We’ve seen equity markets making further progress over the past fortnight, helped by continued positive news on the economic front, particularly in the US, while bond markets have been relatively calm after a volatile first quarter of the year, likely helped by repeated comments from the US Federal Reserve (Fed) and others that they will be extremely patient in adjusting monetary policy, and that forecasts of stronger economic growth do not justify changes to policy in the near term.
The IMF updated their World Economic Outlook this week and upgraded their growth forecasts for 2021 and 2022, whilst reducing their estimates for the impact of the pandemic on the 2020 growth figures. Their report suggested that most advanced economies will not see significant lasting damage from the pandemic, thanks to the vaccine rollout and governments being willing to sharply increase public spending. However, the IMF noted that “recoveries are diverging dangerously across and within countries”. They highlight that the success in managing the economic fallout is unlikely to be replicated in developing countries, with emerging markets and low-income countries expected to suffer greater scarring as a result of their limited policy scope to respond. The IMF said that swift policy action, including $16 trillion in fiscal support, has prevented a far worse outcome, and estimate that the economic collapse in 2020 would have been three times worse without such support. Looking forwards, the IMF expects the global economy to grow by 6% in 2021 and 4.4% in 2022. They expect advanced economies to be close to or above their pre-pandemic growth trends by 2024 but with the exception of China, expect the output from emerging economies in 2024 to be 8% lower than it would have been without the pandemic. Chief Economist Gita Gopinath noted that “a high degree of uncertainty surrounds our projections” and that faster progress with vaccinations could provide upside to their forecasts while a prolonged pandemic with virus variants that reduce vaccine efficacy “can lead to a sharp downgrade”. Gopinath also noted the risks from multi-speed recoveries posing financial risks if US interest rates rise in unexpected ways, which could cause “Inflated asset valuations to unwind in a disorderly manner, financial conditions to tighten sharply and recovery prospects to deteriorate, especially for highly leveraged emerging markets and developing economies”. Despite the warnings, the report delivers an upbeat assessment of the economic outlook. The IMF sees the US growing by 6.4% in 2021, while the UK and eurozone are expected to grow by 5.3% and 4.4% respectively. Chinese growth is expected to be 8.4%. The rebound in growth comes after a contraction of ‘only’ 3.5% for the US in 2020, while China grew by 2.3% per the IMF data. The UK was one of the worst economies impacted, with a contraction of 9.9% in 2020, while Spain contracted by 11%. By contrast, the contraction in the eurozone was 6.6%.
The economic data over the past fortnight has been strong, though the robust data has not been accompanied by notable moves higher in bond yields as we saw over the first few months of the year, with investors assuming that the stronger economic outlook would lead to tighter monetary policy. The Fed’s board members have continued with the narrative that the Fed will be very patient in shifting policy, and wants to see confirmation rather than just predictions of the economic recovery. The minutes of the most recent Fed meeting, published this week, showed caution in respect of the economic recovery and no sense of urgency to remove monetary accommodation. The Fed also noted concerns over stresses in real estate markets “associated with the unwinding of mortgage forbearance and eviction moratoriums provided to households”. The US monthly employment report was stronger than expected, with 916,000 people finding jobs in March. The unemployment rate held steady at 6% but highlights the Fed’s view that the US economy is “far from full employment” is around 11 million jobs below the pre-pandemic trend level. The PMI data for March showed continued strength in manufacturing and a marked improvement in the services data, as well across developed markets. Services data in the US reached an all time high, with survey respondents noting that the lifting of Covid-related restrictions “had released pent-up demand” while also noting a number of factors driving “supply chain disruption”. The US manufacturing data posted the highest level since 1983, highlighting the current strength of the US recovery. It’s worth noting that the very high PMI numbers in the US tend to be associated with a period of lower market returns with the good news already in the price – will it be different this time with so much support from the Fed and the government? Time will tell. The UK and European PMI data was also encouraging with a continued recovery in the UK numbers while the eurozone data showed continued strength in manufacturing and little impact from the increasing Covid restrictions.
Speaking of Covid, the picture across developing markets remains mixed, with UK cases continuing to trend lower, which has allowed the government to confirm the next stage of reopening will go ahead in England next week. In the US, many states continue to ease restrictions even as the Centre for Disease Control warned of a fresh wave of cases with the trajectory “similar to what was seen in Europe a few weeks ago”. The hope is that the rapid US vaccine rollout – the US has vaccinated on average 3 million people a day in the past week – will mitigate the impact of rising cases. However, with case numbers in the US still elevated, risks remain from easing restrictions too quickly. The picture in Europe varies considerably; many countries in eastern Europe are seeing record case numbers while the growth in case numbers in western Europe looks to have slowed, helped by the imposition of tighter restrictions. France for example is now in a one month lockdown. Further afield, India is reporting record daily cases which in turn will impact on the vaccine rollout in the UK and Europe as India has now barred vaccine exports until the situation is brought under control. The P1 variant first discovered in Brazil continues to spread across South America; Brazil is has reported over 4000 fatalities on several days this week as the P1 variant, said to be around 150% more transmissible than the ‘original’ virus, overwhelms the healthcare infrastructure. Vaccination rollouts continue to make progress at varying degrees of speed, though the news of the AstraZeneca vaccine being associated with an (extremely low) risk of blood clots continues to cause headlines. Health regulators in the UK and Europe concluded this week that the health benefits of the vaccine outweigh the extremely low risks of clots occurring. The UK is moving gradually closer to ‘herd immunity’ per the latest ONS survey, with over 50% of the population said to have Covid-19 antibodies as a result of a vaccine or having had the virus. However, the government’s reluctance to open up the economy is understandable given the expected much lower efficacy of the AstraZeneca vaccine to the South African Covid variant, while the Brazilian variant has a reinfection rate of up to 60%. Domestic normality may return a lot quicker than for anyone wishing to cross borders.