Head of Macroeconomic Research
Summary: In its latest monthly report on economic activity released earlier this week, the Bank of France confirmed that the economic rebound continued in July, but at a slower path than in June. Based the high-frequency data we track, such as mobility in retail and recreation and electricity consumption, it appears that the rebound is losing steam in August. At the very same time, the number of new coronavirus cases is increasing at a steady path, forcing the authorities to put in place stricter social distancing measures. France, like many other European countries, has to race against time in order to contain the virus spread before the seasonal flu starts. In case of failure, it would put massive pressure on the health service and might force authorities to resort to more drastic social distancing measures, i.e. localized lockdown, restrictions to transport etc. that would ultimately cause severe economic disruptions again.
According to the Bank of France, the economic rebound continued in July, but at a slower path than in June. On average, the weekly loss of economic activity was about minus 7% in July versus minus 9% in June compared with a normal week. For August, the central bank is very cautious, pointing out that preliminary statistics tend to suggest “a stabilization or a very slight improvement in activity”. This assumption is consistent with the high-frequency data we track, such as mobility in retail and recreation and electricity consumption. The below chart shows that mobility in retail and recreation is stabilizing in early August. However, weekly visitor number to retail and recreational stores is still 4% below the level of a normal week before the pandemic outbreak.
In the second chart, we have plotted electricity consumption level in 2020 and the evolution over the same period last year. As it is an intermediate consumption intensively used by companies, it allow us to assess in real time the state of the production process. Based on the latest statistics, electricity consumption remains 15% below the 2019 August level, confirming that the level of production, especially in the industrial sector, is not back to normal yet.
The observed stabilization in economic rebound is not only happening in France but also in almost all the countries that experience further virus spread. A higher number of Covid cases was expected following the lift of the lockdown but the latest official figures suggest that France is about to enter into risk-zone again. Since June 1, the number of fatalities is almost close to zero, but the number of confirmed cases has been surging fast, reaching its highest weekly level since the end of April. According to the Prime Minister, on average 25 new clusters are discovered per day nowadays compared to 5 clusters three weeks ago. Further social distancing measures have been implemented at local level in 90% of the biggest cities, such as mandatory mask-wearing in crowded streets, and the government is weighting the pros and cons of mandatory mask-wearing in working places from September as well.
France has to race against time in order to contain the virus spread before the start of the seasonal flu, which usually increases pressure on the health system. In case of failure, the risk is that the health system won’t have the capacity to simultaneously deal with Covid and flu, thus forcing authorities to resort to more drastic social distancing measures (i.e. localized lockdown, restrictions to transport etc.) that would ultimately cause severe economic disruptions again and probably translate into slow GDP rebound in Q3 and a relapse in Q4.
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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.
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