Key to keeping markets cheerful: further government help for the economy. That is still just a hope in the U.S. — and unlikely before the election, however much the White House and Congressional Democrats talk. Without that — as the weekly and monthly economic data have begun to show — the Corona recession shock will reverberate for some time. Business closures, rising long-term unemployment, and a renewed climb in daily Covid-19 infections across much of the West will continue to take a toll on the global economy. Most economists expect output at the end of this year to be below the level of a year earlier. But first, we will get GDP numbers that mislead.
As we noted last quarter, the sharper than expected rebound in economic activity that began in May meant that going into Q3, the economy was doing much better than during the worst of the pandemic lockdown. Even if output was completely flat in August and September, the Q3 GDP numbers in the U.S. and many other countries would show a big quarterly jump from Q2’s depressed average. More important for investors is what will happen in Q4 and beyond. The private sector economic motor remains hamstrung by Covid-19 and dependent on fiscal and monetary help. As for most of this strange year, what governments and central banks do — on health policy, fiscal stimulus, and money — will play an enormous role in the outturn.
China, where the virus originated, was earlier to lock down its economy and quicker to open up. That made China the exception in the second quarter, when the second-largest economy in the world began to pull out of recession. South Korea, with a quick and effective response to Covid-19, was hurt by dampening trade and exports. In Q3, China will again be the exception. Expect a positive number, but not as big as for the U.S. This comparison will also be misleading: China’s economic recovery has continued in recent months, helping to pull up numbers for the global economy. And forecasters from the OECD to the IMF expect China to show overall growth for 2020. This sets it apart from other major economies — both emerging and advanced — which are widely expected to end the year with output below that of a year earlier.
Click here to read the full RockCreek Q3 Commentary Letter
