Stock markets continue to be underpinned by the run of good data from economies emerging from the great lockdown imposed to contain the spread of Covid-19. The economic figures have generally come in ahead of expectations across the board, most notably in regard to retail spending, the labour market, consumer confidence and activity surveys.
Last week’s US employment report for June saw a higher than expected 4.8 million rebound in non-farm jobs and a bigger than forecast fall in the unemployment rate, to around 11%.
German retail sales for May were far ahead of expectations, rebounding by almost 14% after a fall of 6.5% in April and they almost 5% above year-earlier levels. Meanwhile, figures from the purchasing managers in manufacturing and services for June also exceeded forecasts, virtually everywhere.
It all suggests that while this may have been the deepest recession in recent history, it is also proving to be the shortest. Indeed, the Bank of England chief economist Andy Haldane, proclaimed that recent data show the deepest recession in hundreds of years in the UK was already “ancient history”.
He noted that the latest indicators show the recovery in activity was proving significantly faster than the bank had expected as recently as May.
Other central bankers, though, have struck a more cautious note. ECB chief economist Philip Lane highlighted that the strong rebound needed to be seen in the context of the exceptionally large contraction in output during the lockdown. A run of positive data was only to be expected but even so, activity will remain far below the pre-crisis level for an extended period. He warned the current rebound does not provide a guide to what’s going to happen over the winter and is likely to be interrupted from time to time.
A cautious note was also struck by US Federal Reserve chief Jerome Powell. He acknowledged that the upturn in spending and hiring had occurred sooner than the Fed had expected. However, it was driven by the early lifting of lockdown restrictions, which is bringing new challenges, notably keeping the virus in check.
The US is failing miserably in this regard, with new cases surging again which could further damage the economy and labour market. In this regard, it is important to bear in mind that while payrolls rose in the last two months, they are still 14.5 million below their pre-crisis levels. The rebound in payrolls could now stall, with new cases of the virus in the US reaching record numbers in the past week, leading to a re-imposition of lockdown restrictions in some states.
The payroll figures also highlight that this is one big hole that the US and global economies have fallen into. Even with good progress and no interruptions, it is going to take a long time to climb out of it. Setbacks, such as the resurgence of the virus, will only further delay a full recovery.
Despite the recent strong data, cautious interest rate markets are leaning towards further policy easing by central banks. Futures contracts are discounting that the ECB, Fed and the Bank of England are likely to lower official rates further in 2021. Whatever about the recent run of good economic data and optimism in stock markets, fixed income investors are not convinced the world economy can dig itself out of the great big hole that it currently finds itself in as a result of the Covid-19 crisis anytime soon.
Oliver Mangan is chief economist at AIB