Economic recovery continues with vaccine optimism
Vaccine developments, normalization of economic activities, and supports from governments are the keys.
It has been seven months since the World Health Organization (WHO) announced COVID-19 as a pandemic.
Clearly, the crisis is still here, and so too do its associated consequences in all aspects of life. Meanwhile, the speediest economic recession had also been witnessed in the world economy. With the recent development in vaccines, economies, in fits and starts, have been recovering while lockdowns and other restrictions are being relaxed also.
Since then, the stock market performance has generated a large amount of interest and discussion that showed a record in the equity’s history in the United States (US). But, as time passes, uneven recoveries around the world raise further concerns.
Fastest equity recovery in history
With reference to other previous crises, an economic recovery often took years to proceed. But, the remarkable performance of the US stock market in August showed the fastest equity recovery in history (Chart 1). Indeed, it only took five months to regain the loss since March this year while the credits market has also recoupled its previous losses.
On a macro-level, global equities evaluated by the MSCI world equity index (MIWD00000PUS), which tracks shares in 49 countries, showed that the world equity market had returned to its pre-pandemic level since August (Chart 2).
US Initial Jobless Claims
However, various uncertainties may also cause disturbances in the markets, such as policy and geopolitical tensions. Additionally, businesses are still downsizing their workforce, as evidenced by recent increases in US initial jobless claims (Chart 3). These factors underscore the need for continued monitoring, as inflationary pressures (Chart 4) could influence the Federal Reserve’s policy decisions and impact stock market performance.
According to Bloomberg, “US Initial Jobless Claims” provides that “initial unemployment claims track the number of people who have filed jobless claims for the first time during the specified period with the appropriate government labour office. This number represents an inflow of people receiving unemployment benefits.”
So, What helped the recovery to begin?
First and foremost, stability in medical advancements can hasten the recovery process. Currently, over 160 vaccines are in development across various countries and more than 30 are already undergoing human trials. With additional agreements reached with pharmaceutical companies, economies are poised to take a more proactive approach to accelerate the recovery.
More importantly, this comes to the second point that the advancements have also given people confidence in resuming businesses that lead to the normalization of economic activities.
Normalization can be seen in the Eurozone as evidenced by the increase in retail sales, which shifted from a negative trend to a positive one (Chart 5). This indicates that retail sales in the Eurozone have regained their pre-pandemic levels. Furthermore, data from the HIS Markit Europe Sector PMI shows that the manufacturing, banking, and services sectors are driving growth while some industries, including tourism, are reporting lower output in August. Notably, the manufacturing PMI output index reached its highest level since 2018, but the recovery in the region has become more reliant on Germany, which accounts for over half of the region’s recent output expansion.
According to IHS Markit, the Europe Sector PMI indices are “compiled from responses to IHS Markit’s European PMI surveys, covering over 8,000 private sector companies in 11 countries. Indices are available for the basic materials, consumer goods, consumer services, financials, healthcare, industrials and technology industry groups, and sub-sectors of these groups.”
However, momentum appears to be slowing since reported cases are increasing again, previous unemployment benefits are being expired, and lockdowns were reintroduced again, both in the US and the eurozone recently.
Finally, the fiscal actions taken by governments worldwide have played a crucial role in facilitating the recovery process. The expansion of government balance sheets has likely instilled confidence in the market and prevented a repeat of the market lows seen in March. Central bank support has been instrumental in this shift, helping to move risk assets from a distressed state to a position closer to pre-pandemic levels.
“While maintaining the focus on addressing the health emergency and providing lifelines for households and businesses, governments need to prepare economies for the transition to the post-COVID-19 world — including by helping people get back to work.” — International Monetary Fund (IMF)
Looking ahead
It is evident that the key to economic recovery lies in vaccine advancements, the normalization of economic activities, and government support. However, the speed of recovery is largely dependent on the evolution of the virus, which brings uncertainty to the global economy and raises concerns about rising unemployment affecting household confidence and consumption. Furthermore, as time progresses, the disparities in recovery across the world are becoming increasingly concerning.
