2020 July Economic Review

NOTE: This post is more than 12 months old, and the information contained within may no longer be accurate.
  • Global stock markets rebounded over the second quarter owing to government support measures during the COVID-19 pandemic and an easing of lockdown restrictions.
  • Countries in Europe and North America experienced a significant slowdown in consumer spending and economic activity.
  • Later in the quarter, there were promising signs of economic recovery in many countries, albeit still below pre-crisis levels.
  • With the pandemic still far from over, the economic and market outlook remains uncertain.

It was a difficult spring for countries around the world. Economic activity fell dramatically and consumer spending dropped owing to social distancing measures and varying forms of lockdown aimed at containing the COVID-19 pandemic. This was particularly the case in Europe and North America, as non-essential businesses were closed for much of April and May. In what may be the biggest financial crisis for decades, the International Monetary Fund estimates that the global economy will shrink by 4.9% in 2020.

Economic update

Throughout the past three months, the focus for governments around the world has been on containing the COVID-19 outbreak and propping up economies. Central banks and governments announced extraordinary amounts of monetary and financial support to cushion the downturn, which was received positively by investors.

In the UK, as well as other countries, the economic situation was challenging. The Office for National statistics reported that gross domestic product – a measure of economic activity in the country – fell by 10.4% in the three months to April. It was not all bad news, however. As the UK government began to re-open the economy, business activity rebounded. The manufacturing and services sector saw increased activity in June as businesses re-opened and people started to go back to work, but it remained below pre-crisis levels. Away from the pandemic, there were renewed concerns that the country could be headed for a no deal Brexit as talks between the UK and European Union appeared to stall.

In Europe, many countries began to re-reopen in May and June, after a lockdown period that caused business activity to slow down remarkably. Conditions across the continent improved in June as the re-opening process continued, and data from the European Commission showed that business and consumer optimism had increased by the end of the quarter.

Similar to other countries, the US economy has been hit hard. The US Bureau of Economic Analysis reported that GDP fell by 5% during the first quarter of the year, the sharpest drop since the 2008 financial crisis. Many parts of the country went into lockdown, sparking a major debate between President Donald Trump and state governors about the economic effect of such restrictions. Much of the US was quick to reopen and this resulted in most states seeing a spike in COVID-19 cases, with those in the south being hit hardest.

There were mixed fortunes in Asia Pacific. Export-focused markets such as Indonesia, Thailand and Taiwan outperformed the region on optimism that the global economy might recover in the second half of the year. However, there were geopolitical tensions in the region as China imposed a national security law in Hong Kong.

In China, where the virus originated, the government began reviving the economy after it introduced a shutdown to fight the outbreak. Early indicators suggest that China’s economy has been recovering. In June, China reported that factory activity was expanding at a fairly strong pace after the government increased investment. That said, it also faced weak export orders, suggesting that the impact of the pandemic will continue to affect the economy for the foreseeable future.

Market commentary

Despite the gloomy economic situation, global stock markets performed well in the second quarter. This was partly due to low interest rates from central banks and financial support packages announced by governments, as well as the easing of lockdown measures and the reopening of economies as summer approached. Stock markets were further propelled by improving employment and retail sales data late in June.

By the end of June, global stock markets as a whole went up by nearly 20%, making up some of the losses seen in February and March. In the UK, stock markets increased by around 8%, while US stock markets were up by more than 20% in sterling terms and Europe by around 18%. Asia Pacific equities went up by around 18% over the quarter, with central bank stimulus and the reopening of economies around the world being key drivers.

In fixed income, riskier assets performed better than those perceived as being safer havens. Yields on benchmark US and German government bonds saw little change. However, UK gilt yields fell as Brexit moved back into focus. Conversely, corporate bonds saw strong performance over the period as they benefited from the same renewed risk appetite that caused stock markets to rise.

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26 Jan 2024

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