With risks to the global economic recovery remaining on the downside in view of rising Covid-19 infection rates, fiscal stimulus continues to evolve in the right direction
US and Chinese equities posted modest gains in the past week, with risk appetite finding support from: i) positive signs regarding the effectiveness of current medical treatments; and ii) various vaccine trials entering their final stages, as well as a continuing flow of positive economic data. Overall, the MSCI ACWI was up by +1.7% wow in the past week (-3% YtD).
The key risk remains the deterioration in epidemiological data, especially in the US and its potential to halt the ongoing economic recovery. Recall that the New York Fed’s Weekly Economic Index, which covers 10 daily and weekly indicators of real economic activity, improved to -6.83 in the week ending July 4th versus -7.66 in the previous week and a trough of -11.5 in mid-April, suggesting that US real GDP growth is rising (see graph). Nevertheless, mobility in the states with the sharpest acceleration in confirmed infection rates (i.e. California, Florida and Texas -- 27% of total US population) has demonstrated signs of fatigue, posing risks for economic activity going forward (see graph).
Fiscal policy, a major pillar of the ongoing economic recovery, remains in the spotlight. The political debate in the US is intensifying vis-a-vis further fiscal measures, with increasing likelihood for a new package of circa $1 tn (4.7% of US GDP) following the massive support measures announced since March, some of which are set to expire this month. In the event, the Federal Pandemic Unemployment Compensation, a benefit of an additional $600 per week for those eligible for unemployment insurance, expires on July 31st and it appears that an extension to that scheme is receiving opposition in view of potentially creating disincentives to return to work (see Economics).
On the other side of the Atlantic, attention will be on the European Council on July 17th/18th, where the main topic will be the highly anticipated “Next Generation EU” with a proposed total size of €750 bn or 5.25% of European Union GDP. Recall that the proposed funds would be raised by the EC in financial markets and channeled to member States mostly as grants (close to €500 bn) and €250 bn as loans, with priority for countries that have suffered the biggest shock from the pandemic and have the least capacity to respond to it. Negotiations are expected to be contentious, centered on the size of the scheme, the ratio of grants vs loans, as well as the country allocation and the conditionalities attached to the disbursed funds (e.g. in terms of how they will be used and their repayment schedule). The final decision requires unanimity among the 27 member states.
In the UK, new fiscal measures totaling £30 bn were announced although we estimate c. £22 bn (1% of UK GDP) of actual new stimulus after discounting: i) the Infrastructure Package of £5.6 bn, which is an acceleration of already announced measures; ii) a part of the £9.4 bn fund for the Job Retention Bonus (a once-off payment of £1000 to employers for every furloughed employee who remains continuously employed up to January 2021) due to an incomplete take-up (we assume 15% - 20% of furloughed workers will not return to work); and iii) part of the £2.1 bn Kickstart Scheme, a fund to create new employment positions for people aged 16-24 who are currently on Universal Credit (UC). The latest package comes on top of pandemic related direct fiscal stimulus measures of circa £160 bn or 7.2% of GDP according to the HM Treasury for fiscal year 2020-2021 (i.e. from April 2020 to March 2021).