Economic recovery times could blow out

By Trevor Hoey. Published at Nov 16, 2020, in Market Wrap

Lockdown measures and the rise in COVID cases, particularly in the US, could stifle projected economic growth says Joshua Mahony, Senior Market Analyst at IG.

“Economic strife over the coming months will likely stifle the market rebound despite the impending vaccine, with today’s indecision highlighting that ongoing battle between optimism and the current reality. Meanwhile, retail is at risk as we head towards the festive period in lockdown.

“The surge in European equities appears to have petered out if early trade is anything to go by, with most major indices treading water after the open. In the UK, the lack of direction is shown by the huge daily fluctuations in value stocks.

The emergence of an effective vaccine does provide reason for optimism, yet traders will have to weigh up whether the prospect of an eventual return to ‘normality’ can simply allow traders to overlook the major hurdles that remain in the meanwhile.

With Donald Trump seemingly preoccupied with the battle to overturn the election result, it seems as though the Coronavirus has been left to proliferate throughout the US in recent weeks.

“The fear is that this incessant rise in US cases and deaths will ultimately force Joe Biden into a nationwide lockdown come January, with the fractured nature of the country meaning that any such restriction could be less effective than elsewhere.

“In Europe, we are yet to see the curve turn off the back of recent lockdown measures, with retail stocks at risk in the event that the virus forces even more prospective customers into the hands of Amazon.

“That fear for the high street has led to declines for the likes of Next and Primark-owned ABF, with the ability to release the lockdown shackles in time for the festive period likely to be key for many hard-hit retailers.”

Australian recovery

Australia’s economic recovery is going to be faster and stronger than previously expected, according to Commonwealth Bank’s Head of Australian Economics Gareth Aird.

Mr Aird revised the profile for Gross Domestic Product (GDP) and said while he still expects GDP to contract by 3.3 per cent in 2020, he now expects to see a much “stronger recovery in 2021”, with a GDP growth prediction of 4.2 per cent in 2021 (up from the previous estimate of 2.5 per cent) and 3.8 per cent in 2022.

“When GDP and employment collapsed in Australia over Q2 20 comparisons were made with the Great Depression,” he said.

"We had not seen such a sharp deterioration in economic data since the 1930s. But the similarities between the Great Depression and the COVID-19 pandemic from an economic perspective only pertain to the Q2 20 activity data.

“There is not much about the Australian economy in 2020 that is analogous to the Great Depression, particularly the huge monetary and fiscal support injected into the economy.

“The Government’s fiscal support packages were designed to keep as much of the economic furniture intact so that when restrictions were eased activity could rebound swiftly. It is clear that the economic data at the national level has improved since the middle of the year. Indeed we expect a decent bounce in GDP over the second half of this year to show up in the Q3 20 and Q4 20 national accounts.”

Mr Aird said he was “optimistic” about the strength and duration of the economic recovery and said there was “plenty of evidence creeping into the data that signals strong outcomes next year are more likely than not”.

“Provided transmission of COVID-19 in Australia remains low, particularly community transmission, the strength of the economic recovery in 2021 will surprise many,” he said.

“We believe the metaphorical ‘bridge’ has been built very well and sets Australia up for a prosperous next two years.”

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