GDP data shows impact of lockdown on economies across the world
- US GDP fell 32.9% at q/q annualised rate in Q2, representing the largest quarterly decline in post-war history but largely in line with expectations given government lockdown measures (consensus: -34.5%, Q1: -5.0%). Consumption fell by 34.6% q/q annualised, driven by a 43.5% q/q decline in the services sector as restrictions remain in place to control the virus. Durable goods consumption was more resilient than non-durable goods, -15.9% and -1.4% q/q respectively, supported by government income support payments. Business fixed investment was weaker than was expected (-27% q/q annualised), with structures investment down 34.9% and equipment investment down 37.7% as global demand remains muted. Federal spending provided some cushion to falling GDP in the short term (+0.8pp), with non-defense spending +40%, and net trade contributed +0.7pp to GDP (exports -64.1%, imports -53.4%).
- The FOMC left its current interest rate policy unchanged at their meeting on Wednesday, warning that the recovery of the US economy would “depend significantly on the course of the virus”. The Fed Funds policy rate has been left at the current level of 0 - 0.25% since March, with the Fed maintaining that a change to rates would only be considered once they are “confident that the economy has weathered recent events”. The FOMC noted the pickup in employment in recent months, but also noted the slowing pace of recovery and oil prices causing downward pressure on inflation.
- Eurozone GDP also saw a record decline in Q2, falling 12.1% q/q (consensus: -12.0%, Q1: -3.6%), taking the region into technical recession. Among the largest economies, flash estimates show that German GDP fell 10.1% q/q, France 13.8%, Spain 18.5% and Italy 12.4%. This takes Italy into its fourth recession in the last decade with output at levels last seen in the 1990’s. In Spain the recovery will be reliant on the crucial tourism sector which has been restricted by increasing quarantine rules put in place by member states. The contraction in German output was worse than analysts had forecast, wiping out nearly 10 years of growth, but unemployment rising only to 6.4% thanks to short-time work subsidy schemes.
- The Mexican economy contracted for the fifth consecutive quarter, 17.3% in Q2, as the virus took its toll on an already shrinking economy. By sector, industry declined -23.6% q/q, services -14.5% and agriculture declined -2.5%. More than 12 million Mexicans have lost their job since the pandemic hit and Coneval reported that 55% of workers could not afford a basic basket of food in May (up from 36% in Q1). The Mexican government have avoided taking on debt to support the unemployed during the crisis, offering only minimal loans to small businesses. Current IMF forecasts are for a GDP contraction of 10.5% this year in Mexico, although the president Andrés Manuel López Obrador reassured voters on Thursday “The worst is behind us. Our strategy has worked. Now we are recovering.”
Soft data indicates continued recovery in China
- China’s July PMIs indicated expectations that the economy continued to recover with seemingly little impact from recent floods. The manufacturing PMI increased to 51.1 in July (consensus: 50.7, June: 50.9) whilst the non-manufacturing PMI was slightly lower at 54.2 (consensus: 51.2, June: 54.4). The sub-indices followed the previous months’ trends of expanding new business and recovery of the service sector, whilst employment and export sales continue to decline (48.7 to 48.1, and 44.5 to 43.3 respectively).