Economics: better numbers not the same as good numbers

Last week the IMF cut further its global (and national) forecasts for growth for this year (-4.9%) and next (+5.4%), which effectively means GDP will not return to its level in 2019 until 2022 globally and later in advanced economies (much later in Japan, Italy, Spain and the UK). Figure 1 shows just how much damage is being done around the world in terms of ‘lost’ GDP. Among major economies only China and Indonesia have any growth prospects for 2020. These forecasts are consistent with others from the World Bank, the OECD and many public and private research organisations. The precise numbers may differ but what matters in such forecasts is the direction and pace.

Nevertheless, the forecasts at first sight do seem excessively gloomy in the light of the stream of recent better economic headlines. The explanation is not just about half-full and half-empty glasses (although there are plenty of arguments about that too) but the nature of the data. PMI surveys deliberately limit the questions to ascertain changes from the previous month and are not weighted by the size of individual respondents. It was not surprising, therefore, that overall responses plunged country by country as lockdown was imposed, nor that the lower they plunged the higher the rebound as lockdown started to be lifted. As might be expected, Manufacturing PMIs have been relatively steady, albeit with scores deep into contraction apart, but only just, from China. Big swings are still taking place in Services, which after collapsing in April are reviving rapidly with China already back into expansion. Business and Consumer Confidence Surveys are more complex but they too are showing a pattern of plunging in April and recovering in May and June, albeit more quickly in the US than in other advanced economies. 

The latest ‘hard’ economic data, has also been reporting some sharp improvements with May Retail Sales in the US and UK being hailed as a turning point. Much less reassuring, however, are comparisons with those of a year ago, which shows that there is a lot more catching up required if jobs are to be saved. Figure 2 suggests that up to 11 million jobs in the US could be at risk of disappearing permanently from a combination of lower staffing needs (demand and supply shock), fewer vacancies (search shock) and businesses failing (reallocation shock). No surprise at which sector would be most affected but it seems there will be job cuts almost everywhere. Continuing Unemployment Benefit Claims in the US still stand at 19.5 million and May Unemployment at 13.3% (which the Bureau of Labour Statistics admits should have been reported as 16.3%!). The UK prefers to report on a 3-month basis and the 3.9% in respect February-April clearly does not yet reflect the lockdown from March. Vacancies are sharply lower here too. It is the same story in other advanced economies, albeit with their various different classification methodologies, and even China is struggling to get people back to work as global trade has collapsed (Figure 3).

Meanwhile COVID-19 is still finding many new victims, even if the death toll is falling in most countries for reasons that not yet fully understood by scientists and doctors, as they try to discover more about its symptoms and how to treat them. Many advanced economies (Figure 4) are currently experiencing the worst of both worlds: people need to go back to earning their living but many are fearful of infecting themselves and their families. Until now, a Supply Shock has inflicted the most economic damage but, unless people are both willing and able to resume their former spending ways, a Demand Shock will make things even worse. The relationship between Employment and Consumption really is symbiotic. Of course, in this ‘Gold Rush’ official encouragement has led some investors to believe that they will somehow be protected no matter how bad the economy gets. Accordingly, although better economic numbers may be welcomed, they can be almost irrelevant for ‘Gold Rushers’!