Macroeconomic Review- March 2020

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March 2020 Macroeconomic Review


Global Economy

o As the coronavirus spreads slowly loses energy in China, it is starting to accelerate in the rest of the world, raising concerns that after a shock on the supply side, due to China, a demand side shock is expected. Although the fatality rate from the virus is much lower than SARS, the fact that it is much more contagious makes coping with it more difficult

o Despite the spread of the virus worldwide, the World Health Organization refrained from declaring the situation as a global epidemic, but it is likely that this announcement will come in March if the infection is not weakened

o At this stage, it is difficult to predict the extent of the economic damage caused by the spread of the virus. However, it is clear that the problem lies not in the severity of the disease but in the steps taken to prevent its spread. These measures create harsh disruptions, which weigh down on manufacturing, trade, tourism and consumption, hence have an immediate impact on the global economy

o Investors’ expectation of monetary and fiscal incentives managed to mask for a while the risk and stock markets traded up by February 20th. However, massive hedging activity has simultaneously pushed the safe assets up and exposed a huge concern, which erupted at the end of the month and resulted in the sharpest weekly decline in stock markets since 2008

o Investors’ expectation for co-operative and coordinated actions by decision makers is increasing. The decision by the Chinese central bank and the Fed to reduce the interest rates and the declaration of G7 economic leaders to take all steps necessary to support the economy, seems like the beginning of such an action

o World Trade Organization has declared that given the spread of the Coronavirus, global trade in goods will weaken in the coming months, after already slowing down, in light of the trade war and uncertainty


United States

o The US economy grew 2.1% in Q4 2019 (annually), similar to Q3. Positive contribution to net trade masked a significant deceleration in consumer spending (1.8%) and a slump in business investment (-1.5%) for the third quarter, the longest stretch since the last recession

o Looking ahead, growth is expected to slow down further in 2021 as a result of the weakening impact of tax cuts, the uncertainty related to the trade war that continues to weigh on companies and the spread of the Coronavirus in China, which is a major US trade partner

o The Coronavirus hits supply chains and increases uncertainty, which was high in the first place, causing businesses to hesitate as reflected in the recently released composite PMI which dropped to 49.6 points, a level that reflects a contraction in business activity and is the lowest since 2013. A source of concern could be found in the sharp decline in the services sector PMI (from 53.4 to 49.4) which until recently was considered immune to external economic shocks

o One of the bright spots for the economy is residential real estate, which continues to benefit from low borrowing costs and the strong labor market. During the fourth quarter of 2019 residential construction outlays increased at a 5.8% rate, the strongest in two years. Homebuilders sentiment in February remained near the highest level since 1999 as construction accelerated going into 2020

o In a surprising move aimed at supporting the economy, the Fed announced it was lowering the base rate by 0.5% to a range of 1% – 1.25%. This is the first time since 2008 that the Fed has been reducing the interest rate, not on the official date, which was scheduled for March 17-18, an action that indicates urgency. In the press release, the Fed noted that “the fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity”



o After some tentative improvements toward the end of 2019, the underlying premise was that after a cloudy year, 2020 will be better for the economy, which expected to experience a slight improvement in performance. However, affected by the spread of the Coronavirus, the picture has become more complex, as consumers take a step back and more and more businesses suspended investment and hiring plans, until the situation becomes clear

o In fact, the block gained momentum until the virus spread in Italy. Economic sentiment has improved continuously since October, with improvement in manufacturing, services and consumer sentiment. Businesses reported improvement in the existing and future demand component as well as in employment. Surveys indicated a growth of 1% in 2020 and 1.3% in 2021 with only a small risk of recession and a slight increase in inflation

o Now with the spread of the virus across the continent the picture is changing, growth expectations are rapidly updating to only 0.5% and inflation expectations are collapsing and reflecting the grave concern of a lingering demand shock and a loss of faith in the ECB ability to hit its target

o The Italian economy, which is never far from a recession and shrinking in late 2019, faces an impossible situation when its business and industrial center is paralyzed as a result of the rapid spread of the virus in northern Italy. Loaded with debt (140% of GDP), demographically shrinking (for every 100 deaths there are just 67 births) and politically paralyzed, the Italian economy’s ability to withstand a crisis is questionable and it will make it very difficult for the Eurozone to cope with the emerging crisis

o Much will depend on how the spread of the Coronavirus will impact confidence in the weeks ahead. Voices calling for more stimulating steps are already heard, though with interest rates already negative and asset purchases underway, it’s not clear how much more firepower is left



o The local economy grew 3.5% in 2019, better than previously reported. Q4 GDP jumped 4.8% as a result of increased consumption of vehicles, arising from a change in the green tax rate on hybrid vehicles

o However, large debt repayments in the first half of 2020 and a limited continuing budget, along with paralyzing effects of the spreading Coronavirus, are expected to hit the local economy and make it much more difficult to exploit its potential. Hence, a sharp reduction of growth forecasts for 2020 should be expected

o It is difficult to assess the impact of the Coronavirus on the Israeli economy, but the rise of China’s foreign trade with Israel, reflected in the rise of the Chinese Yuan’s share of the currency basket to 11.5%, signal that it might have adverse implications on the local economy. Of course, the scenario of local spread of the virus will change the situation completely and the economic damage, in this case, will be much more significant

o Investors and rating agencies assume that the political saga will be resolved soon and that the new government and its approved budget will result in fiscal consolidation. One can only assume that going to fourth elections will change the underlying assumptions and have an adverse effect on local financial markets

o The strong appreciation of the Shekel and increased competition led inflation to plummet in early 2020, increasing the pressure on the BOI to act. CPI fell by 0.4% in January and in the past year rose only 0.3%, well below the inflation target (1%-3%), signaling that inflation is not likely to meet the target in 2020, the seventh consecutive year, unless Drastic actions will be taken