22 Jun 2020
Sonal Desai, Ph.D.
Chief Investment Officer, Franklin Templeton Fixed Income
After the shock of COVID-19, when will the global economy return to a sense of normalcy? Franklin Templeton Fixed Income CIO Sonal Desai examines some key economic activity indicators in the wake of the pandemic. She shares data on recent changes in US consumer behaviour which seem to signal people are eager to go back to normal life.
What is foremost on my mind, and in my heart, is the pain that our country is suffering these days and the pain that our African American communities, colleagues and friends are experiencing and have been experiencing for too long. It’s a time for all of us to reflect deeply on the work we need to do to set our country on a better path, starting with everything that we can directly control, in our workplace and in our daily lives.
The economic crisis stemming from COVID-19, likely to be one of the worst of the past 100 years, has disproportionately hit the most vulnerable segments of society. It has exacerbated the inequality and economic difficulties that also underlie the latest protests and unrest. We are now entering a crucial potential turning point in the economic crisis. We still have over three weeks to go to the end of what will be one of the worst quarters in US economic history, and we will have to wait till the end of July to get the US Bureau of Economic Analysis’ (BEA) first estimate of the contraction. We currently expect it might be even worse than our previous estimate of a near-30% decline in gross domestic product in the second quarter (detailed in our US Macro Outlook, “Now Let’s Bend the Economic Growth Curve,” from April 2020).
However, parts of the US economy have started to reopen. Different states are moving at very different speeds: Georgia allowed hair salons, gyms, dine-in restaurants and theatres to reopen already at the end of April—with social distancing and other safety precautions. Texas took similar steps at the beginning of May. Other states like New York, New Jersey and parts of California are still mostly closed, following a much slower timetable.
Allowing businesses to reopen is a necessary but not sufficient condition for economic activity to come back to life. The crucial question all along has been whether consumers would feel comfortable coming back to restaurants, shopping malls and offices once the restrictions were loosened. This will determine how quickly (in some cases whether) businesses can claw their way back to profitability, and how quickly workers will be rehired. Any forecast of the economic recovery ahead relies on assumptions on whether and to what extent people’s behaviour will change: Will we feel comfortable flying again in a fully booked airplane? Will we be willing to dine in a restaurant that is half full? Three-quarters full?
To get a sense of how the recovery is shaping up, Franklin Templeton Fixed Income has built a High-Frequency Activity Tracker, using data from Google Mobility and from Homebase. These data are beginning to yield a number of interesting insights:
Overall, I see these data as encouraging. We cannot assume they are the beginning of a new trend, of course. This will be an evolving picture; a lot will depend on whether the trend in infections continues to abate, or if we see a resurgence; it will depend on the restrictions that states will impose on different business activities and the pace at which these restrictions will be relaxed. All these factors will impact the logistics of business directly, but will also contribute to shaping people’s attitudes and behaviours. We will need to monitor the situation closely, leveraging a wider range of data.
For now, however, these data seem to signal that people are eager to go back to a normal life. They want the right safeguards in place, but if they feel that reasonable precautions are being implemented, they will not continue to hunker down in fear. This could help the recovery pick up some much-needed momentum during the summer and early fall, before a feared resurgence of contagion in October-November. In the meanwhile, policymakers will have some breathing room to compare the results of different strategies across US states and across countries and determine whether a possible renewed rise in infections can and should be countered with more targeted measures.
The encouraging message in the data so far is that if you open it, they will come.
If we have the courage and strength to address the fundamental causes of the current unrest, the healing process that will follow can still be accompanied and supported by a healthy recovery in economic activity and living standards.
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