Vaccine optimism must be tempered with attention to coronavirus resurgence
- While market sentiment has been dominated by hope that encouraging vaccine results will lead to economic recovery, the resurgence of the virus, especially in the US and Europe, means policy support must continue
Hopes for working vaccines and rapid distribution suggest we might see a faster normalisation of economic activity, especially services. That’s promising for the global economy later in 2021, but the near term is still challenging.
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Meanwhile, the virus resurgence continues to weigh on economic activities in the near term. The composite PMI readings for both the euro area and Britain have dipped below the 50 level in November, pointing to a sequential slowdown in economic activity. The decline was mainly concentrated in the service sector, as social distancing measures tightened in the region.
Data out of the US is holding up relatively better, but there are some early signs of weakness. Hiring has slowed, with non-farm payrolls for November notably below market expectations. In particular, the retail sector lost 35,000 jobs during the month amid surging Covid-19 cases in the US.
That said, the links between rising case counts and bad economic outcomes appear to be weaker than early this year, suggesting the deteriorating virus situation is having a more limited effect on activity. Fatality rates have moved up alongside rising case counts in Europe and the US, but they are still well below their March peaks.
Amid generally less dire health outcomes, the connection with social mobility also appears to have lessened. Based on travel and navigation app usage data, the level of activities involving travel remains relatively unchanged from September/October in the US, while in Europe activity levels have fallen in recent months but are not as low as during March.
Nonetheless, gross domestic product growth in the euro area and Britain are likely to move into negative territory in the fourth quarter, and we should expect somewhat slower US economic growth in the first quarter of next year.
Given the near-term headwinds from the virus resurgence, ongoing policy support remains important to limit long-term damage to economies. There is somewhat better news on the US fiscal front recently, despite lingering uncertainty.
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Congress has yet to reach an agreement on the latest fiscal stimulus proposal worth US$916 billion, but talks have taken a more positive turn this week. In Europe, reports also suggest hopes are rising for a deal with Hungary and Poland over their stand-off on the European Union’s long-term budget and recovery fund. Once rectified, it would allow disbursement of the recovery fund in 2021.
At the same time, major central banks seem to be prepared to roll out further stimulus to shore up their economies. In recent weeks, the Bank of England and the Reserve Bank of Australia have expanded their quantitative easing programmes.
This week, the European Central Bank introduced more easing measures at its December meeting, including expanding its monetary stimulus programme by 500 billion euros (US$605 billion). The Federal Reserve has also indicated its willingness to modify its asset purchases to make them more stimulative when it meets next week.
While better news on the vaccine front is boosting the medium-term economic outlook, the world will continue to lean on policy support through a dark winter of virus resurgence.
Sylvia Sheng is a global multi-asset strategist at JP Morgan Asset Management