Oliver Mangan: In the absence of a vaccine, economies are going to need all the help they can get

Survey data that are beginning to come through on the main economies for May warrant careful interpretation.
Oliver Mangan: In the absence of a vaccine, economies are going to need all the help they can get

Survey data that are beginning to come through on the main economies for May warrant careful interpretation. They need particularly close scrutiny at times when activity is shifting rapidly and economies are at turning points. It's important to note that they are surveys, rather than hard data.

Nonetheless, the surveys are both timely and good at picking up directional shifts in economic activity.

The flash purchasing managers' indices -PMIs) for May show a large bounce from the extremely low levels seen in April when economies were put into lockdown.

The indices, however, remain well below the 50 level that signals growth, for instance the flash composite of the PMIs show readings of 36.4, 30.5 and 28.9 for the US, eurozone and the UK, respectively.

Taken at face value, the data suggest that output and activity fell even further in May from already very low levels in April.

It is more likely, though, that what PMI respondents in the surveys had in mind was where output in May was relative to its pre-Covid levels.

The rise in the indices is most probably an indication that output picked up somewhat in May, but it remains well below pre-Covid norms.

This would be consistent with the fact that the lockdowns in the major economies started to be eased in May, allowing some businesses to re-open again.

Other high-frequency data, especially in relation to movement, also point to a re-awakening of economies in May.

This easing of restrictions, though, is going to be a gradual process and while activity came to a sudden halt in late March and April, the re-opening of economies will be at a much slower pace.

April looks like being the nadir, then, in terms of economic activity, while the second quarter should be the trough in terms of GDP output.

As the IMF has pointed out, though, while economies should rebound in the second half of 2020 and 2021, it will be a partial recovery.

It is going to take at least a couple of years for output to return to pre-Covid levels, certainly in advanced economies.

In this regard, labour market data on jobs and unemployment require close watching to see if firms that have kept workers on through government supported wage subsidy or furlough schemes, now begin to lay people off.

Notably, both initial jobless claims and continuing claims in the US are still increasing at a sharp pace even as the economy starts to re-open, which is something of a worry.

We are now seeing job losses being announced across numerous countries in sectors that will be very slow to recover from the pandemic.

A continuing very high level of unemployment would weigh on the pace of economic recovery.

It suggests that further supports will be required to ensure that economies can rebound quickly.

Authorities are preparing to double-down in this regard.

More quantitative easing, or QE, can be expected from central banks, with the Bank of England also now saying that a move to negative interest rates in the UK is being actively considered.

Meanwhile, the US treasury secretary has indicated a further fiscal stimulus package will most likely be required to help the American economy.

EU authorities are also mulling over the finer details of a large recovery fund.

The Irish Government has indicated that economic support measures will have to be extended well into the second half of the year, boosting the budget deficit even further.

In the absence of a vaccine for the coronavirus, it is going to take some effort to restore economies to anything like rude health, given that some restrictions like social distancing and on overseas travel could remain in place for quite some time.

Economies are going to need all the help they can get.

--Oliver Mangan is chief economist at AIB

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