Head of Macroeconomic Research
Summary: In today's edition, we explain you why we think Europe will need to take further health and economic measures in order to contain quickly the COVID-19 outbreak.
You have probably seen this chart, or something similar, everywhere. It refers to the worldwide number of new COVID-19 cases per day. While there is no new reported cases in China, the coronavirus peak has certainly not been reached yet in the rest of the world. Following the successful containment of the virus, China’s economy has restarted faster than most expected. A few days ago, FEDEX pointed out that China’s demand has rebounded strongly and that 90% to 95% of large Chinese manufacturers and 65%-70% of small business are operating again. These reassuring figures give hope that a similar rebound may occur in the rest of the world, especially in Europe which is the new coronavirus epicenter. Unfortunately, at this stage, everything suggests that the conditions have not yet been met for an economic rebound to occur so quickly in Europe. There are two notable differences between the health and economic responses of China and Europe to the coronavirus outbreak.
In Europe, the health response is still too slow and too lax in some countries. Though there are numerous factors at play that we don’t fully understand, it seems we can learn some valuable lesson from the Province of Venice in order to fight efficiently the spread of the virus. Probably influenced by Chinese standards, Venice implemented a health response at a very early stage (February), adopted a large scale testing approach (especially targeting the most exposed people: hospital staff, cashiers, policemen etc.) and enforced restrictive home quarantine (for suspected cases and asymptomatic cases). This is still far from being the case in many European countries while it is scientifically proven that these measures are the most effective.
On the economic side, the main issue is the lack of European coordination and demand-oriented support measures. The most obvious economic responses taken at national level consisted in tax deferral, liquidity injections, extending unemployment benefit and avoiding layoff with short-time working paid in part with public money. So far, the coordinated EU response has been ridiculously insufficient. A support package of around 1% of net euro area GDP has been unveiled, including some initiatives that are not new. A bigger stimulus will be need, including tax cuts and cash handouts, if we want Europe to restart when the containment measures will be lifted. Without that, China is unlikely to be a leading indicator for Europe on the economic front.
2024: The wasted year
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
