“ Il faut raison garder ”
The outlook for growth across the world will be challenging at least in the first-half 2020. Coronavirus has been declared a pandemic and the probability of a recession mount. Negative growth for at least two consecutive quarters is almost certain, the world will be driven into a recession. The economic shock of the virus could be similar to the 2008 financial crisis. The main economic powers are stepping up their efforts to limit the fall-out from the disease. Central banks-Federal Reserve, the ECB, Swiss National Banks, Bank of England – have been responding with a very generous monetary policy. Several countries have signaled they are ready to show great flexibility on their commitment to balanced budgets and pledged to do all they can to ensure a global response.
So far intervention by central banks has failed to stop fears over the deteriorating of the world economy. Investors negative reaction has been expected, confidence plummeted this month to its lowest level in 10 years. But the markets will be only reassured by the slowdown of the spread of disease and climbing down of the death toll. Everyone is looking for first signs Europe and the US can make through this crisis.
A deep slowdown of all economies is probably unavoidable but only in the short term. Fears of depression and lack of cash are greatly exaggerated. Everything, injection of trillions of dollars into the financial system, package of easing measures, quantitative easing programmes, all will be favourable for the economies and the markets in the medium term. We are confident central banks flexibility will be effective to avoid dislocations.
The market will remain under pressure, and this free fall is not probably over yet. But all the stimulus measures that have been taken these last few days will bring brighter perspectives for the economy, the markets and the portfolios of our Clients.
Quarterly Economic Environment and Outlook
Basel, Q2-2020 (April 2020)
Growth in Switzerland will decline sharply in the first half of 2020. A deep fall of external demand will have a very strong impact on the economy. German manufacturing is collapsing with a negative effect across Europe and Switzerland. The Swiss franc remains a concern, the central bank is trying to mitigate the effects of a strong currency. The main concern is the coronavirus pandemic across the world.
The US economy will fall sharply in the first and second quarters of 2020. Consumption is declining, the labour market conditions are deteriorating very fast, the savings rate is not improving. House prices are stable but residential investment will contract. Short-term rates will remain very low, growth forecasts are very pessimistic. The corporate sector is under pressure, earnings are expected to collapse. A contraction of growth in Europe will hurt export-oriented companies. This scenario is extremely negative, but the combined weight of emergency fiscal and monetary measures should alleviate economic pain and allow a sustained rebound in the second half of 2020.
Industrial production is falling. Growth rates will decline, most countries are still challenged by public debt financing. In Germany, the employment barometer has fallen by a record amount and manufacturing companies are planning to reduce workers. Exports and services decline in France, Italy, and Spain raise intense pressure on the governments to continue to add fiscal stimulus. The ECB has made clear its willingness to act without limits, the era of quantitative easing will go on for a long time. Interest rates will remain at very low levels. In the UK, the Bank of England put a new monetary strategy to finance the country’s response to the pandemic.
The government in Japan is pushing for more growth and the central bank, with its negative interest rate policy, has pledged to expand asset purchases, buying bonds and treasury bills. The public debt is already very high. The economy is stalling, private consumption and public investment weaker. A strong competitive yen increases corporate pessimism. In China, exports are declining more than expected. The economy and domestic demand remain under strong pressure. In India, the new government continues to implement policy changes designed to improve growth.
|CHF||Stable, due to its role as a safe haven currency. The SNB will continue to sell Swiss francs to avoid a further appreciation.|
|USD||Volatile, could weaken.|
|EURO||Volatile, could rise.|
|JPY||To remain stable, likely to soften again if there is bank intervention.|
|Gold||Firm, benefiting from continuing economic and geo-political uncertainties.|
The aforementioned Economic Environment and Outlook shall not constitute a recommendation or an investment advice. It is not the result of any financial analysis and the “Directives on the Independence of Financial Research” issued by Swiss Bankers Association does therefore not apply.