A potential game-changer? The details behind the EU’s proposed recovery plan
On the latest edition of Market Week in Review, Quantitative Investment Strategist Dr. Kara Ng and Julie Zhang, director, North America sales enablement, provided an update on the latest policy responses to the coronavirus pandemic. They also discussed the outlook for the U.S. labor market as well as renewed tensions between China and the U.S.
European Union unveils plans for massive recovery package
Reiterating that the road to a global economic recovery depends on three factors—the spread of the coronavirus, the amount of economic damage caused by government containment measures and the effectiveness of the global policy response—Ng noted that the economic devastation inflicted by measures to slow the spread of the virus has been unprecedented. Importantly, though, the magnitude of the worldwide policy response has also been unprecedented in scope, she said. The latest example of this occurred May 27, when Japan announced an additional $1.1 trillion stimulus package, Ng noted. “When added on to the country’s relief measures from March, Japan’s total stimulus package now amounts to roughly 40% of its annual GDP (gross domestic product),” she stated.
The European Union also made headlines the same day, Ng said, with its proposal of a €750 billion recovery plan. “Two-thirds of this package would consist of grants, and one-third would consist of loans,” she stated, adding that the size of the package amounts to 6% of eurozone annual GDP. Ng characterized the package as a potential game-changer, if approved, noting that it would represent risk-sharing across the eurozone via the issuance of what would be known as Eurobonds.
Eurobonds, she explained, would be government bonds issued by the European Union, rather than by individual eurozone countries. Eurobonds were first proposed in 2011, amid the European debt crisis, but never came to fruition, Ng said.
“There is some opposition to this recovery plan, especially from some of the more frugal member-states of the EU, so discussions around the plan will be an important watchpoint moving forward as Europe attempts to stabilize its economy,” she stated.
Pace of U.S. unemployment claims slows
Turning to the U.S., Ng said there is tentative evidence that the U.S. labor market has bottomed out. New jobless claims, while still at extraordinarily high levels, have been falling for the past eight weeks, she noted. In addition, the number of continuing jobless claims—representative of individuals who are already receiving unemployment benefits—dropped for the first time since widespread containment measures were imposed in mid-March. “This is a sign that some workers are returning to their jobs as lockdown restrictions ease,” Ng stated.
The May jobs report, which will be released June 5, will provide further clarity on the state of the U.S. jobs market, she said. “April’s report showed that only 10% of laid-off workers expected their job loss to be permanent. Keeping an eye on whether this number changes in the May report will be important,” Ng remarked.
She explained that in a frictionless world, a pause in economic activity due to containment measures would result in only temporary, rather than permanent, job losses. Unfortunately, the real world doesn’t work that way, Ng said, due to the secondary effects of these measures. “For instance, consumer confidence may fall, which could result in less demand for goods and services. This, in turn, could cause businesses to make permanent reductions to their labor force—and a souring job market could then further derail consumer confidence and spending,” she explained.
In other words, Ng said, the negative confidence spiral brought on by economic disruption could turn a temporary shock into a sustained one—with major implications for the economy, corporate profits, markets and investor portfolios.
Hong Kong national security law sparks renewed tensions between China, U.S.
Shifting to China, Ng noted that after the successful signing of a Phase 1 trade deal between the U.S. and China in January, tensions between the world’s two largest economies are on the rise again. This time, one of the key issues centers around China’s plan to impose a national security law on Hong Kong. The proposal, recently approved by the Chinese government, served as a trigger for the U.S. government’s May 27 declaration that it no longer considers Hong Kong autonomous from China.
“This declaration means that the special trade exemptions the U.S. has carved out for the city of Hong Kong may go away. In addition, the U.S. could also introduce punitive measures against China,” Ng explained. The renewed tensions between China and the U.S. could potentially escalate into another trade war, she said, which would be disruptive for global supply chains, investment spending and business confidence.
“With things already on shaky ground due to the coronavirus pandemic, a re-escalation in trade tensions could be a fatal blow to the global economy,” she concluded.
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