Grinding to a halt?
The secondary waves of Covid infection that we’re now seeing across Europe appear less deadly, so far, than the first, but it is understood that without mitigating measures, exponential growth in cases could lead to similar levels of hospitalisations and deaths as in the spring. The negative economic repercussions are clear. With social restrictions slowly being reintroduced and consumer caution again taking hold, economic recovery is grinding to a halt.
The chart below illustrates this by showing the evolution of the purchasing managers’ index (PMI) for each of the UK, France, Germany and entire euro area since May. These PMIs measure the services, manufacturing and construction sectors and are regarded as ‘forward-looking’ economic indicators because they survey businesses on their new orders and expectations for future growth as well as on their current levels of activity.
A number below 50 denotes no growth and is commonly associated with recessions. These PMI readings were firmly pointing to an economic expansion in the summer but have begun to sag across Europe and even dipped back into negative territory in parts of the euro area.
Euro area/UK composite PMIs
Source: Bloomberg, as at 25 September.
This shaky PMI trend is backed up by other data that shows mobility levels still 25% to 30% below pre-pandemic levels as plans to return to the office are placed on hold and some physical socialising is curtailed.
Mobility trends for places work (Google Mobility Index)
Source: Google Mobility Data, Trends at workplaces, 7-day moving average. As at 25 September 2020.
What happens next depends on several unknown factors. The most positive, potentially, remains the discovery and mass production of an effective vaccine against the virus. And here there’s room to be slightly more optimistic with a number of vaccines in the phase 3 of trials and a possibility of widespread availability around the middle of next year.
But before that happens the continent still has to contend with heightened job insecurities as consumer-facing services, especially, struggle to recover and job-support schemes are phased out or amended, leading to lower disposable incomes.
Still pending, also, is the not-so-small challenge of a successfully negotiated trade deal between the European Union and United Kingdom.
Are we in the midst of a ‘W’-shaped recession given these early signs of a double-dip? We still think probably not – and certainly not one with a second dip that is as pronounced as the first. But we’re clearly also not going to see a short, sharp ‘V’ shaped recovery. That ship has sailed.
The chart below encapsulates our current thinking as far as the UK economy is concerned, but we expect the shape of recovery to follow a similar path elsewhere too.
Source: Vanguard, as at 28 September. Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.
What we’re seeing now is evidence of the two-phased recovery we’ve long been forecasting, in which some sectors of the economy quickly come back on stream while others struggle and remain subject to secondary outbreaks and localised lockdowns, though the possibility of some form of renewed national lockdown cannot, unfortunately, be ruled out.
The message for the economy then, is one of patience. We think the economy will recover but the precise timeline is uncertain. And so too for investment portfolios. When markets are turbulent, a focus on long run outcomes will tend to serve investors best.
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Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.
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