Monthly Macro Outlook : Hysteresis is becoming mainstream

Rest of the world : The great divergence

In the rest of the world, things are looking challenging and uncertainty remains like in China regarding the evolution of local consumption. But like in China, recovery is slowly happening in parts of the world that are reopening from the great lockdown. Looking at fatalities per capita, most of Europe, with the notable exception of Sweden and the United Kingdom, is doomed to reopen further the economy while evidence is growing that the United States will have no other choice but halting reopening, following the recent example of Arizona that closed bars and cinemas again. In the short-term, it appears obvious that countries that will be able to reopen the first will have a competitive advantage on others.

In the United States, the health crisis is reaching worrying levels, with a strong increase in contamination in Florida, Texas and California (Chart 3). The states of New York, New Jersey and Connecticut record one of the highest mortality rates per capita at global level. The V-shaped recovery narrative is also facing a major setback. The ECRI weekly leading indicator, which has proved to be a very reliable indicator to assess the evolution of the economy in COVID times, is turning down again (Chart 4). We believe that Chair Powell perfectly summarized the situation when testifying before the Committee on financial services of the U.S. House of Representative on June 30: “The path forward for the economy is extraordinarily uncertain and will depend in large part on our success in containing the virus. A full recovery is unlikely until people are confident that it is safe to reengage in a broad range of activities”. In other words, the outlook for unemployment is also very grim in the United States. Based on the LendingTree small business survey (May 2020), only 50% of small business say they are bringing back all employees all hours once they will be able to reopen. The risk is that long-term unemployment will rise, thus increasing further preexisting social and racial tensions.

In Europe, the health crisis is broadly contained and downside risks are slowly vanishing. As expected, the German government and the Bundestag have backed the ECB's bond-buying program, thus preventing a political crisis from emerging in the middle of the summer regarding the participation of the Bundesbank. In addition, statistics confirm that the credit channel is still wide open, which differs strongly from normal recession, with euro area bank loans to corporate over the past three months increasing the most since the euro was created. It is mostly due to the implementation of state guarantee schemes for loans in many euro area countries. However, the Union is not out of the woods yet. The risk of divergent recovery within the euro area is real with Southern European countries at risk of massive wealth and job destruction due to their strong exposure to tourism that could ultimately lead to a debt trap. As it is also the case for China and the rest of the world, we will have more visibility from September on the path of the recovery once the tourist season will be over in Europe and that all companies will be able to assess the real cost of the pandemic on their business.

Calendar of July 2020

July 2: NFP report covering the month of June.

Around July 8: Cabinet reshuffle in France and announcement of new stimulus package.

July 17-18: Physical EUCO meeting in Brussels to discuss the European recovery fund “EU Next Generation”.

July 29: FOMC meeting. No major announcement expected.