02 June 2020
Last Thursday, the UK ‘Clapped for our Carers’ for possibly the last time. What had started as a way of acknowledging the sacrifices of frontline workers became a way to connect neighbours and communities together again, bringing a nation that has been bitterly divided for four years together again.
But Annemarie Plas, the woman behind the gesture, said last week that it had become too politicised – meaningful recognition of our frontline workers must come from inside parliament, not on the pavements outside.
She’s not the only one fearful of the influence of politics: global markets ended their two-week rally on Friday after tensions between the US and China came to the fore.
Industrial and energy stocks rallied last week, with the Dow Jones closing above 25,000 points for the first time since early March and logging the largest two-day advance in a month. Hopes were raised that the global economy had turned a corner emerged with the resurgence of cyclical stocks, which are more economically sensitive than defensive sectors such as healthcare and technology.
However, after the US reacted to China’s enforcement of a national security bill against Hong Kong, indices then turned red on Friday. In a press conference at the end of last week, President Trump announced that the US no longer considered Hong Kong to be ‘autonomous’ but stopped short of declaring any specific measures against China. Markets breathed a sigh of relief in response and ended the week relatively stable.
A second wave of the coronavirus has been the greatest threat to the economy since March, but these new geopolitical tensions mean uncertainty is coming from all areas. As a result, the shape of recovery is becoming increasingly difficult to predict.
Wednesday saw the epicentre of the virus change to Latin America, as the region now accounts for 40% of daily deaths globally. Brazil, whose management of the virus sparked controversy, now has more cases than any country except the US.
“The implications for the virus in Latin America are broad, encompassing healthcare shortages, economic challenges, and tragic humanitarian consequences,” said Edward Robertson from Somerset Capital Management, managers of the St. James’s Place Global Emerging Markets fund. “Government responses have been wide-ranging, and different stances on testing and quarantine are resulting in a varying ability to control the rate of infection. The challenge governments now face is whether to open up the economy to stave off rising poverty and unemployment or maintain lockdown.” The MSCI Emerging Markets Latin America index has plateaued, remaining close to its mid-March low.
Europe’s fiscal union
Early last week, a recovery package worth €750 billion was proposed by the European Commission. With huge ramifications, it required unanimous approval from EU member states, and would significantly increase economic integration in the European Union. Money would be taken as common debt and issued to the areas of Europe hit hardest by the virus, then repaid through EU-wide taxes over the next 30 years. The package signifies a mutualisation of European debt that takes the bloc closer to something like a federal union.
“This proposal confirms that the EU is moving towards a substantial common fiscal response to the pandemic,” said John Higgins, economist at Capital Economics. The member states are due to debate the package in the middle of June, but pushback is expected from the ‘Frugal Four’ – Austria, Denmark, the Netherlands and Sweden – which would challenge the level and scope of economic integration.
Debt-laden countries in southern Europe rallied in response, along with equities, to lift sentiment in eurozone markets.
“We have seen European stock markets rebound from the lows of March as monetary and fiscal stimulus has come in the matter of weeks since COVID-19 hit the headlines,” said Ken Hsia from Ninety One, manager of the St. James’s Place Continental European fund. “This compares to investors having to wait for months during the global financial crisis, showing that policymakers have learnt from the past.”
Will footfall rise, or fall?
From yesterday in England, select year groups will return to school, groups of six can gather outside, and some non-essential businesses have been allowed to reopen.
This pickup in business gives the economy a chance to offset some of the damage done during the second quarter of the year when lockdown measures were most intense. The Office for National Statistics say that 24% of businesses are to restart trading in June, and 31% will open from July.
Simply opening the doors is only one side of the story, however – turning a profit will rely on increased footfall and consumer spending. Research from Capital Economics suggests that, contrary to what might be the assumption, people have been saving less instead of more during the lockdown period. “There may not be much pent up demand, which would be another reason to think that the economy will only recover slowly,” warned economist Andrew Wishart.