Commentary on financial market developments – April 2020
Highlights:
- U.S. unemployment jumps
- what happens after the coronavirus?
Commentary:
Without context, just the optics of the numbers, April turned out great for global markets. The major world stock indices strengthened significantly, the price of gold rose and the price of oil also rebounded from the bottom.
A closer look is not so optimistic. Unemployment in the US jumped from 3.5% to 4.4% in April. We can expect the US labour market to deteriorate further in April, we will know the results soon. The US labour market is very flexible, it does not protect employees as much as the European one. Thus, US unemployment reacted very quickly, European figures will deteriorate with a lag.
The situation regarding the coronavirus pandemic itself was improving during March. The virus itself seems to have peaked and is slowly receding. However, the economic consequences are yet to be fully felt.
Unemployment and the sharp economic slowdown will of course be reflected in a decline in the purchasing power of the population, in people’s and companies’ fears about the future and in a lesser willingness to take on debt or investment or business risk. Firms are then likely to face a fall in demand for their products, which would further increase unemployment and put downward pressure on wages. Like any crisis, this one could result in a vicious circle of economic contraction and the bursting of a debt bubble (a cathartic but painful mechanism).
However, the deteriorating performance of the economy and the decline in “wealth” is such a large and fundamental policy issue that no countries and their leaders are likely to want to admit it. That is why central banks and governments are preparing huge monetary and fiscal stimulus. This is where the other big risk comes in, and that is the limits of the public finances of many countries, because their debt levels have already risen significantly during the last financial crisis, which started in 2008, although of course its roots go back even further.
A critical situation can arise in southern Europe, for example, where Italy has not only been hit hard by the pandemic, but its high public debt and unhealthy banking sector can be a lethal combination. Similarly, Spain or Greece is in a similarly bad way, having thus recovered from the worst of it, and is likely to lose its crucial tourist season this year. This, of course, could shake up the whole eurozone or even the EU as a whole.
We could continue in a similar vein with other countries, for example, heavily indebted Japan, and the US debt is also already relatively very high. The question is therefore which countries will still be trusted by investors and which ones will be broken by bad management.
I would like the rather pessimistic commentary on the markets, which ironically started with positive figures, to serve as food for thought. Indeed, it is possible that the market gains were premature and the situation may deteriorate again. Moreover, perhaps, unlike the financial crisis, there will already be a real separation of the bad from the good. It is possible that some countries will not be able to recover from the downturn in the world economy and will have no further money to borrow. It is also possible that some companies with little added value, which have been operating on low margins and only adding to their debts, will be hit. And, of course, the crisis will also hit people with no reserves and large debts. Such a crisis is painful, but it can set a much healthier foundation for the world economy in the future.