In the beginning of 2020, when the coronavirus first began spreading outside of China, many governments and organizations like the International Monetary Fund predicted that the pandemic will have a short-term impact on the economy and that we’d soon see a V-shaped recovery.
However, almost ten months later, the coronavirus is still around. The global economic growth curve has shifted from a V to a U, and one with an ever-expanding bottom section. It is clear that Covid-19 still poses a great danger to growth around the globe and that the future of the economy is uncertain.
Europe is one of the most evident cases, since the European Union is the largest single market in the world and a powerful bloc whose economic performance affects the markets far and wide. Due to the prolonged lockdowns in April and May, the second quarter of 2020 was devastating for the EU, with GDP dropping to negative 11.4%, one of the worst readings in the region’s history. Unemployment has risen by 2.7%, and inflation is more stagnant than ever.
In July, the prognosis for the Old Continent improved after the European Commission’s recovery fund proposal was finally approved by all EU member states. That and aggressive asset purchasing from the ECB gave investors hope for an economic recovery. There was a marked improvement in sentiment and the value of the euro at the time.
However, fundamentals soon slowed down again, casting doubt on the region’s pace of recovery. More importantly, the coronavirus has made a resurgence in Europe. France just experienced its highest daily increase of cases (16,096) yesterday and has been declaring much higher numbers than it did during the first wave of infections. Spain also outdid its record this week and has been declaring similar, if slightly higher numbers than it did during the March peak. The UK is also moving ever closer to its April numbers. If the situation is not contained, further lockdowns and even more harm to the economy are likely.
The United States, the world’s most powerful economy, is also facing a similar problem. Unlike many other countries that experienced a slowdown in the spread of the coronavirus before seeing a second wave, the US seems to have not caught a single break. It saw a lot of infections in March and April, then the numbers grew in the middle of the summer. The current daily averages are somewhere in between the spring and summer digits.
The outbreak in the United States has been long and relentless, and has taken a toll on employment and growth. The GDP dropped by more than 30% this year and more than 40 million Americans lost their jobs.
In preparation for a long, difficult recovery, the Federal Reserve switched its policy to an extra dovish one recently. However, the bigger problem right now is that the government is not providing any fiscal stimulus of its own, like it did earlier in 2020. Since the previous package expired in July, lawmakers have been unable to agree on a new stimulus bill. Democrats push for more spending to cover a greater area of the affected economy, while Republicans keep trying to bring that number down. According to the latest predictions, a compromise will not come this year and the pace of recovery will slow down further in the United States.
In this context, traders need to watch out for fundamental reports and any news of stimulus. If the recovery continues to prove difficult, stocks and risky assets will suffer, while safe havens will receive a boost. Pay careful attention to gold and oil, as those are quoted in the USD and tend to depreciate in price when the dollar strengthens. If stimulus does come, expect a weaker dollar and stronger stock indices.
