Over the weekend, economists at Goldman Sachs revised down their estimates for growth of the U.S. economy this quarter with the economy slumping 4.6 percent this year, which is worse than the 4.2 percent they had previously forecast. That said, interestingly, the same economists expect the U.S. economy to grow by 5.8 percent next year. They also expect unemployment to be at 9 percent at the end of this year, which is better than their previous estimate of 9.5 percent.
Of course, these are estimates that will change over the coming months. The fact is that the coronavirus, with all its implications, continues to cause havoc in the U.S. economy, and as things stand today, it appears that we are not out of the woods yet — not by a long shot.
In the meantime, we see a risk-on tendency in the financial markets today under leadership of the Chinese markets where, overnight, the Shanghai Composite Index has risen 5.7 percent to a two-year high, while the combined daily turnover on the Shanghai and Shenzhen bourses hit a five-year high of USD $213.2 billion.
Loosening monetary stimulus, the coronavirus impact apparently under control while China’s economy is expected to expand by as much as 4 percent in the second quarter — recovering from a 6.8 per cent contraction in the first quarter — seem to be the main drivers of the upward moves, the South China Morning Post reported.
On the effects of ending lockdowns, today’s May German factory orders could, for investors, be interesting enough to take a somewhat closer look.
German factory orders rose 10.4 percent month-on-month in May, following a 26.2 percent drop in April, which was the highest on record. May's positive reading is also the second highest ever and occurred after the coronavirus lockdown was lifted in Germany.
However, the figures came in below market forecasts of a 15 percent surge, and factory orders are still 30.8 percent lower than in February, the month before lockdowns were imposed in Germany. New orders in the automotive industry increased in May, after very low levels in April and were still more than 47 percent lower than in February.
Year-on-year, factory orders were still down 29.3 percent.
Now, for developed economies, the pattern of growth is likely to be led by consumers. Consumers emerging from lockdown have money to spend, and it will be their first opportunity to spend in three months. Freed of legal restrictions, nothing is there to stop an immediate surge in consumer spending, even with supply chains that could have been disrupted by the coronavirus, but that’s not the case.
We know that production depends on complex global supply chains, and that a problem with one link in the supply chain can stop, or at least slow production.
Because GDP measures what is made, this will mean that the third quarter is more likely to show the GDP effects of the spending during a post lockdown bounce back.
In this context, recent surveys suggest that few American, European and Japanese companies are intending to relocate production out of China, implying that supply chains are here to stay the way they are functioning today, the Chinese daily Caixinglobal reported recently.
Of course, these surveys have no correlation with American, European, or Japanese investment into China.
Supply chain relocation that is supposed to happen is probably going to take time. However, so far at least, during the aftermath of last year’s U.S. trade tariffs, we haven’t noticed mass relocation of their supply chains by U.S. companies, for example. They and of course their customers, just paid the tariffs.
Where alternative facilities already existed, there was some relocation, but for the most part existing supply chains continued.
Nevertheless, automation and digitization is slowly localizing trade because it’s more profitable to localize trade, and this process will be accelerated by the coronavirus pandemic, but it cannot happen overnight.
Investors could do well keeping an eye on China.
Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
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