Global Outlook Summer 2020
The
pandemic has inflicted an enormous human cost across the globe. The response,
which has involved governments’ imposing a range of necessary measures designed
to combat the spread of the disease, has inevitably had a major impact on
global economic activity. The most recent Organization for Economic
Co-operation and Development (OECD) outlook, warned, “The crisis will cast a
long shadow over the world”. While IMF projections do suggest the global
economy is likely to bounce back in 2021 as economic activity hopefully normalizes,
the uncertainty caused by the pandemic is clearly placing huge pressure on
economies all around the world.
The
IMF’s economic assessment, published before Q1 GDP figures had been released,
paints a bleak picture of economic prospects. The baseline projection, which
suggests the world economy will contract 3% during 2020, assumes that in most
countries, outbreaks peak during the second quarter before fading across the
second half of the year, with business closures and other containment measures
gradually easing. However, the IMF also suggested that a longer pandemic
lasting into Q3, could cause a further 3% contraction during 2020.
The
IMF subsequently indicated a potential downward revision to its forecast after
Q1 economic data for many countries came in below their already pessimistic
assumptions. IMF Managing Director, Krista Lina Georgieva, commented: “With no
immediate medical solutions, more adverse scenarios might, unfortunately, materialize
for some economies. It is the unknown about the behavior of this virus that is
clouding the horizon for projections.”
Major
benchmarks have rebounded from the lows reached in March as the pandemic tightened
its grip. As lockdowns ease in some regions, economies tentatively begin to
reopen. Governmental stimulus measures have provided some much-needed support.
Markets largely shrugged off concerns over renewed tensions between the US and
China, however, bleak economic data releases are still coming in.
Europe
IMF
data for the 19-country Eurozone revealed growth across the whole bloc
contracted by a record of 3.8% in Q1. Both France and Italy, the second and third
largest Eurozone economies were plunged into recession, recording quarterly
contractions of 5.8% and 4.7%, respectively.
While
the German economy performed less badly, it also fell into recession with
growth in the January–March period declining by 2.2%. European markets have
rallied as lockdown measures have been eased. The European Commission has
proposed a colossal €750bn ‘, Recovery Fund’.
Switzerland
In
April, the manufacturing and services PMI (Purchasing Managers’ Index) fell to
record lows as business activity and demand evaporated. The unemployment rate
climbed and exports dropped in April on narrow external demand. In the middle
of May, a second phase of the easing lockdown measures was implemented, with a
further lifting of domestic restrictions in June and the reopening of
international borders in mid-June.
The economy is expected to shrink this year as reduced incomes and unemployment
suppress consumer spending. Government spending should lessen the extent of the
downturn.
UK
Data
from ONS (Office for National Statistics), shows the UK economy contracted by
just over a fifth (20.4%) in April – the largest monthly contraction on record.
The OECD data highlighted that the UK is likely to be one of the hardest hit
major economies, due to its service-based nature.
This the news understandably subdued UK markets, with the focus now turning to the Bank
of England, to see what fiscal measures they may choose to implement. In the
UK, optimism is high as elements of the economy start to reopen. The Bank of England Governor, Andrew Bailey
recently said that recovery would not be normal and there would be some
permanent scarring, but “we see evidence of elements of that recovery
starting.” Last month the Bank said that the economy could shrink by 14% this
year but may bounce back with growth of 15% in 2021.
US
As
concerns about the second spike of infection surfaced in the US in early June,
many global stock markets suffered their worst day since mid-March. Steven Munching,
US Treasury Secretary ruled out shutting down the US economy again. Jerome
Powell, Federal Reserve Chair, said the pandemic could result in permanent
economic damage, indicating further stimulus efforts could be deployed. The Fed
expects to hold interest rates near zero and to maintain its current rate of
bond-buying. As consumer spending has reduced, job losses have mounted at pace.
GDP
figures released by the Bureau of Economic Analysis showed that output in the
US declined during Q1 2020. According to preliminary estimates, the world’s
largest economy shrank at an annualized rate of 4.8%, the lowest recorded GDP
figure since the nadir of the financial crisis in the final quarter of 2008.
This contraction ended the US economy’s record expansion streak which had
stretched right back to Q2 2014.
Asia and emerging market equities
Output
in China contracted during the first three months of the year, with the economy
shrinking at an annualized rate of 6.8%. This was the first recorded
contraction in the world’s second-largest economy since at least 1992 when
official quarterly growth statistics were first published. The Chinese
authorities have announced they will not be setting a specific growth goal for
this year but will instead focus on stabilizing employment and ensuring living
standards. This appears to be an acknowledgment of the significant challenges
the country now faces a struggling economy and rising international
hostility due to the fallout from the outbreak.
The Japanese economy, the world’s third-largest economy contracted at an annualized
rate of 3.4% in the opening three months of this year; a second successive
quarterly decline, thereby meeting the technical definition of a recession.
Exports in the first quarter suffered its largest decline since the country’s
devastating 2011 earthquake as worldwide lockdowns and supply chain disruptions
severely hit shipments of Japanese goods.
Asian
equity market performances have been mixed as US-China tensions re-escalated.
Emerging Markets equity markets have been supported by stimulus efforts from
governments, with interest rates cut in several countries, including Brazil,
India and South Africa.
Commodities
Gold
is currently trading at around $1,717 a troy ounce. The price has been
supported by growing US-China tensions, buoyed more recently by fears of a
second wave of infections. Brent Crude is currently trading at around $32 per
barrel. The price has previously been supported by growing confidence that
producers are observing commitments to cut supplies and as fuel demand picks up
as restrictions ease, but more recent fears of a second wave have weighed.
Looking ahead
Continuing
uncertainties surrounding the future spread of the virus and the success of
efforts to develop a vaccine and therapies to counter it, make it extremely
challenging to predict the most likely path for the global economy over the
coming year or so.
The best investment strategy is to be prepared. A well-defined investment plan,
tailored to your objectives, in line with your attitude to risk, that takes
into account your financial situation, can help you weather market
fluctuations. Market volatility is a timely reminder to keep your investments
under regular review. We want to reassure you that we understand the challenges
you may face and we’re here to support you. You can rely on our experience and
knowledge; rest assured, through open and honest communication, we can guide
you through any challenges.
It
is important to take professional advice before making any decision relating to
your personal finances. Information within this document is based on our
current understanding and can be subject to change without notice and the
accuracy and completeness of the information cannot be guaranteed. It does not
provide individually tailored investment advice and is for guidance only. Some
rules may vary in different jurisdictions. We cannot assume legal liability for
any errors or omissions it might contain. Levels and bases of, and reliefs
from, taxation are those currently applying or proposed and are subject to
change; their value depends on the individual circumstances of the investor. No
part of this document may be reproduced in any manner without prior permission.
The
value of investments can go down as well as up and you may not get back the
full amount you invested. The past is not a guide to future performance and
past performance may not necessarily be repeated. If you withdraw from an
investment in the early years, you may not get back the full amount you
invested. Changes in the rates of exchange may have an adverse effect on the
value or price of an investment in sterling terms if it is denominated in a
foreign currency.
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get financial advice ask
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