Second wave slowdown

A surge in new COVID-19 infections and cluster breakouts in nations where the virus appeared to be under control is a concern for markets

28 June 2020 | Shane Oliver, AMP Capital

“Second wave” coronavirus fears have really escalated over the last week. The global trend in new cases remains up and this continues to be mainly driven by the emerging world.

However, the big change is a renewed surge in new cases in developed countries due to the US. While the number of new cases in north eastern states (led by NY) remains down its been offset by a surge in cases mainly in the south and west (particularly in Texas, Arizona, Florida and California).

So far hospitalisations and deaths in the US remain well down from their highs earlier this year. This may partly reflect more young people being tested (due to a big increase in testing), better protections for older people, and better management of new cases. All of which may mean that the latest wave of new cases may not be as deadly as that seen in the first wave.

China appears to have limited the growth in new cases following the outbreak in Beijing (which was not due to imported salmon despite earlier speculation), albeit its still elevated compared to a few weeks ago.

Finally, while Australia’s new case numbers remain relatively low they have continued to pick due mainly to various family related clusters in Victoria, raising concerns about a second wave in Australia.

Will the second wave delay re-openings?

This all begs the question as to whether we will see a reversal of the reopening that has occurred since April. I suspect that the hurdle to return to the severe “stay at home” lockdown is now immense: there is now significant shutdown fatigue and authorities may conclude that the economic cost of doing so is just too high.

It’s now clear that in the absence of a vaccine it is very hard to completely eliminate the virus. So we may just have to learn to live with it and manage outbreaks (as Korea, China and others have done over the last few months) with only partial and targeted lockdowns, some slowing in reopening in some areas, travel restrictions and rigorous testing, tracking and quarantining and a renewed emphasis on social distancing.

Of course, if medical systems are overwhelmed then it’s a different story and a return to more severe lockdowns may become inevitable.

Either way shares are in for a bit more volatility but if it’s the former then the pullback in shares seen over the last few weeks will remain just a correction with the rising trend likely to resume in the next few months as the economic recovery continues.

Economic indicators convey optimism

For the time being economic indicators continue to point to recovery. June business conditions PMIs for the US, the Eurozone, Japan and Australia rose sharply again and are now well up from their April low with the rebound looking very much like that seen in Japan.

Bear in mind though that this does not mean that economic activity is now nearly back to normal, but it is consistent with it going in the right direction.

Our weekly economic activity trackers for the US and Australia based on high frequency data for things like restaurant bookings, confidence, retail foot traffic, box office takings, hotel bookings, credit card data, mobility indexes & jobs data are probably a better and more timely guide.

They are telling us that economic activity is continuing to improve from its April low but they have still only recovered half the initial collapse in Australia and a bit less than that in the US. The Australian tracker is now up for 10 weeks in a row.

A prolonged recovery

I suspect that the recovery going forward will be slower than the “Deep V” rebound seen so far in some recent data releases. First second wave fears will add a bit to consumer caution in terms of going out to restaurants and shopping. Second the easy gains from reopening including the unleashing of pent up demand may have mostly been seen but distancing requirements and travel restrictions mean that it will take a long time for some industries (like travel & restaurants) to get back to normal.

And even if there is a vaccine soon, the coronavirus shock has accelerated the shift to a digital world and cost cutting associated with automation which is now likely occurring faster than new jobs are created. All of which adds to a long tail of unemployment which will in turn constrain growth.

Some call this a square root recovery, ie: an initial Deep V rebound then slower growth. Obviously, it would be better than a W recovery that would likely occur if we see a renewed severe lockdown.

IMF forecasts declining global GDP

While the latest downgrade to the IMF’s global growth forecasts caused the usual excitement, it’s just catching up to market expectations.

It’s forecast fall in global GDP for this year has been revised down to -4.9% (from -3%) and growth next year is forecast to rebound by 5.4% but its less negative than the OECD’s forecasts released two weeks ago and our own forecast for global growth to contract by -5.7% this year.

Meanwhile, the IMF’s Australian growth forecast for this year was revised up from a too pessimistic -6.7% contraction to -4.5% which is similar to our own forecast.

Dr Shane Oliver is Head of Investment Strategy and Chief Economist, AMP Capital