19: Economic Brief

Assessing implications for economies, sectors and markets

Grant Colquhoun, Marie-Louise Deshaires and Roxane Osuna

24 July 2020

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Developments and implications summary – 24 July

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Overview ◼ New Covid-19 cases are showing signs of flattening out in the United States and have fallen back in both Brazil and South Africa. Of countries where the spread of the virus has been focused recently, only India has seen the rate of infection accelerate further in the past week.

◼ The number of virus cases and fatalities has fallen to low levels in the euro-zone. But, the virus has not been eliminated and local outbreaks suggest that a significant threat of a renewed upturn in numbers remains.

Sectors ◼ We expect Euro-zone household consumption to fall by around seven per cent this year, which would be much bigger than the 1.1 per cent decline during the global financial crisis in 2009.

◼ The United Kingdom economy is on a longer recovery road than the United States and euro-zone. This is partly because sectors exposed to social distancing, such as hospitality and entertainment, are a bigger chunk of the economy than in its major peers.

Markets ◼ The recovery in emerging market capital flows stalled last month, but this is only a minor setback. The key near-term risk is a re-imposition of national lockdowns in major global economies.

◼ Provided that the global economy continues to recover, we think that both equity markets and emerging markets currencies will regain some further ground.

Forecasts ◼ We have become a little more cautious on growth prospects for France, Italy and Spain in 2021. Each economy is now expected to expand by around 6.5 per cent, a downward revision of around one per cent since last week.

◼ Both Korea and Brazil are now expected to do a little better this year and a little worse in 2021. The Mexican economy is looking a lot weaker in the second quarter than previously expected and we have revised growth for the quarter down by 7.5 percentage points but expect this to be largely recouped in the current quarter.

◼ Our global forecasts this week are little changed overall. The global economy is projected to decline by 4.6 per cent this year and grow by 7.0 per cent in 2021.

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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 0.1Cinemas reopened earlier this week in low-risk areas, with clear social distancing guidelines, limited seating offered. Parks, tourist resorts, and indoor venues, including gyms, libraries, and museums reopened at half capacity on Monday in Beijing.

Korea 0.9 No new policy developments.

Japan 4.4Tokyo’s governor told residents not to make unnecessary trips out of the home during the four-day weekend starting on July 23.

Singapore 46.0 No new policy developments.

India 28.4 No new policy developments.

Europe

Germany 4.9Germany's state health ministers have decided that anyone entering Germany from countries considered high-risk for coronavirus could face a mandatory coronavirus test when they arrive at airports.

France 16.9France has made face masks compulsory in all enclosed public spaces. Masks were already mandatory on public transport, but from Monday they must also be worn in places like shops.

Italy 3.0Under the deal struck by the European Union leaders on Tuesday, Italy will receive the biggest slice of the bloc’s dedicated 750-billion euros coronavirus recovery package: 209 billion euros.

Spain 63.6The Catalan government has announced a two weeks string of new lockdown measures from Saturday at 9 am to avoid the spread of coronavirus.

Poland 9.1 No new policy developments.

United Kingdom 8.8 Since 24 July, the wearing of a face mask is compulsory in shops in England.

Americas

United States 266.3Some states this week issued a statewide mandate requiring people to wear masks. Alabama issued a mask mandate on Wednesday while Colorado Governor on Thursday issued a statewide mask mandate requiring everyone age ten and older to wear a mask or other facial covering while in public indoor spaces.

Mexico 47.8On Saturday, authorities in Mexico City imposed a two-day suspension of non-essential business in parts of the capital, after shoppers flocked to the high street.

Brazil 115.1 No new policy developments.

Improving / Less

restrictive

Worsening / More

restrictive

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

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Aggregate measure of the stringency of containment policies in place

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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

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China Korea Japan Singapore India

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Germany France Italy Spain

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Poland United Kingdom Russia Sweden

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United States Canada Mexico Brazil

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No sign yet of outbreak coming under control in India

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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

New cases accelerate further in India

The number of Covid-19 new infections globally continued to pick up over the past week, averaging over 230,000 per day. Of the countries where the spread of the virus has been focused in recent weeks, new cases are showing signs of flattening out in the United States and have fallen back in both Brazil and South Africa. Only India has seen the rate of infection accelerate further.

The deteriorating situation in India means that many restrictions to control the spread of infection will need to remain in place for an extended period and, in areas where virus cases are rising particularly fast, a re-imposition of tighter measures is likely. Such measures, along with fears over the risk of infection, will further hold back the recovery in consumption. And demand boosting measures from the Finance Ministry’s fiscal package are too small to provide much support the economy. We think real gross domestic product will contract by more than five per cent this year and that relative to potential, the recovery is likely to be one of the weakest among major economies.

Virus still not eliminated in Europe

The number of virus cases and fatalities has fallen to low levels in all euro-zone countries. That said, the virus has not been eliminated and local outbreaks in many countries suggest that a significant threat of a renewed upturn in virus numbers remains. Though there are still some restrictions in place throughout the euro-zone, the end of national lockdowns means that restrictions are now less severe than they were on average during the second quarter.

The relaxation of restrictions has enabled economies to recover. Our economic forecasts assume that governments contain the virus in the coming two years without the re-imposition of across-the-board national lockdowns.

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USA Other developed markets

China Other large EM*

Other emerging markets

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02-Feb 01-Mar 29-Mar 26-Apr 24-May 21-Jun 19-Jul

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*Brazil, Mexico, Russia, South Africa and India

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Chances of localised lockdowns rising in Japan as cases continue to rise in some areas

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Weekly cinema ticket sales in Japan, US$ millions

Sources: Capital Economics, CEIC, Refinitiv, TableCheck and Apple.

Apple Maps routing requests in selected Japanese regions, driving, seven-day moving average, 13 January = 100

Possible new restrictions on activity to contain the outbreak

With coronavirus cases hitting record-highs in Tokyo and rising in other urban areas, the government announced on Monday that it plans to give local governments greater power to request business closures. The recovery in consumer spending has been disappointing so far in the third quarter – for example, there were still very few people venturing to the cinema in early-July.

Apple Maps data suggest road traffic has returned to normal levels in parts of Japan. But in the urban heartlands of Kanto and Kansai routing requests are below where they were in February and March. Likewise, restaurant bookings have only recovered to around two-thirds of pre-virus levels in June and stagnated in the first few days of July. Overall, we do not expect private consumption to return to pre-virus levels until 2021.

Online restaurant reservations in Japan, daily bookings per restaurant, seven-day moving average

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Kanto Kansai Tohoku Hokkaido

Latest = 5th July

GoldenWeek holiday

Latest = 11th July

Hokkaido state of emergency

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Recovery in euro-zone consumption losing momentum

The slight decline in the European Commission’s euro-zone consumer confidence index, from -14.7 in June to -15.0 in July, came as something of a surprise. Our forecast and the consensus expectation were for a small rise, given the generally low level of virus cases in Europe and signs that economic activity has continued to improve. The consumer confidence index is still well below its level in February of -6.6.

Euro-zone consumption growth is almost certainly much weaker than implied by the past association with confidence. Moreover, the fact that consumer confidence fell in July adds to signs from high frequency data that the rebound in spending slowed in July. Later in the year, rising unemployment and anxiety about the epidemic will probably keep spending weak. We expect household consumption to fall by around seven per cent this year, which would be much bigger than the 1.1 per cent decline during the global financial crisis in 2009.

Output has rebounded fast but will remain subdued until 2022

Our Covid Mobility Trackers point to an impressive rebound so far for the euro-zone, but highlight the differing experiences of the four largest economies in the bloc. The contraction in our Tracker for France was as deep as those in Italy and Spain but has shown a fuller rebound, while Germany experienced the shallowest downturn and a more gradual recovery.

Spain and Italy face particularly difficult recoveries ahead after projected double-digit declines in gross domestic product this year, with Italy facing heightened risk of an eventual debt restructuring. But even the economies of Germany and France are unlikely to be back at pre-crisis levels before the end of 2022.

Euro-zone EC consumer confidence, index, and household spending, year-on-year change, per cent

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

Capital Economics recovery trackers, difference vs January-6th February, seven-days moving average, per cent

Slow and uneven recovery ahead for the euro-zone

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2007 2009 2011 2013 2015 2017 2019

EC consumer confidence (LHS) Household consumption (RHS)

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01-Mar 01-Apr 01-May 01-Jun 01-Jul

Germany France Italy Spain

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United Kingdom on long recovery road while Central Europe will bounce back strongly

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Central Europe to drive a solid recovery

The economies of Emerging Europe are set to bounce back more strongly from the coronavirus crisis than those in many other parts of the world. Central Europe will lead the recovery. Governments have had success in slowing the spread of the virus and, as restrictions continue to be loosened, large fiscal and monetary policy support will underpin a strong rebound in activity.

Recoveries will be slower in Turkey and Russia. In Turkey, the recent credit boom will support demand, but the recovery will be held back by the country’s reliance on tourism. And in Russia, the government’s limited fiscal response will increase the risk of long-term scarring on the economy and mean that it takes longer for output to recover.

UK won’t get back to pre-crisis levels until first half of 2022

The United Kingdom economy is on a longer recovery road than the United States and euro-zone. This is partly because a bigger chunk of its economy is exposed to the impositions of social distancing than its major peers. The hit to the United Kingdom’s hospitality and entertainment sectors – which typically take in a fifth of household spending – is highlighted by Google data. The United Kingdom is also burdened by going into lockdown slower and later than many others, and by sluggish business investment in the face of Brexit.

This all means gross domestic product may not be back at its pre-crisis peak until the first half of 2022, and will require looser monetary policy than markets are anticipating. We expect the Bank of England to expand quantitative easing by further 250 billion pounds in total.

Real gross domestic product by end-2022, difference compared with pre-Coronavirus forecast, per cent

Sources: Capital Economics, Refinitiv, CEIC, Bloomberg and Google.

Visits to retail and recreation locations, difference vs January, per cent

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Exports weighing on Korea and Australian government extends labour market support

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Korea output falls sharply in Q2 but recovery already underway

Korean gross domestic product shrank sharply in the second quarter on the back of the largest drop in exports since 1963. Data released today show that gross domestic product fell 3.3 per cent quarter-on-quarter in the second quarter, after falling 1.3 per cent in the first quarter. A breakdown of the data shows that consumption was the main bright spot. This was far outweighed by a massive 16.6 per cent quarter-on-quarter drop in exports on the back of “decreases in motor vehicles and petroleum products”.

The good news is that the economy likely bottomed out in May and has already started to recover. The bad news is that the rebound in the quarters ahead is unlikely to be quick. The upshot is that it is unlikely to be until next year that the economy regains its pre-crisis level of output. Given the stronger-than-expected second quarter data, our earlier estimate of a two per cent contraction this year looks too pessimistic. But we still expect the economy to contract by 1.5 per cent in 2020, the most since 1998.

JobKeeper extension to keep lid on unemployment in Australia

The Australian government will extend the JobKeeper wage subsidy by six months to March. There were 1.4 million JobSeeker recipients in June, equivalent to nearly eleven per cent of the workforce. That’s much higher than the official unemployment rate of 7.4 per cent.

Unemployment benefits will be made less generous which should encourage many of those having dropped out of the labour force to seek a job. However, we still expect the unemployment rate to fall over coming months as employment rebounds more strongly than the labour force. As more people return to work, consumption should expand by close to five per cent next year, driving economic growth of 3.4 per cent after a three per cent contraction this year.

Korea gross domestic product, quarter-on-quarter change, per cent

Sources: Capital Economics, Australia Department of Social Services, Refinitiv and Bloomberg.

Australia JobSeeker recipients and unemployed, share of total labour force, per cent

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2012 2013 2014 2015 2016 2017 2018 2019 2020

Newstart/JobSeeker recipientsNumber of unemployed

Structural break due to phasing out of Parenting Payment

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Emerging market currencies vulnerable, but likely to regain further ground

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EM net capital outflows should remain modest

The recovery in emerging market capital flows stalled last month, but this is only a minor setback – net outflows were very small. The main culprit appears to have been softer foreign demand for emerging market equities, with appetite for bonds continuing to strengthen. If we’re right that global risk appetite will improve in the coming months, net capital outflows from emerging market s should remain modest.

The key near-term risk to emerging market capital flows is a re-imposition of national lockdowns in major global economies, which could trigger another drop in activity and dislocation in financial markets. But even then, the pace of net outflows would probably be limited.

EM currencies exposed to US pandemic prospects

As equity markets have struggled to make further headway over the past month, the rally in emerging market currencies has also stalled. There is now a significant divergence between emerging markets and developed markets currencies. Since the start of the coronavirus crisis, there has been an inverse relationship between equities and the US dollar. As fears about the pandemic spread in the first quarter, equity markets plunged and the dollar rose sharply. Once equities turned the corner, on the back of massive policy stimulus and signs that the spread of the virus was slowing, the dollar started giving back some of its gains.

If the pandemic continues to worsen in the United States, equity markets may well take another turn for the worse and that would probably pull emerging markets currencies down too. But provided that the global economy continues to recover – which remains our central expectation – we think that both equity markets and emerging markets currencies will regain some further ground.

Capital Economics total emerging market capital flows tracker, monthly, US $billions

Sources: Capital Economics and Refinitiv.

S&P 500 index versus Fed’s Advanced Foreign Economies (AFE) and Emerging Market Economies (EME) trade-weighted US Dollar indices, 1 January = 100, inverted

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Trump election

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Gross domestic product forecasts, selected countries

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Forecast as of 24 July 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

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Gross domestic product forecasts in detail, selected countries – 24th July

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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 1.7 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 -2.2 -6.2 3.0 1.8 -5.0 3.5 -5.2 2.9

France -5.3 -14.5 16.5 4.0 -8.0 6.5 -8.8 5.5

Italy -5.3 -16.2 16.5 2.0 -10.0 6.0 -10.2 5.8

Spain -5.2 -20.7 17.8 3.5 -12.0 7.0 -13.3 5.5

UK -2.2 -21.5 14.2 5.2 -11.0 9.5 -12.0 7.7

Americas

US -1.3 -9.3 5.2 2.0 -4.6 4.5 -6.6 2.1

Mexico -1.2 -20.0 12.5 4.0 -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 -5.7 6.0 3.0 -4.6 7.0 -7.4 3.8

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

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Contact details

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Grant Colquhoun

Head of Consultancy

Grant.Colquhoun@capitaleconomics.com

Marie-Louise Deshaires

Economist

Marielouise.deshaires@capitaleconomics.com

Roxane Osuna

Economist

Roxane.Osuna@capitaleconomics.com

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